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, 2017.
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.
Accounts Receivable
Accounts receivable are carried at net
realizable value, net of write-offs and allowances. The Company establishes an allowance for doubtful accounts based on estimates
as to the collectability of accounts receivable. Management specifically analyzes past-due accounts receivable balances and, additionally,
considers bad debt history, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. Uncollectible accounts receivable are written-off when it is determined that
the balance will not be collected. Reserves for uncollectible accounts receivable are recorded as part of selling, general and
administrative expenses in the Consolidated Statements of Operations, and were approximately $15,000 at March 31, 2018.
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:
|
|
March 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
Raw materials
|
|
$
|
1,041
|
|
|
$
|
1,174
|
|
Work in process, including manufactured parts and components
|
|
|
1,342
|
|
|
|
1,462
|
|
Finished goods
|
|
|
445
|
|
|
|
560
|
|
|
|
$
|
2,828
|
|
|
$
|
3,196
|
|
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.
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, 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 March
31, 2018, the Company’s management concluded that it is more likely than not that the Company will not be able to realize
any portion of the benefit on the net deferred tax balance of $3,448,000 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.
For the three months ended March 31, 2018,
the Company did not record a current provision for income taxes due to the availability of net operating loss carryforwards to
offset taxable income for both federal and state tax purposes.
For the three months ended March 31, 2017,
the Company did not record a current provision for either state tax or federal alternative minimum tax due to the losses incurred
for both income tax and financial reporting purposes.
The Tax Cuts and Jobs Act was enacted on
December 22, 2017. The Tax Act eliminates alternative minimum taxes and lowers the U.S. federal corporate income tax from 34% to
21% effective January 1, 2018. At December 31, 2017, the Company remeasured its net deferred tax assets using the new Federal
Tax Rate and posted a one-time reduction of $1,765,000 in deferred tax assets and $1,765,000 to the valuation allowance to reflect
the lower realization rate to be applied commencing in 2018.
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, 2018,
a total of 14,941 stock options, 1,875,000 warrants issuable upon conversion of outstanding convertible notes and 84,375 warrants
issuable on conversion of accrued interest on convertible notes were excluded from the computation of diluted net income per common
share.
For the three months ended March 31, 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 convertible
notes, in addition to 901,341 common stock options.
A reconciliation of the shares used in
the calculation of basic and diluted earnings (loss) per common share is as follows:
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
|
|
Income(Loss)
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
Income(Loss)
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
264,163
|
|
|
|
13,516,600
|
|
|
$
|
0.02
|
|
|
$
|
(291,429
|
)
|
|
|
13,151,944
|
|
|
$
|
(0.02
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes
|
|
|
37,500
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Accrued Interest on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes
|
|
|
—
|
|
|
|
112,500
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Stock Options
|
|
|
—
|
|
|
|
404,196
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
301,663
|
|
|
|
16,533,296
|
|
|
$
|
0.02
|
|
|
$
|
(291,429
|
)
|
|
|
13,151,944
|
|
|
$
|
(0.02
|
)
|
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 May 2014, the FASB issued Accounting
Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”),
which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” ASU 2014-09 is based on the
principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about
the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments
and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for
fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the
provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales
continue to generally be recognized either when products are shipped (i.e. point in time) or under certain long-term government
contracts, as the Company transfers control of the product or service to its customers (i.e. over time), which approximates the
previously used percentage-of-completion method of accounting. As such, the adoption of ASU 2014-09 had no material impact to the
Company’s financial position or results of operations; however, the Company has now presented the disclosures required by
this new standard, refer to Note 2.
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 – REVENUE
The Company’s revenues are comprised
of product sales as well as products and services provided under long-term government contracts with its customers. All revenue
is recognized when the Company satisfies its performance obligation(s) under the contract (either implicit or explicit) by transferring
the promised product or service to its customer either when (or as) its customer obtains control of the product or service. A performance
obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price
is allocated to each distinct performance obligation. The majority of the Company’s contracts have a single performance obligation,
as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore,
not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price
to each performance obligation using the Company’s best estimate of standalone selling price for each distinct product or
service in the contract, which is generally based on an observable price.
Revenue is measured as the amount of consideration
the Company expects to receive in exchange for transferring products or providing services. As such, revenue is recorded net of
returns, allowances, customer discounts, and incentives. Sales, value add, and other taxes collected from customers and remitted
to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included
in cost of goods sold.
The Company’s performance obligations
under long-term government contracts are generally satisfied over time. Revenue from products or services transferred to customers
over time accounted for approximately 3.1% and 4.1% of revenue for the three months ended March 31, 2018 and 2017, respectively.
Revenue under these long-term government contracts are generally recognized over time using an input measure based upon the proportion
of actual costs incurred to estimated total project costs, which is a method used to best depict the Company’s performance
to date under the terms of the contract.
Accounting for these long-term government
contracts involves the use of various techniques to estimate total revenue and costs. The Company estimates profit on these long-term
government contracts as the difference between total estimated revenue and expected costs to complete a contract and recognizes
that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future
events that may span several years. These assumptions include, among other things, labor productivity, costs and availability of
materials, and timing of funding by the U.S. government. The nature of these long-term agreements may give rise to several types
of variable consideration, such as claims, awards and incentive fees. Historically, these amounts of variable consideration are
not considered significant. Additionally, contract estimates may include additional revenue for submitted contract modifications
if there exists an enforceable right to the modification, the amount can be reasonably estimated and its realization is probable.
These estimates are based on historical collection experience, anticipated performance, and the Company’s best judgement
at the time. These amounts are generally included in the contract’s transaction price and are allocated over the remaining
performance obligations. Changes in judgments on these above estimates could impact the timing and amount of revenue recognized
with a resulting impact on the timing and amount of associated income. Under these long-term government contracts, the Company
may receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to
consideration becomes unconditional. In the event a contract loss becomes known, the entire amount of the estimated loss is recognized
in the Consolidated Statements of Operations.
The majority of the Company’s revenue
is from products and services transferred to customers at a point in time and was approximately 96.9% and 95.9% of revenue for
the three months ended March 31, 2018 and 2017, respectively. The Company recognizes revenue at the point in time in which the
customer obtains control of the product or service, which is generally when product title passes to the customer upon shipment.
In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical
location.
As part of the adoption of Accounting Standards
Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, the Company reviewed its sales
by market area and reassigned certain customers within the existing markets. In addition, the Universities and National Lab market
was renamed to Scientific/R&D. Sales by market area, as previously presented for the three months ended March 31, 2017, were
reclassified accordingly.
The following table summarizes the Company’s
sales by market area:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Aerospace & Defense
|
|
|
1,029,007
|
|
|
|
712,822
|
|
Process Control & Metrology
|
|
|
1,557,816
|
|
|
|
843,303
|
|
Laser Systems
|
|
|
366,230
|
|
|
|
312,395
|
|
Scientific / R&D
|
|
|
349,376
|
|
|
|
295,800
|
|
Total
|
|
$
|
3,302,429
|
|
|
$
|
2,164,320
|
|
Net sales by timing to transfers of goods and services is as
follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Transfer at point in time
|
|
$
|
3,198,780
|
|
|
$
|
2,075,251
|
|
Transfer over time
|
|
|
103,649
|
|
|
|
89,069
|
|
Total net sales
|
|
$
|
3,302,429
|
|
|
$
|
2,164,320
|
|
The timing of revenue recognition, billings
and cash collections results in billed receivables, costs in excess of billings (contract assets), and billings in excess of costs
(contract liabilities, previously deferred revenue) on the Consolidated Balance Sheet. Contract liabilities additionally include
customer advances or prepayments. Costs in excess of billings and billings in excess of costs associated with long-term government
contracts were not significant at March 31, 2018 or 2017. Revenue recognized during the three months ended March 31, 2018 and 2017
that was included in contract liabilities at the beginning of the period was $551,873 and $47,004, respectively.
On March 31, 2018, the Company has approximately
$6,485,909 of remaining performance obligations, which is also referred to as backlog. Approximately 1% of the March 31, 2018 backlog
is related to projects that will extend beyond March 31, 2019.
NOTE 3- EQUITY COMPENSATION PROGRAM AND STOCK BASED COMPENSATION
The Company's results of operations for
the three months ended March 31, 2018 and 2017 include stock-based compensation expense for stock option grants totaling $13,035
and $14,985, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations
within cost of goods sold in the amount of $3,583 ($4,223 for 2017), and selling, general and administrative expenses in the amount
of $9,452 ($10,762 for 2017).
As of March 31, 2018 and 2017, there were
$76,451 and $127,029 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 1.25 years and 1.7 years, respectively.
There were no stock options granted during
the three months ended March 31, 2018 and 170,000 stock options granted in the three months ended March 31, 2017, respectively.
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, 2018 and 2017:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected Volatility
|
|
|
—
|
%
|
|
|
133
|
%
|
Risk-free interest rate
|
|
|
—
|
%
|
|
|
2.17
|
%
|
Expected term
|
|
|
—
|
|
|
|
10 years
|
|
The following table represents stock options
granted, exercised and forfeited during the three months ended March 31, 2018:
Stock Options
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price per Option
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2018
|
|
|
903,008
|
|
|
$
|
.58
|
|
|
|
5.2
|
|
|
$
|
648,410
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
903,008
|
|
|
$
|
.58
|
|
|
|
4.9
|
|
|
$
|
479,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
725,184
|
|
|
$
|
.60
|
|
|
|
4.1
|
|
|
$
|
374,942
|
|
The following table represents
non-vested stock options granted, vested and forfeited for the three months ended March 31, 2018.
|
|
Options
|
|
|
Weighted-Average Grant-Date
Fair Value ($)
|
|
Non-vested - January 1, 2018
|
|
|
330,495
|
|
|
|
.44
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(152,671
|
)
|
|
|
.38
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested – March 31, 2018
|
|
|
177,824
|
|
|
|
.49
|
|
NOTE 4- STOCKHOLDERS’ EQUITY
In May 2018, the Company approved a matching
contribution to participants in the Inrad Optics 401k Plan (the “Plan”) for the year ended December 31, 2017. In total,
cash in the amount of $30,926 and 111,288 common shares of Inrad Optics, Inc will be contributed to the Plan in the second quarter
of 2018.
NOTE 5 – RELATED PARTY TRANSACTIONS
On April 12, 2018, 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, 2021 from April 1, 2019. 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,
2022 to April 1, 2024. As of March 31, 2018, the Company had accrued interest in the amount of $112,500 associated with these notes.
NOTE 6 – OTHER LONG TERM NOTES
Other Long Term Notes consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
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.
|
|
|
267
|
|
|
|
270
|
|
Less current portion
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Long-term debt, excluding current portion
|
|
$
|
255
|
|
|
$
|
258
|
|