INRAD OPTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
511,984
|
|
|
$
|
673,685
|
|
Accounts receivable (net of allowance for doubtful accounts of $15,000 in 2016 and 2015)
|
|
|
1,351,103
|
|
|
|
1,345,197
|
|
Inventories, net
|
|
|
2,899,474
|
|
|
|
2,995,365
|
|
Other current assets
|
|
|
182,883
|
|
|
|
143,293
|
|
Total Current Assets
|
|
|
4,945,444
|
|
|
|
5,157,540
|
|
Plant and Equipment:
|
|
|
|
|
|
|
|
|
Plant and equipment, at cost
|
|
|
14,503,849
|
|
|
|
14,493,611
|
|
Less: Accumulated depreciation and amortization
|
|
|
(13,461,343
|
)
|
|
|
(13,364,216
|
)
|
Total plant and equipment
|
|
|
1,042,506
|
|
|
|
1,129,395
|
|
Precious Metals
|
|
|
553,925
|
|
|
|
553,925
|
|
Intangible Assets, net
|
|
|
181,992
|
|
|
|
201,633
|
|
Other Assets
|
|
|
32,496
|
|
|
|
32,496
|
|
Total Assets
|
|
$
|
6,756,363
|
|
|
$
|
7,074,989
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of other long term notes
|
|
$
|
170,500
|
|
|
$
|
170,500
|
|
Accounts payable and accrued liabilities
|
|
|
1,148,967
|
|
|
|
1,035,487
|
|
Customer advances
|
|
|
374,220
|
|
|
|
368,068
|
|
Total Current Liabilities
|
|
|
1,693,687
|
|
|
|
1,574,055
|
|
|
|
|
|
|
|
|
|
|
Related Party Convertible Notes Payable
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
Other Long Term Notes, net of current portion
|
|
|
336,873
|
|
|
|
378,906
|
|
Total Liabilities
|
|
|
4,530,560
|
|
|
|
4,452,961
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock: $.01 par value; 60,000,000 authorized shares; 12,737,808 shares issued at March 31, 2016 and December 31, 2015
|
|
|
127,380
|
|
|
|
127,380
|
|
Capital in excess of par value
|
|
|
18,544,846
|
|
|
|
18,538,884
|
|
Accumulated deficit
|
|
|
(16,431,473
|
)
|
|
|
(16,029,286
|
)
|
|
|
|
2,240,753
|
|
|
|
2,636,978
|
|
Less - Common stock in treasury, at cost (4,600 shares)
|
|
|
(14,950
|
)
|
|
|
(14,950
|
)
|
Total Shareholders’ Equity
|
|
|
2,225,803
|
|
|
|
2,622,028
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
6,756,363
|
|
|
$
|
7,074,989
|
|
See Notes to Condensed Consolidated Financial
Statements (Unaudited)
INRAD OPTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,348,106
|
|
|
$
|
2,530,225
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,073,655
|
|
|
|
1,838,442
|
|
Selling, general and administrative expenses
|
|
|
634,035
|
|
|
|
629,257
|
|
|
|
|
2,707,690
|
|
|
|
2,467,699
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(359,584
|
)
|
|
|
62,526
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense—net
|
|
|
(42,603
|
)
|
|
|
(44,655
|
)
|
|
|
|
(42,603
|
)
|
|
|
(44,655
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(402,187
|
)
|
|
|
17,871
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(402,187
|
)
|
|
|
17,871
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share — basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.00
|
|
Net (loss) income per common share — diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic
|
|
|
12,733,208
|
|
|
|
12,349,493
|
|
Weighted average shares outstanding — diluted
|
|
|
12,733,208
|
|
|
|
12,403,321
|
|
See Notes to Condensed Consolidated Financial
Statements (Unaudited)
INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Three
Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(402,187
|
)
|
|
$
|
17,871
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
116,768
|
|
|
|
144,611
|
|
Stock based compensation
|
|
|
5,962
|
|
|
|
6,480
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,906
|
)
|
|
|
(31,272
|
)
|
Inventories, net
|
|
|
95,891
|
|
|
|
(246,506
|
)
|
Other current assets
|
|
|
(39,590
|
)
|
|
|
(39,782
|
)
|
Accounts payable and accrued liabilities
|
|
|
113,480
|
|
|
|
265,771
|
|
Customer advances
|
|
|
6,152
|
|
|
|
(62,538
|
)
|
Total adjustments and changes
|
|
|
292,757
|
|
|
|
36,764
|
|
Net cash (used in) provided by operating activities
|
|
|
(109,430
|
)
|
|
|
54,635
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(10,238
|
)
|
|
|
(15,296
|
)
|
Net cash used in investing activities
|
|
|
(10,238
|
)
|
|
|
(15,296
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on notes payable-other
|
|
|
(42,033
|
)
|
|
|
(40,258
|
)
|
Net cash used in financing activities
|
|
|
(42,033
|
)
|
|
|
(40,258
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(161,701
|
)
|
|
|
(919
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
673,685
|
|
|
|
1,003,254
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
511,984
|
|
|
$
|
1,002,335
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
Interest paid
|
|
$
|
5,594
|
|
|
$
|
44,880
|
|
Income taxes paid
|
|
$
|
800
|
|
|
$
|
—
|
|
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, 2015.
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:
|
|
March
31,
2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
Raw materials
|
|
$
|
1,096
|
|
|
$
|
1,110
|
|
Work in process, including manufactured parts and components
|
|
|
1,158
|
|
|
|
1,224
|
|
Finished goods
|
|
|
645
|
|
|
|
661
|
|
|
|
$
|
2,899
|
|
|
$
|
2,995
|
|
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 months ended March 31, 2016
and 2015, the Company did not record a current provision for either state or federal income tax due to 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. The cumulative loss incurred by the Company
in the three-year period ended December 31, 2015 and the three month period ended March 31, 2016 was considered a significant piece
of objective negative evidence. Such objective evidence limits the ability to consider other subjective evidence such as our projections
for future growth.
On the basis of this evaluation as of March
31, 2016, 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 $4,831,000, 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 Income (Loss) per Common Share
Basic net income (loss) per common share
is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted
net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and
common stock equivalents outstanding, calculated on the treasury stock method for options, stock grants and warrants using the
average market prices during the period, including potential common shares issuable upon conversion of outstanding convertible
notes, except if the effect on the per share amounts is anti-dilutive.
For
the three months ended March 31, 2016, all common stock equivalents were excluded from the computation of diluted net loss per
share because their effect is anti-dilutive. This included 2,500,000 common shares and 1,875,000 warrants issuable upon conversion
of outstanding related party convertible notes, in addition to 842,304 common stock options and grants.
For the three months ended March 31, 2015,
there were a total of 53,828 common stock equivalents related to outstanding stock options which were included in the computation
of diluted net income per share because they were dilutive. There were 2,500,000 common shares and 1,875,000 warrants issuable
upon conversion of outstanding related party convertible notes which were excluded from the computation of diluted net loss per
share because their effect is 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.
New Accounting Guidance
In April 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-10, “Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing.” The amendments clarify two aspects of Topic
606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The update is effective for annual
periods beginning after December 15, 2017 including interim reporting periods therein. The Company is currently evaluating the
impact the adoption of ASU 2016-10 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
which simplifies several aspects of the accounting for employee share-based payments, including income tax consequences, application
of award forfeitures to expense, classification on the statement of cash flows, and classification of awards as either equity or
liabilities. This guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods
within those annual periods. The Company is currently evaluating the effect that this guidance will have on its financial
statements and related footnote disclosures.
In February 2016, the FASB created Topic
842 and issued ASU 2016-02, Leases. The guidance in this update supersedes Topic 840, Leases. This ASU requires lessees to recognize
a right-of-use assets and a lease liability, initially measured at the present value of the lease payments on the balance sheet.
For public companies, the amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact of the adoption of
ASU 2016-02 on its financial statements and disclosure.
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”, which
changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities
measured under the fair value option that are attributable to instrument-specific credit risk. We are currently assessing the impact
the adoption of ASU 2016-01 will have on our consolidated financial statements. ASU 2016-01 is effective for annual reporting periods
beginning after December 15, 2017, including interim periods within those fiscal years.
In November 2015, the FASB issued ASU 2015-17, Income
Taxes (Subtopic 740-10). The amendments in this update require deferred tax liabilities and assets be classified as noncurrent
regardless of the classification of the underlying assets and liabilities. For public companies, the amendments will be effective
for financial statements issued for annual periods beginning after December 15, 2016. Earlier application is permitted. We expect
the adoption of this guidance will not have a material impact on our financial statements.
NOTE 2 – EQUITY COMPENSATION PROGRAM AND STOCK BASED
COMPENSATION
The Company's results of operations for
the three months ended March 31, 2016 and 2015 include stock-based compensation expense for stock option grants totaling $5,962
and $6,480, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations within
cost of goods sold in the amount of $1,578 ($1,148 for 2015), and selling, general and administrative expenses in the amount of
$4,384 ($5,332 for 2015).
As of March 31, 2016 and 2015, there were
$74,854 and $45,015 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 1.7 years and 1.5 years, respectively.
There were 163,500 and 133,000 stock options
granted during the three months ended March 31, 2016 and 2015. The following range of weighted-average assumptions were used to
determine the fair value of stock option grants during the three months ended March 31, 2016 and 2015:
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Expected Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected Volatility
|
|
|
128
|
%
|
|
|
122-127
|
%
|
Risk-free Interest Rate
|
|
|
2.07
|
%
|
|
|
1.96
|
%
|
Expected Term
|
|
|
10 years
|
|
|
|
10 years
|
|
The following table represents stock options granted, exercised and forfeited
during the three month period ended March 31, 2016:
Stock Options
|
|
Number of Options
|
|
|
Weighted
Average
Exercise
Price per Option
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at January 1, 2016
|
|
|
699,604
|
|
|
$
|
.71
|
|
|
|
4.9
|
|
|
$
|
32,230
|
|
Granted
|
|
|
163,500
|
|
|
|
.35
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(20,800
|
)
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
842,304
|
|
|
$
|
.69
|
|
|
|
5.3
|
|
|
$
|
50,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
|
562,471
|
|
|
$
|
.80
|
|
|
|
4.7
|
|
|
$
|
14,222
|
|
The following table represents non-vested stock options granted, vested and
forfeited for the three months ended March 31, 2016.
|
Options
|
Weighted-Average Grant-Date Fair Value
|
Non-vested - January 1, 2016
|
206,662
|
$0.21
|
Granted
|
163,500
|
$0.34
|
Vested
|
(90,329)
|
$0.23
|
Forfeited
|
-
|
-
|
Non-vested – March 31, 2016
|
279,833
|
$0.28
|
NOTE 3 – STOCKHOLDERS’ EQUITY
In May 2016, a total of 418,736 common shares were issued to the Inrad Optics
401k plan as a match to employee contributions for the year ended December 31, 2015.
NOTE 4 – RELATED PARTY TRANSACTIONS
On July 29, 2014, 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, 2017 from April 1, 2015. 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, the expiration dates of the warrants were extended from April 1, 2018 to April 1, 2020. As
of March 31, 2016, the Company had accrued interest in the amount of $70,000 associated with these notes.
NOTE 5 – 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 equipment. 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:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(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
|
|
$
|
216
|
|
|
$
|
256
|
|
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.
|
|
$
|
291
|
|
|
$
|
294
|
|
|
|
|
507
|
|
|
|
550
|
|
Less current portion
|
|
|
(171
|
)
|
|
|
(171
|
)
|
Long-term debt, excluding current portion
|
|
$
|
336
|
|
|
$
|
379
|
|
|
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, 2015, as filed with the Securities and Exchange Commission on
March 30, 2016. 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, 2015. 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 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, 2015.
Results of Operations
Inrad Optics, Inc. operates a manufacturing facility in Northvale, New Jersey.
The Company’s business falls into two main categories: Optical Components and Laser System 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 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/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 crystal based devices and associated instrumentation.
The majority of crystals, crystal components and laser devices that the Company manufactures are used in laser systems, defense
EO systems, medical lasers and R&D applications by engineers within corporations, universities and national laboratories.
Revenue
Sales for the three months ended March 31, 2016 were approximately $2,348,000,
a decrease of 7%, from approximately $2,530,000 for the three months ended March 30,
2015. Sales
to the defense/aerospace market and the laser device/instrumentation market decreased year over year by approximately 22.4% and
21.5%, respectively. This was partially offset by increased sales to the process control and metrology market, in addition to
increased sales to the university and national lab market which increased by 7.3% and 38.1%, respectively.
The decrease in defense market sales is
mainly attributable to reduced shipments to two large defense contractors partially offset by increased sales to another defense
customer. Shipments in the laser device/instrumentation market decreased overall but was not primarily attributable to a single
customer.
Process control and metrology sales to one large customer increased by approximately
70% in the three months ended March 31, 2016 compared the three months ended March 31, 2015. One customer in the university and
national lab market accounted for most of the increased sales in the first quarter of 2015 compared to 2014.
In the three months ended March 31, 2016, two customers, each represented
10% or more of total sales. In 2015 there was one customer who represented 10% or more of sales.
The Company’s top five customers represented 40.3% of total sales in
the three month period ended March 31, 2016, compared to 46.6% in the same period in 2015. Two of the same customers were included
in the top five for each of the three month periods ended March 31, 2016 and 2015, respectively.
Orders booked during the first three months of 2016 totaled $2,550,000 compared
with $2,536,000 in the same period last year.
Order backlog at March 31, 2016 and 2015 was $5,426,000 and $6,512,000, respectively.
Cost of Goods Sold
For the three months ended March 31, 2016, cost of goods sold was $2,074,000
compared to $1,838,000 in the same quarter in 2015, an increase of approximately $236,000 or 13%.
The overall sales mix consisted of products with a higher cost of material
and labor components which contributed to the increase in the cost of goods sold for the three months ended March 31, 2016, as
compared to the same quarter last year.
Material costs increased by approximately 6% in the three months ended March
31, 2016 compared to the same period last year as a result of the change in product mix. As a percentage of sales for the three
months ended March 31, 2016, material costs increased by 1.5 % compared with the same period in 2015.
Manufacturing salaries, wages and related fringe benefits increased by 5.3%
for the three months ended March 31, 2016 from the comparable period last year.
In addition, cost of goods sold in the
three months ended March 31, 2015 were favorably impacted by a favorable overhead variance associated with higher production levels
in the period as compared to the current period this year.
Gross profit for the three months March 31, 2016 was $274,000 or 11.7 % of
sales compared to $692,000 or 27.3 % in the same quarter last year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A” expenses)
in the three months ended March 31, 2016 amounted to $634,000 or 27.0% of sales. This compared to $629,000 or 24.9% of sales for
the same periods in 2015.
SG&A salaries and wages and related fringe benefits increased by 2.6%,
compared with the same period in 2015.
For the three months ended March 31, 2016, SG&A expenses excluding salary
and wages, decreased by 1.82% compared to the same period in 2015.
(Loss) Income from Operations
The Company had an operating loss of $360,000 for the three months ended March
31, 2016 compared with an operating gain of $63,000 in the three months ended March 31, 2015 The operating loss in 2016 primarily
reflects the impact of lower sales and an overall sales mix consisting of products with lower margins.
Other Income and Expense
Interest expense for the three months ended March 31, 2016 was $43,000 compared
to $45,000 in the same period in 2015 as there was no significant change in the Company’s borrowings.
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 months ended March 31, 2016 the Company did not record a current
provision for either state or federal income tax due to 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. The cumulative loss incurred by the Company in the three-year period ended
December 31, 2015 and the three month period ended March 31, 2016 was considered a significant piece of objective negative evidence.
Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth
As a result, 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 $4,831,000
and therefore the Company maintains a valuation allowance for the full amount of the net deferred tax balance.
Net (Loss) Income
The Company had
net loss of $ (402,000) for the three months ended March 31, 2016 compared to a net income of $18,000 for the same period last
year reflecting lower sales and higher costs in the three months ended March 31, 2016 compared to the three months ended March
31, 2015.
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 operating
losses, for payment of accrued and current interest on convertible debt, for servicing of long term debt and for capital expenditures.
As of March 31, 2016 and December 31, 2015, the Company had cash and cash
equivalents of $512,000 and $674,000, 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 enhances 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%.
On July 29, 2014, 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, 2017 from April 1, 2015. 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, the expiration dates of the warrants were extended from April 1, 2018 to April 1, 2020. As
of March 31, 2016, the Company had accrued interest in the amount of $70,000 associated with these notes.
The following table summarizes net cash provided by (used in) operating, investing
and financing activities for the three months ended March 31, 2015 and 2014:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(110
|
)
|
|
$
|
54
|
|
Net cash (used in) investing activities
|
|
|
(10
|
)
|
|
|
(15
|
)
|
Net cash (used in) financing activities
|
|
|
(42
|
)
|
|
|
(40
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(162
|
)
|
|
$
|
(1
|
)
|
Net cash used by operating activities was
$110,000 for the three months ended March 31, 2016 compared to net cash provided by operations of $54,000 in the same period last
year.
The decrease in net cash provided by operating activities in the three months
ended March 31, 2016 compared to net cash provided by operating activities in 2015 resulted primarily from the Company’s
decreased sales and profitability for the quarter.
Net cash used in investing activities was $10,000 during the three months
ended March 31, 2016 compared to $15,000 in the same period last year. Capital expenditures for the three months ended March 31,
2016 and 2015 were $10,000 and $15,000, respectively. The expenditures in 2016 and 2015 were for miscellaneous operating equipment.
Net cash used in financing activities was $42,000 and $40,000 during the three months ended March 31, 2016 and 2015, respectively,
related to required principal payments on other long term notes.
Overall, the Company had a net decrease in cash and cash equivalents of $162,000
in the three months ended March 31, 2016 compared with a net decrease of $1,000 for the comparable period last year.
The Company’s management believe that existing cash resources and cash
resources 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 twelve months.