INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March
31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,086,783
|
|
|
$
|
1,185,553
|
|
Accounts receivable
(net of allowance for doubtful accounts of $15,000 in 2019 and 2018)
|
|
|
1,320,814
|
|
|
|
1,296,487
|
|
Inventories,
net
|
|
|
2,933,536
|
|
|
|
3,015,883
|
|
Other
current assets
|
|
|
201,661
|
|
|
|
180,893
|
|
Total
current assets
|
|
|
5,542,794
|
|
|
|
5,678,816
|
|
|
|
|
|
|
|
|
|
|
Plant
and equipment:
|
|
|
|
|
|
|
|
|
Plant
and equipment, at cost
|
|
|
14,794,078
|
|
|
|
14,696,966
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(14,127,781
|
)
|
|
|
(14,069,880
|
)
|
Total
plant and equipment
|
|
|
666,297
|
|
|
|
627,086
|
|
Precious
metals
|
|
|
562,347
|
|
|
|
562,347
|
|
Intangible
assets, net
|
|
|
23,697
|
|
|
|
32,156
|
|
Other
assets
|
|
|
32,020
|
|
|
|
32,020
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
6,827,155
|
|
|
$
|
6,932,425
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of other long term notes
|
|
$
|
12,960
|
|
|
$
|
12,960
|
|
Accounts
payable and accrued liabilities
|
|
|
909,373
|
|
|
|
835,015
|
|
Contract
liabilities
|
|
|
603,292
|
|
|
|
772,927
|
|
Total
current liabilities
|
|
|
1,525,625
|
|
|
|
1,620,902
|
|
|
|
|
|
|
|
|
|
|
Related
party convertible notes payable
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
Other
long term Notes, net of current portion
|
|
|
241,548
|
|
|
|
244,781
|
|
Total
liabilities
|
|
|
4,267,173
|
|
|
|
4,365,683
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common stock: $.01 par value; 60,000,000 authorized shares; 13,636,988
shares
issued at March 31, 2019 and 13,636,988 shares issued at December 31, 2018
|
|
|
136,371
|
|
|
|
136,371
|
|
Capital in excess of
par value
|
|
|
19,084,990
|
|
|
|
19,055,615
|
|
Accumulated
deficit
|
|
|
(16,646,429
|
)
|
|
|
(16,610,294
|
)
|
|
|
|
2,574,932
|
|
|
|
2,581,692
|
|
Less
- Common stock in treasury, at cost (4,600 shares)
|
|
|
(14,950
|
)
|
|
|
(14,950
|
)
|
Total
shareholders’ equity
|
|
|
2,559,982
|
|
|
|
2,566,742
|
|
Total
Liabilities and shareholders’ equity
|
|
$
|
6,827,155
|
|
|
$
|
6,932,425
|
|
See Notes to Condensed Consolidated Financial
Statements (Unaudited)
INRAD OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
excess of
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
par
value
|
|
|
Deficit
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018
|
|
|
13,521,200
|
|
|
$
|
135,213
|
|
|
$
|
18,882,086
|
|
|
$
|
(17,316,902
|
)
|
|
$
|
(14,950
|
)
|
|
$
|
1,685,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401K contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued on exercise of options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
13,035
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income March 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
264,163
|
|
|
|
—
|
|
|
|
264,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
|
|
13,521,200
|
|
|
$
|
135,213
|
|
|
$
|
18,895,121
|
|
|
$
|
(17,052,739
|
)
|
|
$
|
(14,950
|
)
|
|
$
|
1,962,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
excess of
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
par
value
|
|
|
Deficit
|
|
|
Stock
|
|
|
Equity
|
|
Balance, January 1, 2019
|
|
|
13,636,988
|
|
|
|
136,371
|
|
|
|
19,055,615
|
|
|
|
(16,610,294
|
)
|
|
|
(14,950
|
)
|
|
|
2,566,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401K contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued on exercise of options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
29,375
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss March 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36,135
|
)
|
|
|
—
|
|
|
|
(36,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
13,636,988
|
|
|
$
|
136,371
|
|
|
$
|
19,084,990
|
|
|
$
|
(16,646,429
|
)
|
|
$
|
(14,950
|
)
|
|
$
|
2,559,982
|
|
See notes to consolidated financial statements
INRAD
OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,601,060
|
|
|
$
|
3,302,429
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,956,280
|
|
|
|
2,452,205
|
|
Selling, general and administrative expenses
|
|
|
642,254
|
|
|
|
543,999
|
|
|
|
|
2,598,534
|
|
|
|
2,996,204
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,526
|
|
|
|
306,225
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense—net
|
|
|
(38,661
|
)
|
|
|
(39,774
|
)
|
Loss on exchange of precious metals
|
|
|
—
|
|
|
|
(2,288
|
)
|
|
|
|
(38,661
|
)
|
|
|
(42,062
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(36,135
|
)
|
|
|
264,163
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(36,135
|
)
|
|
|
264,163
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share — basic
|
|
$
|
(0.00
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share — diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding — basic
|
|
|
13,632,388
|
|
|
|
13,516,600
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted
|
|
|
13,632,388
|
|
|
|
16,533,296
|
|
See Notes to Condensed Consolidated Financial
Statements (Unaudited)
INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(36,135
|
)
|
|
$
|
264,163
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
66,360
|
|
|
|
73,049
|
|
Loss on exchange of precious metals
|
|
|
—
|
|
|
|
2,288
|
|
Stock based compensation
|
|
|
29,375
|
|
|
|
13,035
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(24,327
|
)
|
|
|
(497,802
|
)
|
Inventories, net
|
|
|
82,347
|
|
|
|
367,884
|
|
Other current assets
|
|
|
(20,768
|
)
|
|
|
(29,749
|
)
|
Accounts payable and accrued liabilities
|
|
|
74,358
|
|
|
|
(126,474
|
)
|
Contract Liabilities
|
|
|
(169,635
|
)
|
|
|
(355,777
|
)
|
Total adjustments and changes
|
|
|
37,710
|
|
|
|
(553,546
|
)
|
Net cash
provided by (used in) operating activities
|
|
|
1,575
|
|
|
|
(289,383
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(97,112
|
)
|
|
|
(13,790
|
)
|
Purchase of precious metals
|
|
|
—
|
|
|
|
(875
|
)
|
Net cash (used in) investing activities
|
|
|
(97,112
|
)
|
|
|
(14,665
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on notes payable-other
|
|
|
(3,233
|
)
|
|
|
(3,110
|
)
|
Net cash (used in) financing activities
|
|
|
(3,233
|
)
|
|
|
(3,110
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash and cash equivalents
|
|
|
(98,770
|
)
|
|
|
(307,158
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,185,553
|
|
|
|
799,953
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,086,783
|
|
|
$
|
492,795
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
Interest paid
|
|
$
|
40,033
|
|
|
$
|
40,156
|
|
Income taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
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, 2018.
In preparing these unaudited condensed consolidated
financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date
the unaudited condensed 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, 2019.
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,
2019
|
|
|
December
31,
2018
|
|
|
|
(Unaudited)
|
|
|
Raw materials
|
|
$
|
1,161
|
|
|
$
|
1,143
|
|
Work in process, including manufactured parts
and components
|
|
|
1,419
|
|
|
|
1,389
|
|
Finished goods
|
|
|
354
|
|
|
|
484
|
|
|
|
$
|
2,934
|
|
|
$
|
3,016
|
|
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 year 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 years period ended December 31, 2018. 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, 2019, 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 $3,478,000 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, 2019,
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) 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, 2019,
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 addition to 1,228,267 common stock options.
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.
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, 2019
|
|
|
Three Months Ended
March 31, 2018
|
|
|
|
Income (Loss)
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
Income (Loss)
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(36,135
|
)
|
|
|
13,632,388
|
|
|
$
|
0.00
|
|
|
$
|
264,163
|
|
|
|
13,516,600
|
|
|
$
|
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)
|
|
$
|
(36,135
|
)
|
|
|
13,632,388
|
|
|
$
|
0.00
|
|
|
$
|
301,663
|
|
|
|
16,533,296
|
|
|
$
|
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 has adopted ASU 2016-02 on its financial statements and
disclosure. The adoption of ASU 2016-02 did not have a material effect on the financial statements.
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 a 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 3.6% and 3.1% of revenue
for the three months ended March 31, 2019 and 2018, respectively. Revenue under these long-term government contracts is 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 96.4% and 96.9% of revenue for
the three months ended March 31, 2019 and 2018, 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.
The following table summarizes the Company’s
sales by market area:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Aerospace & Defense
|
|
$
|
1,040,557
|
|
|
$
|
1,029,007
|
|
Process Control & Metrology
|
|
|
1,120,987
|
|
|
|
1,557,816
|
|
Laser Systems
|
|
|
284,990
|
|
|
|
366,230
|
|
Scientific / R&D
|
|
|
154,526
|
|
|
|
349,376
|
|
Total
|
|
$
|
2,601,060
|
|
|
$
|
3,302,429
|
|
Net sales by timing to transfers of goods and services is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Transfer at point in time
|
|
$
|
2,507,507
|
|
|
$
|
3,198,780
|
|
Transfer over time
|
|
|
93,553
|
|
|
|
103,649
|
|
Total net sales
|
|
$
|
2,601,060
|
|
|
$
|
3,302,429
|
|
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, 2019 or 2018. Revenue recognized during the three months ended March 31, 2019 and 2018,
that was included in contract liabilities at the beginning of the period was $218,535 and $551,843, respectively.
On March 31, 2019, the Company has approximately
$5,729,561 of remaining performance obligations, which is also referred to as backlog. Approximately 1% of the March 31, 2019
backlog is related to projects that will extend beyond March 31, 2020.
NOTE 3- EQUITY COMPENSATION PROGRAM AND STOCK BASED COMPENSATION
The Company's results of operations for the
three months ended March 31, 2019 and 2018, include stock-based compensation expense for stock option grants totaling $29,375
and $13,035, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations
within cost of goods sold in the amount of $8,372 ($3,583 for 2018), and selling, general and administrative expenses in the amount
of $21,003 ($9,452 for 2018).
As of March 31, 2019 and 2018, there were
$282,442 and $76,451 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 1.70 years and 1.25 years, respectively.
There were 185,000 stock options granted during
the three months ended March 31, 2019, and no stock options granted in the three months ended March 31, 2018. 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, 2019, and 2018:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Expected Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected Volatility
|
|
|
139
|
%
|
|
|
—
|
%
|
Risk-free interest rate
|
|
|
2.43
|
%
|
|
|
—
|
%
|
Expected term
|
|
|
10 years
|
|
|
—
|
|
The following table represents stock options
granted, exercised and forfeited during the three months ended March 31, 2019:
Stock Options
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price per Option
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2019
|
|
|
1,058,208
|
|
|
$
|
.64
|
|
|
|
5.58
|
|
|
$
|
337,997
|
|
Granted
|
|
|
185,000
|
|
|
|
.71
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(14,941
|
)
|
|
|
1.75
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
1,228,267
|
|
|
$
|
.64
|
|
|
|
6.53
|
|
|
$
|
1,202,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
|
|
866,598
|
|
|
$
|
.58
|
|
|
|
4.78
|
|
|
$
|
701,342
|
|
The following table represents non-vested
stock options granted, vested and forfeited for the three months ended March 31, 2019.
|
|
Options
|
|
|
Weighted-Average Grant-Date
Fair Value ($)
|
|
Non-vested - January 1, 2019
|
|
|
349,491
|
|
|
|
.74
|
|
Granted
|
|
|
185,000
|
|
|
|
.71
|
|
Vested
|
|
|
(172,822
|
)
|
|
|
.63
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested – March 31, 2019
|
|
|
361,669
|
|
|
|
.77
|
|
NOTE 4- STOCKHOLDERS’ EQUITY
In February 2019, the Company approved a matching
contribution to participants in the Inrad Optics 401k Plan (the “Plan”) for the year ended December 31, 2018. In total,
cash in the amount of $31,196 and 98,189 common shares of Inrad Optics, Inc will be contributed to the Plan in the second quarter
of 2019.
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, 2019, the Company had accrued interest in the amount of $75,000 associated with these notes.
NOTE 6 – OTHER LONG TERM NOTES
Other Long Term Notes consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(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.
|
|
|
255
|
|
|
|
258
|
|
Less current portion
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Long-term debt, excluding current portion
|
|
$
|
242
|
|
|
$
|
245
|
|
|
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, 2018, as filed with the Securities
and Exchange Commission on April 1, 2019. 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, 2018. In preparing our unaudited 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, 2018.
Results of Operations
Inrad Optics, Inc.’s business falls into
two main categories: Optical Components and Laser 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 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 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 March
31, 2019, were $2,601,000, a decrease of 21.2%, compared to $3,302,000 for the three months ended March 31, 2018.
Sales to the defense/aerospace market
increased by $11,000 or 1.1% to $1,041,000 in the three months ended March 31, 2019, compared to $1,029,000 for the three months
ended March 31, 2018. The increase is mainly attributable to a trend in increased demand for our products in the defense/aerospace
market offset by the completion of the long term project in 2018.
Process control and metrology (“PC&M”) sales
were $1,121,000 for the three months ended March 31, 2019, decreased by $437,000, or 28.1%, from $1,558,000 for the three months
ended March 31, 2018. Reduced demand and the timing of delivery schedules in the PC&M market resulted in sales decrease to
several existing accounts in the three months ended March 31, 2019, compared to the three months ended March 31, 2018.
For the three months ended March 31, 2019,
sales to customers in the laser systems market were $285,000, decreased by $81,000 or 22.2% from $366,000 for the three months
ended March 31, 2018.
The decrease in sales is due to
the timing of delivery schedules to an international distributor and one large OEM offset by increases in shipments to several
newer customers.
Sales
to customers in the Scientific/R&D market (formerly Universities & National Labs) decreased by $194,000 or 55.6% to $155,000
for the three months ended March 31, 2019, compared to sales of $349,000 for the three months ended March 31, 2018. The decreased
is mainly due to order placement timing from one large national lab customer and a slight decrease in billings to one US Government
account.
For the three months ended March 31, 2019 and
2018, there were two customers that each represented 10% or more of total sales in both periods.
The Company’s top five customers
represented 51.8% of sales in the three months period ended March 31, 2019, compared to 59.9% in the same period in 2018.
Orders booked during the first three months
of 2019 totaled $1,937,000, compared to $3,274,000 in the same period last year.
Order backlog at March 31, 2019 and 2018,
was $5,730,000 and $6,486,000, respectively.
Cost of Goods Sold
For the three months ended March 31, 2019
and 2018, cost of goods sold was $1,956,000 and $2,452,000, respectively, a decrease of $496,000 or 20.2 %.
The decrease in cost of goods sold in 2019,
was attributable to the following: material costs decreased by approximately 30.7%, compared to a sales decrease of 21.2%, lower
wage and salary expenses and a reduction in variable overhead costs primarily due to lower sales.
Gross profit for the three months ended March
31, 2019, was $645,000 or 24.8% of sales, compared to $850,000 or 25.7% in the same quarter last year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
(“SG&A” expenses) in the three months ended March 31, 2019, amounted to $642,000 or 24.7% of sales, compared to
$544,000 or 16.5% of sales for the three months ended March 31, 2018.
SG&A salaries and wages and related fringe
benefits increased by 17.8%, compared with the same period in 2018 partially reflecting increases in sales staff, marketing, and
health care and other benefit costs during the three months ended March 31, 2019.
Income (Loss) from Operations
The Company had income from operations
of $3,000 for the three months ended March 31, 2019, compared with an operating income of $306,000 in the three months ended March
31, 2018. The decrease in income primarily reflects the impact of the Company’s significantly lower sales in the three months
ended March 31, 2019, compared to the same period last year.
Other Income and Expense
Net interest expense for the three months
ended March 31, 2019 was $39,000 compared to $40,000 in the same period in 2018, as there was no significant change in the Company’s
borrowing level.
Income Taxes
For the three months ended March 31, 2019,
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.
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.
Net Income (Loss)
The Company had a net loss of $36,000 for
the three months ended March 31, 2019, compared to a net income of $264,000 for the three months ended March 31, 2018. The net
loss primarily reflects the decrease in sales for the three months ended March 31, 2019, compared to the last period.
Liquidity and Capital Resources
The Company’s primary source of liquidity
is cash and cash equivalents and on-going collection of accounts receivable. The Company’s major use of cash in recent years
has been for financing operations, for payment of accrued and current interest on convertible debt, for servicing of long term
debt and for capital expenditures.
As of March 31, 2019, and December 31, 2018,
the Company had cash and cash equivalents of $1,087,000 and $1,186,000, respectively.
The Company occupies approximately 42,000
square feet of space located at 181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease. Under the terms of the lease,
the Company is obligated for all real estate taxes, maintenance and operating costs of the facility, the current lease will expire
on May 31, 2019. The company intends to have sing a new lease agreement prior to May, 31, 2019.
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, 2019, 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 three months ended March 31, 2019 and 2018:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
2
|
|
|
$
|
(289
|
)
|
Net cash used in investing activities
|
|
|
(97
|
)
|
|
|
(15
|
)
|
Net cash used in financing activities
|
|
|
(4
|
)
|
|
|
(3
|
)
|
Net (decrease) in cash and cash equivalents
|
|
$
|
(99
|
)
|
|
$
|
(307
|
)
|
Net cash provided by operating activities
was $2,000 for the three months ended March 31, 2019, compared to net cash used in operations of $289,000 in the same period last
year.
Net cash provided by operating activities
in the three months ended March 31, 2019, resulted primarily from decrease in accounts receivable, reduction in inventory, higher
accounts payables and accrued liabilities, this compared to net cash used in operating activities of $289,000 in the three months
ended March 31, 2018, which was primarily due to increases in accounts receivable, reductions in accounts payable and accrued
liabilities, and lower contract liabilities which were offset by reduced inventory levels during the period.
Net cash used in investing
activities was $97,000 during the three months ended March 31, 2019 compared to $15,000 in the same period last year reflecting
capital expenditures in both periods. Net cash used in financing activities during the three months ended March 31, 2019, was
$4,000 compared to $3,000 during the three months ended March 31, 2018 respectively, related to required principal payments.
Overall, cash and cash equivalents decreased
by $99,000 and $307,000 for the three months ended March 31, 2019 and 2018, respectively.
Management believes based on the Company’s
operations and its existing working capital resources together with existing cash flows, that the Company has sufficient cash
flows to fund operations through at least June 30, 2020.