Item
1.
Condensed Consolidated Financial Statements
INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,324,037
|
|
|
$
|
673,685
|
|
Accounts receivable (net of allowance for doubtful accounts of $15,000 in
2016 and 2015)
|
|
|
760,664
|
|
|
|
1,345,197
|
|
Inventories, net
|
|
|
2,691,827
|
|
|
|
2,995,365
|
|
Other current assets
|
|
|
143,417
|
|
|
|
143,293
|
|
Total current assets
|
|
|
4,919,945
|
|
|
|
5,157,540
|
|
|
|
|
|
|
|
|
|
|
Plant and equipment:
|
|
|
|
|
|
|
|
|
Plant and equipment, at cost
|
|
|
14,565,955
|
|
|
|
14,493,611
|
|
Less: Accumulated depreciation and amortization
|
|
|
(13,645,196
|
)
|
|
|
(13,364,216
|
)
|
Total plant and equipment
|
|
|
920,759
|
|
|
|
1,129,395
|
|
Precious Metals
|
|
|
553,925
|
|
|
|
553,925
|
|
Intangible Assets, net
|
|
|
142,710
|
|
|
|
201,633
|
|
Other Assets
|
|
|
61,246
|
|
|
|
32,496
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,598,585
|
|
|
$
|
7,074,989
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of other long term notes
|
|
$
|
148,302
|
|
|
$
|
170,500
|
|
Accounts payable and accrued liabilities
|
|
|
892,782
|
|
|
|
1,035,487
|
|
Customer advances
|
|
|
544,710
|
|
|
|
368,068
|
|
Total current
liabilities
|
|
|
1,585,794
|
|
|
|
1,574,055
|
|
|
|
|
|
|
|
|
|
|
Related Party Convertible Notes Payable
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
Other Long Term
Notes, net of current portion
|
|
|
273,685
|
|
|
|
378,906
|
|
Total liabilities
|
|
|
4,359,479
|
|
|
|
4,452,961
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock: $.01 par value; 60,000,000 authorized shares; 13,156,544
shares issued at September 30, 2016 and 12,737,808 issued at December 31, 2015
|
|
|
131,567
|
|
|
|
127,380
|
|
Capital in excess of par value
|
|
|
18,693,820
|
|
|
|
18,538,884
|
|
Accumulated deficit
|
|
|
(16,571,331
|
)
|
|
|
(16,029,286
|
)
|
|
|
|
2,254,056
|
|
|
|
2,636,978
|
|
Less - Common stock in treasury,
at cost (4,600 shares)
|
|
|
(14,950
|
)
|
|
|
(14,950
|
)
|
Total shareholders’
equity
|
|
|
2,239,106
|
|
|
|
2,622,028
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
6,598,585
|
|
|
$
|
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 September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,440,332
|
|
|
|
2,799,952
|
|
|
$
|
7,429,769
|
|
|
$
|
8,095,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,863,068
|
|
|
|
2,038,459
|
|
|
|
5,999,387
|
|
|
|
6,108,230
|
|
Selling, general and administrative expenses
|
|
|
570,029
|
|
|
|
582,459
|
|
|
|
1,845,959
|
|
|
|
1,912,213
|
|
|
|
|
2,433,097
|
|
|
|
2,620,918
|
|
|
|
7,845,346
|
|
|
|
8,020,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
7,235
|
|
|
|
179,034
|
|
|
|
(415,577
|
)
|
|
|
75,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense—net
|
|
|
(41,712
|
)
|
|
|
(43,941
|
)
|
|
|
(126,469
|
)
|
|
|
(132,887
|
)
|
Gain on sale of plant and equipment
|
|
|
—
|
|
|
|
5,500
|
|
|
|
—
|
|
|
|
5,500
|
|
|
|
|
(41,712
|
)
|
|
|
(38,441
|
)
|
|
|
(126,469
|
)
|
|
|
(127,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income taxes
|
|
|
(34,477
|
)
|
|
|
140,593
|
|
|
|
(542,046
|
)
|
|
|
(52,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(34,477
|
)
|
|
$
|
140,593
|
|
|
$
|
(542,046
|
)
|
|
$
|
(52,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per common share— basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding— basic
|
|
|
13,151,944
|
|
|
|
12,733,208
|
|
|
|
12,872,787
|
|
|
|
12,528,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding— diluted
|
|
|
13,151,944
|
|
|
|
12,812,542
|
|
|
|
12,872,787
|
|
|
|
12,528,560
|
|
See Notes to Condensed Consolidated Financial
Statements (Unaudited)
INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(542,046
|
)
|
|
$
|
(52,287
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
339,903
|
|
|
|
420,675
|
|
401K common stock contribution
|
|
|
135,193
|
|
|
|
79,537
|
|
Gain on sale of plant and equipment
|
|
|
—
|
|
|
|
(5,500
|
)
|
Stock based compensation
|
|
|
23,930
|
|
|
|
19,577
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
584,533
|
|
|
|
100,020
|
|
Inventories, net
|
|
|
303,538
|
|
|
|
(362,023
|
)
|
Other current assets
|
|
|
(124
|
)
|
|
|
(3,999
|
)
|
Accounts payable and accrued liabilities
|
|
|
(142,705
|
)
|
|
|
(94,567
|
)
|
Customer advances
|
|
|
176,642
|
|
|
|
109,647
|
|
Total adjustments and changes
|
|
|
1,420,910
|
|
|
|
263,367
|
|
Net cash provided by
operating activities
|
|
|
878,864
|
|
|
|
211,080
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(72,343
|
)
|
|
|
(26,953
|
)
|
Proceeds from sale of plant and equipment
|
|
|
—
|
|
|
|
5,500
|
|
Capitalized license fees
|
|
|
(28,750
|
)
|
|
|
—
|
|
Net cash (used in) investing activities
|
|
|
(101,093
|
)
|
|
|
(21,453
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on notes payable-other
|
|
|
(127,419
|
)
|
|
|
(121,831
|
)
|
Net cash (used in) financing
activities
|
|
|
(127,419
|
)
|
|
|
(121,831
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase in cash and cash equivalents
|
|
|
650,352
|
|
|
|
67,796
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
673,685
|
|
|
|
1,003,254
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,324,037
|
|
|
$
|
1,071,050
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
90,460
|
|
|
$
|
133,560
|
|
Income taxes paid
|
|
$
|
800
|
|
|
$
|
1,800
|
|
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) 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.
Inventories are comprised of the following
and are shown net of inventory reserves, in thousands:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
Raw materials
|
|
$
|
990
|
|
|
$
|
1,110
|
|
Work in process, including manufactured parts and components
|
|
|
1,002
|
|
|
|
1,224
|
|
Finished goods
|
|
|
670
|
|
|
|
661
|
|
|
|
$
|
2,692
|
|
|
$
|
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 and nine months ended September
30, 2016 and 2015 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, 2015.
Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
On the basis of this evaluation as of
September 30, 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 $4,788,000 and therefore the Company continues to maintain
a valuation allowance for the full amount of the net deferred tax balance.
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 months and nine months ended
September 30, 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 common shares from warrants issuable upon conversion
of outstanding related party convertible notes in each respective period, in addition to 779,547 common stock options, in each
respective period.
For the three months ended September 30,
2015, 79,334 common stock options were included in the computation of diluted net income per share and 2,500,000 common shares
and 1,875,000 warrants issuable upon conversion of outstanding related party convertible notes were excluded from the computation
of diluted net loss per share because their effect is anti-dilutive. For the nine months ended September 30, 2015 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 each
respective period, in addition to 820,644 common stock options.
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 August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230) which provides guidance on the classification of certain cash receipts and payments in the
statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning
in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied
prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard
on its Consolidated Statement of Cash Flows.
In June 2016, the FASB issued ASU No.
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 2020, with earlier application
permitted in 2019. We expect the adoption of this guidance will not have a material impact on our financial statements.
In May 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606), Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability,
noncash consideration and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be
considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In
addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable
consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The Company is currently
evaluating the impact the adoption of ASU 2016-12 will have on its consolidated financial statements
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. ASU 2016-01 is effective for annual
reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. We expect the adoption
of this guidance will not have a material impact on our financial statements.
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 September 30, 2016 and 2015 include stock-based compensation expense for stock option grants totaling $8,370
and $6,549, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations
within cost of goods sold in the amount of $2,311 ($1,217 for 2015), and selling, general and administrative expenses in the amount
of $6,059 ($5,332 for 2015).
The Company's results of operations for
the nine months ended September 30, 2016 and 2015 include stock-based compensation expense for stock option grants totaling $23,930
and $19,577 respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations
within cost of goods sold in the amount of $6,194 ($3,581 for 2015), and selling, general and administrative expenses in the amount
of $17,736 ($15,996 for 2015).
As of September 30, 2016 and 2015, there
were $56,886 and $31,918 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 1.5 years and 1.3 years, respectively.
There were 163,500 and 133,000 stock options
granted during the nine months ended September 30, 2016 and 2015, respectively. The following range of weighted-average assumptions
were used to determine the fair value of stock option grants during the nine months ended September 30, 2016 and 2015:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Expected Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected Volatility
|
|
|
128
|
%
|
|
|
122-127
%
|
|
Risk-free interest rate
|
|
|
2.1
|
%
|
|
|
2.0
|
%
|
Expected term
|
|
|
10 years
|
|
|
|
10 years
|
|
The following table represents stock options
granted, exercised and forfeited during the nine month period ended September 30, 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
|
|
|
(83,557
|
)
|
|
|
1.02
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
779,547
|
|
|
$
|
.60
|
|
|
|
5.1
|
|
|
$
|
18,980
|
|
The following table represents
non-vested stock options granted, vested and forfeited for the nine months ended September 30, 2016.
|
|
Options
|
|
|
Weighted-Average Grant-Date
Fair Value ($)
|
|
Non-vested - January 1, 2016
|
|
|
206,662
|
|
|
|
.21
|
|
Granted
|
|
|
163,500
|
|
|
|
.34
|
|
Vested
|
|
|
(90,329
|
)
|
|
|
.23
|
|
Forfeited
|
|
|
(3,333
|
)
|
|
|
.18
|
|
Non-vested – September 30, 2016
|
|
|
276,500
|
|
|
|
.28
|
|
|
c)
|
Restricted Stock Unit Awards
|
There were no restricted stock units granted
under the 2010 Equity Compensation Program during the nine months ended September 30, 2016 and 2015.
NOTE 3- STOCKHOLDERS’ EQUITY
In May 2016, the Company issued an additional
418,736 common shares to the Inrad Optics 401k plan as a match to employee contributions for 2015.
NOTE 4 – RELATED PARTY TRANSACTIONS
On June 9, 2016, 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, 2019 from April 1, 2017. 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, 2020 to April 1, 2022. As of September 30, 2016, the Company had accrued interest in the amount of $75,000 associated
with these notes.
NOTE 5 – OTHER LONG TERM NOTES
Other Long Term Notes consist of the following:
|
|
September30,
|
|
|
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
|
|
$
|
137
|
|
|
$
|
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.
|
|
|
285
|
|
|
|
294
|
|
|
|
|
422
|
|
|
|
550
|
|
Less current portion
|
|
|
(148
|
)
|
|
|
(171
|
)
|
Long-term debt, excluding current
portion
|
|
$
|
274
|
|
|
$
|
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.’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 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 a manufacturing facility
in Northvale, New Jersey and has its corporate offices in the same location.
Revenue
Sales for the three months ended September
30, 2016 decreased by $360,000 or 12.8% to $2,440,000 from $2,800,000 for the comparable period last year. For the nine months
ended September 30, 2016, sales were $7,430,000, a decrease of $666,000 or 8.2% compared to $8,096,000 for the nine months ended
September 30, 2015.
Sales to customers in the defense/aerospace
market decreased by 25.2% and 8.9% for the three and nine months ended September 30, 2016 compared to the same periods last year.
The third quarter sales decrease compared to the three months ended September 30, 2015 were due to a decrease in shipments to three
large defense contractors which was partially offset by increased shipments to another large customer in this market. In the nine
months ended September 30, 2016, a decline in sales to two large customers were partially offset by increased sales to three other
customers.
Sales to customers in the process control
and metrology market decreased by 10.4% and 13.3% for the three and nine months ended September 30, 2016, respectively, compared
to the same periods last year. This was mainly attributable to lower sales to one major customer.
Sales in the laser systems and related
products market decreased by 18.0% for the three months ended September 30, 2016 compared to the same period last year. This was
primarily due to reduced sales to one large OEM customer. Sales for the nine months ended September 30, 2016 declined by 5.8% compared
to last year’s nine month period mainly impacted by decreased shipments to the same large OEM customer offset by increased
sales to other customers.
The university and national lab market
is the smallest market the Company serves. Sales in this market decreased by 18.6% in the three months ended September 30, 2016.
For the nine months ended September 30, 2016, sales to this market were up 7.4% compared to the same period last year. Sales to
one large national lab comprise most of the sales in this market along with a large number of smaller customers which typically
vary from period to period.
In the nine months ended September 30,
2016 and September 30, 2015, the Company had sales representing more than 10% to a major customer in the defense/aeronautic market.
There were no customers representing more than 10% of of sales in the three months ended September 30, 2016 compared to two customers
who represented more than 10% in the three months ended September 30, 2015.
The Company’s top five customers
represented 38.6% of total sales in the nine month period ended September 30, 2016, compared to 42.4% in the same period in 2015.
For the three months ended September 30, 2016, sales for the top five customer group were 39.2% compared to 46.7% for the comparable
period last year.
Orders booked during the first nine months
of 2016 were $7.5 million compared to $7.6 million last year.
Order backlog was $5.4 million at September 30, 2016, compared to $5.7 million at September 30, 2015.
Cost of Goods Sold
Cost of goods sold was $1,863,000 versus
$2,038,000 for the three months ended September 30, 2016 and 2015, respectively. This represented a decrease of $175,000 or 8.6%.
For the nine months ended September 30, 2016, cost of goods sold were $5,999,000, down by $109,000 or 1.8% compared to $6,108,000
in the same period in 2015. The overall decrease in cost of goods sold in the three and nine months ended September 30, 2016 related
mainly to a decrease in sales from the comparable periods last year without a commensurate decrease in cost of goods sold. This
is primarily due to the fixed nature of many of the Company’s manufacturing costs.
Material costs as a percentage of sales
for the three and nine months ended September 30, 2016 decreased as compared to the same period in 2015, primarily as a result
of lower sales and a change in sales mix to products with a lower percentage of material costs.
For the three months ended September 30,
2016, manufacturing salaries and wages and related fringe benefits decreased by approximately 6.6 % or by $71,000 from the comparable
period in 2015. For the nine months ended September 30, 2016, manufacturing salaries and wages and related fringe benefits decreased
by approximately 3.6 % or $120,000 from the nine months ended September 30, 2015.
Manufacturing expenses decreased by approximately
8.0 % and .3 % in the three and nine months ended September 30, 2016 versus the three and nine months ended September 30, 2015.
Overall, gross profit and margins decreased
in each respective period as expenses reductions did not match the decrease in sales levels. Gross profit for the three months
ended September 30, 2016 was $577,000 or 23.7% of sales compared to $761,000 or 27.2% of sales in the same quarter last year. Gross
profit for the nine months ended September 30, 2016 and 2015 was $1,430,000 or 19.3% and $1,987,000 or 24.5% of sales, respectively.
Selling, General and Administrative
Expenses
Selling, general and administrative expenses
(“SG&A” expenses) in the three and nine months ended September 30, 2016 amounted to $570,000 or 23.4% of sales
and 1,846,000 or 24.8% of sales, respectively. This compared to $582,000 or 20.8% of sales and $1,912,000 or 23.6% of sales, respectively,
for the same periods in 2015.
For the three and nine months ended September
30, 2016, SG&A salary, wages and fringe benefits decreased by approximately $39,000 or 11.4% and $80,000 or 7.4%, respectively,
reflecting lower head count levels compared to the same periods in 2015.
SG&A expenses excluding salary, wages
and fringe benefits increased by approximately $29,000 or 14.3% and $19,000 or 2.6% in the three and nine months ended September
30, 2016 versus the three and nine months ended September 30, 2015 mainly due to increased consulting fees, sales travel and trade
show expenses.
Loss from Operations
The Company had a gain from operations
of $7,000 in the three months ended September 30, 2016 compared with $179,000 in the three months ended September 30, 2015. For
the nine months ended September 30, 2016, the Company had an operating loss of $416,000 compared with an operating gain of $75,000
in the same period last year.
Other Income and Expense
Net interest expense for the three months
ended September 30, 2016 was $42,000 compared to $44,000 in the same period in 2015. Net interest expense for the nine months ended
September 30, 2016 was $126,000 compared to $133,000 in the same period in 2015.
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 nine months ended September
30, 2016 and 2015, 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, 2015 and the nine
month period ended September 30, 2016. 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 $4,788,000 and therefore the Company maintains a valuation allowance for the full amount of the net deferred tax
balance.
Net Income (Loss)
For the three and nine months ended September
30, 2016, the Company had a net loss of $34,000 and $542,000 respectively, compared to a net gain of $141,000 and a net loss of
$52,000, respectively, for the same periods in 2015 primarily due to lower sales.
Liquidity and Capital Resources
The Company’s primary source of liquidity
is cash and on-going collection of accounts receivable. The Company’s major use of cash in recent years has been for financing
operating losses, payment of accrued and current interest on convertible debt, servicing of long term debt and capital expenditures.
As of September 30, 2016 and December 31,
2015, the Company had cash and cash equivalents of $1,324,000 and $674,000, respectively.
On June 9, 2016, 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, 2019 from April 1, 2017. 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,
2020 to April 1, 2022. As of September 30, 2016, the Company had accrued interest in the amount of $75,000 associated with these
notes.
The following table summarizes net cash
(used in) operating, investing and financing activities for the nine months ended September 30, 2016 and 2015:
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
878
|
|
|
$
|
211
|
|
Net cash (used in) investing activities
|
|
|
(101
|
)
|
|
|
(21
|
)
|
Net cash (used in) financing activities
|
|
|
(127
|
)
|
|
|
(122
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
650
|
|
|
$
|
68
|
|
Net cash provided by operating activities
was $878,000 for the nine months ended September 30, 2016 compared to $211,000 in the same period last year.
The increase in net cash provided by operating
activities in the nine months ended September 30, 2016 resulted primarily from a decrease in accounts receivable and inventory,
net of accounts payable reductions. This was offset by increased operating losses as compared to the nine months ended September
30, 2015.
Net cash used in investing activities was
$101,000 during the nine months ended September 30, 2016 compared to $21,000 last year. The expenditures in 2016 and 2015 were
primarily for operating equipment and capitalized license fees. Net cash used in financing activities was $127,000 and $122,000
during the nine months ended September 30, 2016 and 2015, respectively, related to principal payments made on other long term notes.
Overall, the Company had a net increase
in cash and cash equivalents of $650,000 in the nine months ended September 30, 2016 compared with a net increase of $68,000 for
the nine months ended September 30, 2015.
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.