INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
619,271
|
|
|
$
|
973,333
|
|
Accounts receivable (net of allowance for doubtful accounts of $15,000 in 2017 and 2016)
|
|
|
1,303,524
|
|
|
|
1,204,908
|
|
Inventories, net
|
|
|
3,118,974
|
|
|
|
2,739,864
|
|
Other current assets
|
|
|
194,975
|
|
|
|
143,970
|
|
Total current assets
|
|
|
5,236,744
|
|
|
|
5,062,075
|
|
|
|
|
|
|
|
|
|
|
Plant and equipment:
|
|
|
|
|
|
|
|
|
Plant and equipment, at cost
|
|
|
14,635,341
|
|
|
|
14,607,155
|
|
Less: Accumulated depreciation and amortization
|
|
|
(13,893,351
|
)
|
|
|
(13,729,985
|
)
|
Total plant and equipment
|
|
|
741,990
|
|
|
|
877,170
|
|
Precious metals
|
|
|
613,647
|
|
|
|
613,647
|
|
Intangible assets, net
|
|
|
111,287
|
|
|
|
151,402
|
|
Other assets
|
|
|
30,338
|
|
|
|
30,338
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,734,006
|
|
|
$
|
6,734,632
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of other long term notes
|
|
$
|
25,452
|
|
|
$
|
107,801
|
|
Accounts payable and accrued liabilities
|
|
|
1,285,184
|
|
|
|
1,074,671
|
|
Customer advances
|
|
|
850,166
|
|
|
|
599,340
|
|
Total current liabilities
|
|
|
2,160,802
|
|
|
|
1,781,812
|
|
|
|
|
|
|
|
|
|
|
Related party convertible notes payable
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
Other long term notes, net of current portion
|
|
|
264,770
|
|
|
|
270,722
|
|
Total liabilities
|
|
|
4,925,572
|
|
|
|
4,552,534
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock: $.01 par value; 60,000,000 authorized shares; 13,512,867 shares issued at June 30, 2017 and 13,156,544 shares issued at December 31, 2016
|
|
|
135,130
|
|
|
|
131,567
|
|
Capital in excess of par value
|
|
|
18,850,150
|
|
|
|
18,699,852
|
|
Accumulated deficit
|
|
|
(17,161,896
|
)
|
|
|
(16,634,371
|
)
|
|
|
|
1,823,384
|
|
|
|
2,197,048
|
|
Less - Common stock in treasury, at cost (4,600 shares)
|
|
|
(14,950
|
)
|
|
|
(14,950
|
)
|
Total shareholders’ equity
|
|
|
1,808,434
|
|
|
|
2,182,098
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
6,734,006
|
|
|
$
|
6,734,632
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,606,931
|
|
|
$
|
2,641,331
|
|
|
$
|
4,771,251
|
|
|
$
|
4,989,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,160,002
|
|
|
|
2,062,664
|
|
|
|
4,035,188
|
|
|
|
4,136,319
|
|
Selling, general and administrative expenses
|
|
|
642,788
|
|
|
|
641,895
|
|
|
|
1,182,629
|
|
|
|
1,275,930
|
|
|
|
|
2,802,790
|
|
|
|
2,704,559
|
|
|
|
5,217,817
|
|
|
|
5,412,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(195,859
|
)
|
|
|
(63,228
|
)
|
|
|
(446,566
|
)
|
|
|
(422,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense—net
|
|
|
(40,237
|
)
|
|
|
(42,154
|
)
|
|
|
(80,959
|
)
|
|
|
(84,757
|
)
|
|
|
|
(40,237
|
)
|
|
|
(42,154
|
)
|
|
|
(80,959
|
)
|
|
|
(84,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(236,096
|
)
|
|
|
(105,382
|
)
|
|
|
(527,525
|
)
|
|
|
(507,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(236,096
|
)
|
|
$
|
(105,382
|
)
|
|
$
|
(527,525
|
)
|
|
|
(507,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
common share— basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding— basic and diluted
|
|
|
13,508,267
|
|
|
|
12,942,576
|
|
|
|
13,253,751
|
|
|
|
12,793,027
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(527,525
|
)
|
|
$
|
(507,569
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
203,481
|
|
|
|
231,181
|
|
401K common stock contribution
|
|
|
124,289
|
|
|
|
135,193
|
|
Stock based compensation
|
|
|
29,572
|
|
|
|
15,560
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(98,616
|
)
|
|
|
264,151
|
|
Inventories, net
|
|
|
(379,110
|
)
|
|
|
399,186
|
|
Other current assets
|
|
|
(51,005
|
)
|
|
|
(34,887
|
)
|
Other assets
|
|
|
—
|
|
|
|
(19,166
|
)
|
Accounts payable and accrued liabilities
|
|
|
210,513
|
|
|
|
(226,753
|
)
|
Customer advances
|
|
|
250,826
|
|
|
|
62,562
|
|
Total adjustments and changes
|
|
|
289,950
|
|
|
|
827,027
|
|
Net cash (used in) provided by operating activities
|
|
|
(237,575
|
)
|
|
|
319,458
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(28,186
|
)
|
|
|
(26,388
|
)
|
Capitalized license fees
|
|
|
—
|
|
|
|
(10,000
|
)
|
Net cash (used in) investing activities
|
|
|
(28,186
|
)
|
|
|
(36,388
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on notes payable-other
|
|
|
(88,301
|
)
|
|
|
(84,505
|
)
|
Net cash (used in) financing activities
|
|
|
(88,301
|
)
|
|
|
(84,505
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(354,062
|
)
|
|
|
198,565
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
973,333
|
|
|
|
673,685
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
619,271
|
|
|
$
|
872,250
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
81,952
|
|
|
$
|
84,504
|
|
Income taxes paid
|
|
$
|
1,050
|
|
|
$
|
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, 2016.
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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
949
|
|
|
$
|
1,041
|
|
Work in process, including manufactured parts and components
|
|
|
1,618
|
|
|
|
1,115
|
|
Finished goods
|
|
|
552
|
|
|
|
584
|
|
|
|
$
|
3,119
|
|
|
$
|
2,740
|
|
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, 2017 and 2016, 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, 2016 and the six
months ended June 30, 2017. 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, 2017, 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 $5,118,000 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, 2017, 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 911,341 and 901,341 common stock options, in each respective
period.
For the three and six months ended June
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 800,614 common stock options, in each respective period.
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 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 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 adoption of this guidance has no material impact on the Company’s consolidated financial
statements.
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.
NOTE 2 - EQUITY COMPENSATION PROGRAM AND STOCK BASED
COMPENSATION
The Company's results of operations for
the three months ended June 30, 2017 and 2016 include stock-based compensation expense for stock option grants totaling $14,587
and $9,598, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations within
cost of goods sold in the amount of $4,024 ($2,305 for 2016), and selling, general and administrative expenses in the amount of
$10,563 ($7,293 for 2016).
The Company's results of operations for
the six months ended June 30, 2017 and 2016 include stock-based compensation expense for stock option grants totaling $29,572 and
$15,560, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations within
cost of goods sold in the amount of $8,247 ($3,883 for 2016), and selling, general and administrative expenses in the amount of
$21,325 ($11,677 for 2016).
As of June 30, 2017 and 2016, there were
$119,442 and $65,256 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 1.6 years and 1.6 years, respectively.
There were 180,000 and 163,500 stock options
granted during the six months ended June 30, 2017 and 2016, respectively. 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, 2017 and 2016:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Expected Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected Volatility
|
|
|
133
- 134
|
%
|
|
|
128
|
%
|
Risk-free interest rate
|
|
|
2.2 - 2.3
|
%
|
|
|
2.1
|
%
|
Expected term
|
|
|
10 years
|
|
|
|
10 years
|
|
The following table represents stock options
granted, exercised and forfeited during the six month period ended June 30, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Aggregate
|
|
Stock Options
|
|
Options
|
|
|
Price per Option
|
|
|
Term (years)
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
760,214
|
|
|
$
|
.60
|
|
|
|
4.8
|
|
|
$
|
109,168
|
|
Granted
|
|
|
180,000
|
|
|
|
.58
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(28,873
|
)
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
911,341
|
|
|
$
|
.59
|
|
|
|
5.6
|
|
|
$
|
296,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
580,846
|
|
|
$
|
.66
|
|
|
|
4.2
|
|
|
$
|
165,693
|
|
The following table represents non-vested
stock options granted, vested and forfeited for the six months ended June 30, 2017.
|
|
Options
|
|
|
Weighted-Average Grant-Date
Fair Value ($)
|
|
Non-vested - January 1, 2017
|
|
|
272,167
|
|
|
|
.28
|
|
Granted
|
|
|
180,000
|
|
|
|
.56
|
|
Vested
|
|
|
(121,672
|
)
|
|
|
.27
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested – June 30, 2017
|
|
|
330,495
|
|
|
|
.44
|
|
NOTE 3 - STOCKHOLDERS’ EQUITY
In April 2017, the Company issued a total
of 356,323 common shares to the Inrad Optics 401k plan as a match to employee contributions for the year ended December 31, 2016.
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 quarterly 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 June 30, 2017, the Company had accrued interest in the amount of $75,000 associated with these notes
which is included in accrued expenses.
NOTE 5 – OTHER LONG TERM NOTES
Other Long Term Notes consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(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
|
|
$
|
14
|
|
|
$
|
96
|
|
U.S. Small Business Administration term note payable in equal monthly installments of principal and interest in the amount of $1,922 and bearing an interest rate of 4.0% and expiring in April 2032.
|
|
|
276
|
|
|
|
282
|
|
|
|
|
290
|
|
|
|
378
|
|
Less current portion
|
|
|
(25
|
)
|
|
|
(108
|
)
|
Long-term debt, excluding current portion
|
|
$
|
265
|
|
|
$
|
270
|
|
|
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, 2016, as filed with the Securities
and Exchange Commission on March 31, 2017. 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, 2016. 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, 2016.
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 June 30,
2017 decreased 1.3% to $2,607,000 from $2,641,000 for the comparable period last year. For the six months ended June 30, 2017,
sales were $4,771,000, a decrease of 4.4%, compared to $4,989,000 for the six months ended June 30, 2016.
Sales to customers in the defense/aerospace
market decreased by 31.4% and 18.2% for the three and six months ended June 30, 2017, respectively, compared to the same periods
last year. This reflected lower bookings activity and reduced shipments to three major customers in this market.
Sales to customers in the process control
and metrology market increased by 35.1% and 11.9% for the three and six months ended June 30, 2017, respectively, compared to the
same periods last year. This was mainly attributable to increased shipments to one major customer who booked a large order during
the periods.
Sales in the laser systems and related
products market decreased by 52.1% and 32.5% for the three and six months ended June 30, 2017, respectively, as compared to the
same periods last year. Sales under one government contract, in addition to two sales to original equipment manufacturers in this
market were primarily responsible for the decrease compared to the same periods last year.
The university and national lab market
increased by 97.5% in the second quarter of 2017 and was up 43.4% in the six months ended June 30, 2017 compared to the same periods
last year. Sales increases to one large national lab were primarily attributable for the overall increase.
In the six months ended June 30, 2017,
the Company had two customers that individually had sales representing more than 10% of total sales. One customer was in the defense/aerospace
market and the other customer was in the process control and metrology market. For the six months ended June 30, 2016, there was
one customer with sales of more than 10% of total sales. This customer was in the defense/aerospace market.
The Company’s top five customers
represented 47.4% of total sales in the six month period ended June 30, 2017, compared to 35.9% in the same period in 2016. For
the three months ended June 30, 2017 and 2016, sales for the top five customer group represented 51.4% and 41.1%, respectively.
Orders booked during the first six months
of 2017 were $5.4 million compared to $4.9 million in the comparable period last year.
Order backlog was $6.8 million at June
30, 2017, compared to $5.1 million at June 30, 2016.
Cost of Goods Sold
Cost of goods sold was $2,160,000 and $2,063,000
for the three months ended June 30, 2017 and 2016, respectively. This represented an increase of $97,000 or 4.7%. For the six months
ended June 30, 2017, cost of goods sold were $4,035,000, a decrease of $101,000 or 2.4% compared to $4,136,000 in the same period
in 2016.
Material costs as a percentage of sales
for the three and six months ended June 30, 2017 increased as compared to the same period in 2016, primarily due to an increase
in sales mix to products with a higher component of material costs.
For the three months ended June 30, 2017,
manufacturing salaries and wages and related fringe benefits decreased by approximately 5.4% or $57,000 from the comparable period
in 2016. For the six months ended June 30, 2017, manufacturing salaries and wages and related fringe benefits decreased by approximately
7.6% or $167,000 from the six months ended June 30, 2016. Average head counts were higher during the comparable periods last year.
Manufacturing expenses decreased by 16.1%
in the second quarter compared to the same period in 2016 and were down 8.6% in the six months ended June 30, 2017 compared to
the six months ended June 30, 2016.
Gross profit for the three months ended
June 30, 2017 was $447,000 or 17.1% of sales compared to $579,000 or 21.9% of sales in the same quarter last year. Gross profit
for the six months ended June 30, 2017 and 2016 was $736,000 or 15.4% and $853,000 or 17.1% of sales, respectively.
Selling, General and Administrative
Expenses
Selling, general and administrative expenses
(“SG&A” expenses) in the three and six months ended June 30, 2017 amounted to $643,000 or 24.7% of sales and 1,183,000
or 24.8% of sales, respectively. This compared to $642,000 or 24.3% of sales and $1,276,000 or 25.6% of sales, respectively, for
the same periods in 2016.
For the three and six months ended June
30, 2017, SG&A salary, wages and fringe benefits decreased by approximately $11,000 or 3.3% and $103,000 or 14.9%, respectively,
reflecting lower average head count levels compared to the same periods in 2016.
SG&A expenses increased by approximately
$12,000 or 3.7% and $9,000 or 1.7% in the three and six months ended June 30, 2017 compared to the three and six months ended June
30, 2016 mainly due to higher recruiting costs which were partially offset by lower trade show expenses during the period.
Loss from Operations
The Company had a loss from operations
of $196,000 in the three months ended June 30, 2017 compared with an operating loss of $63,000 in the three months ended June 30,
2016. For the six months ended June 30, 2017, the Company’s operating loss was $447,000 compared with an operating loss of
$423,000 in the same period last year.
Other Income and Expense
Net interest expense for the three months
ended June 30, 2017 was $40,000 compared to $42,000 in the same period in 2016. Net interest expense for the six months ended June
30, 2017 was $81,000 compared to $85,000 in the same period in 2016.
Income Taxes
For the three and six months ended June
30, 2017 and 2016, the Company did not record a current provision for either state tax or federal tax due to the losses incurred
for both income tax and financial reporting purposes.
Net Income (Loss)
The Company had a net loss of $236,000
compared to a net loss of $105,000 in the three months ended June 30, 2017 and 2016, respectively. For the six months ended June
30, 2017 and 2016, the Company had a net loss of $528,000 and $508,000, respectively. Lower sales in the three and six months ended
June 30, 2017 partially offset by reduced operating and SG&A expenses compared to the previous year was primarily responsible
for the increase in operating losses.
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 June 30, 2017 and December 31, 2016,
the Company had cash and cash equivalents of $619,000 and $973,000, 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 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 annual interest rate
of 4.35%. In July, the term loan agreement with Valley National Bank was paid off, in full.
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 June 30, 2017, the Company had accrued interest in the amount of $75,000 associated with these notes.
The following table summarizes net cash
(used in) provided by operating, investing and financing activities for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(238
|
)
|
|
$
|
319
|
|
Net cash (used in) investing activities
|
|
|
(28
|
)
|
|
|
(36
|
)
|
Net cash (used in) financing activities
|
|
|
(88
|
)
|
|
|
(85
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(354
|
)
|
|
$
|
198
|
|
Net cash used in operating activities was
$(238,000) for the six months ended June 30, 2017 compared to net cash provided by operating activities of $319,000 in the same
period last year.
In addition to the higher loss, the decrease
in net cash from operating activities in the six months ended June 30, 2017 resulted primarily from the Company’s net decrease
in working capital compared to the six months ended June 30, 2016 as increases in accounts receivable and inventory were only partially
offset by increased accounts payable and customer advances.
Net cash used in investing activities was
$28,000 during the six months ended June 30, 2017 compared to $36,000 last year. The expenditures in 2017 and 2016 were primarily
for operating equipment, in addition to capitalized license fees in 2016. Net cash used in financing activities was $88,000 and
$85,000 during the six months ended June 30, 2017 and 2016, respectively, and were related to principal payments on other long
term notes.
Overall, the Company had a net decrease
in cash and cash equivalents of $354,000 in the six months ended June 30, 2017 compared with a net increase of $198,000 for the
six months ended June 30, 2016.
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.