INRAD
OPTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
812,309
|
|
|
$
|
1,185,553
|
|
Accounts receivable (net of allowance for doubtful accounts of $15,000 in 2019 and 2018)
|
|
|
1,134,415
|
|
|
|
1,296,487
|
|
Inventories, net
|
|
|
2,973,097
|
|
|
|
3,015,883
|
|
Other current assets
|
|
|
117,367
|
|
|
|
180,893
|
|
Total current assets
|
|
|
5,037,188
|
|
|
|
5,678,816
|
|
|
|
|
|
|
|
|
|
|
Plant and equipment:
|
|
|
|
|
|
|
|
|
Plant and equipment, at cost
|
|
|
14,988,285
|
|
|
|
14,696,966
|
|
Less: Accumulated depreciation and amortization
|
|
|
(14,257,044
|
)
|
|
|
(14,069,880
|
)
|
Total plant and equipment
|
|
|
731,241
|
|
|
|
627,086
|
|
Precious metals
|
|
|
561,909
|
|
|
|
562,347
|
|
Intangible assets, net
|
|
|
21,964
|
|
|
|
32,156
|
|
Lease right-of-use
|
|
|
754,653
|
|
|
|
-
|
|
Other assets
|
|
|
23,149
|
|
|
|
32,020
|
|
Total Assets
|
|
$
|
7,130,104
|
|
|
$
|
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
|
|
|
807,636
|
|
|
|
835,015
|
|
Contract liabilities
|
|
|
794,034
|
|
|
|
772,927
|
|
Current portion of lease obligation
|
|
|
264,297
|
|
|
|
-
|
|
Total current liabilities
|
|
|
1,878,927
|
|
|
|
1,620,902
|
|
|
|
|
|
|
|
|
|
|
Related party convertible notes payable
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
Other long term notes, net of current portion
|
|
|
173,763
|
|
|
|
244,781
|
|
Lease obligation, net of current portion
|
|
|
490,356
|
|
|
|
-
|
|
Total liabilities
|
|
|
5,043,046
|
|
|
|
4,365,683
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Common stock: $.01 par value; 60,000,000 authorized shares; 13,735,177
shares issued at September 30, 2019, and 13,636,988 shares issued at December 31, 2018
|
|
|
137,353
|
|
|
|
136,371
|
|
Capital in excess of par value
|
|
|
19,245,969
|
|
|
|
19,055,615
|
|
Accumulated deficit
|
|
|
(17,281,314
|
)
|
|
|
(16,610,294
|
)
|
|
|
|
2,102,008
|
|
|
|
2,581,692
|
|
Less - Common stock in treasury, at cost (4,600 shares)
|
|
|
(14,950
|
)
|
|
|
(14,950
|
)
|
Total shareholders' equity
|
|
|
2,087,058
|
|
|
|
2,566,742
|
|
Total Liabilities and shareholders' equity
|
|
$
|
7,130,104
|
|
|
$
|
6,932,425
|
|
See
Notes to Condensed Consolidated Financial Statements (Unaudited)
INRAD
OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Total revenue
|
|
$
|
2,223,751
|
|
|
$
|
2,788,863
|
|
|
$
|
7,444,434
|
|
|
$
|
8,814,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,870,260
|
|
|
|
1,862,879
|
|
|
|
5,999,190
|
|
|
|
6,459,987
|
|
Selling, general and administrative expenses
|
|
|
608,868
|
|
|
|
579,254
|
|
|
|
2,000,185
|
|
|
|
1,648,325
|
|
|
|
|
2,479,128
|
|
|
|
2,442,133
|
|
|
|
7,999,375
|
|
|
|
8,108,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(255,377
|
)
|
|
|
346,730
|
|
|
|
(554,941
|
)
|
|
|
706,455
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense-net
|
|
|
(38,298
|
)
|
|
|
(40,015
|
)
|
|
|
(115,642
|
)
|
|
|
(119,185
|
)
|
Loss on exchange of precious metals
|
|
|
-
|
|
|
|
-
|
|
|
|
(438
|
)
|
|
|
(2,288
|
)
|
|
|
|
(38,298
|
)
|
|
|
(40,015
|
)
|
|
|
(116,080
|
)
|
|
|
(121,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(293,675
|
)
|
|
|
306,715
|
|
|
|
(671,021
|
)
|
|
|
584,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(293,675
|
)
|
|
$
|
306,715
|
|
|
$
|
(671,021
|
)
|
|
$
|
584,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share - basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share - diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
13,735,177
|
|
|
|
13,627,888
|
|
|
|
13,658,808
|
|
|
|
13,541,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
13,735,177
|
|
|
|
13,992,925
|
|
|
|
13,658,808
|
|
|
|
13,921,616
|
|
See
Notes to Condensed Consolidated Financial Statements (Unaudited)
INRAD
OPTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401K contribution
|
|
|
111,288
|
|
|
|
1,113
|
|
|
|
91,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92,780
|
|
Stock-based compensation
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
12,965
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,965
|
|
Net income June 30,
2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,104
|
|
|
|
-
|
|
|
|
14,104
|
|
Balance, June 30, 2018
|
|
|
13,632,488
|
|
|
$
|
136,326
|
|
|
$
|
18,999,753
|
|
|
$
|
(17,038,635
|
)
|
|
$
|
(14,950
|
)
|
|
$
|
2,082,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401K contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
27,192
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,192
|
|
Net income September
30, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
306,715
|
|
|
|
-
|
|
|
|
306,715
|
|
Balance, September
30, 2018
|
|
|
13,632,488
|
|
|
$
|
136,326
|
|
|
$
|
19,026,945
|
|
|
$
|
(16,731,920
|
)
|
|
$
|
(14,950
|
)
|
|
$
|
2,416,401
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
29,375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,375
|
|
Net
income (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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401K
contribution
|
|
|
98,189
|
|
|
|
982
|
|
|
|
92,605
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93,587
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
33,343
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,343
|
|
Net
income (loss) June 30, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(341,210
|
)
|
|
|
-
|
|
|
|
(341,210
|
)
|
Balance,
June 30, 2019
|
|
|
13,735,177
|
|
|
$
|
137,353
|
|
|
$
|
19,210,938
|
|
|
$
|
(16,987,639
|
)
|
|
$
|
(14,950
|
)
|
|
$
|
2,345,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401K
contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
35,031
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,031
|
|
Net
income September 30, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(293,675
|
)
|
|
|
-
|
|
|
|
(293,675
|
)
|
Balance,
September 30, 2019
|
|
|
13,735,177
|
|
|
$
|
137,353
|
|
|
$
|
19,245,969
|
|
|
$
|
(17,281,314
|
)
|
|
$
|
(14,950
|
)
|
|
$
|
2,087,058
|
|
See
Notes to Condensed Consolidated Financial Statements (Unaudited)
INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(671,021
|
)
|
|
$
|
584,982
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
197,356
|
|
|
|
210,502
|
|
(Gain) loss on exchange of precious metals
|
|
|
438
|
|
|
|
2,288
|
|
401K common stock contribution - non cash item
|
|
|
93,587
|
|
|
|
92,780
|
|
Stock based compensation
|
|
|
97,750
|
|
|
|
53,192
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
162,072
|
|
|
|
(497,898
|
)
|
Inventories, net
|
|
|
42,787
|
|
|
|
322,713
|
|
Other current assets
|
|
|
63,525
|
|
|
|
1,201
|
|
Other assets
|
|
|
8,870
|
|
|
|
13,246
|
|
Accounts payable and accrued liabilities
|
|
|
(27,378
|
)
|
|
|
(483,067
|
)
|
Contract liabilities
|
|
|
21,107
|
|
|
|
(69,225
|
)
|
Total adjustments and changes
|
|
|
660,114
|
|
|
|
(354,268
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(10,907
|
)
|
|
|
230,714
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(291,320
|
)
|
|
|
(130,075
|
)
|
Purchase of precious metals
|
|
|
-
|
|
|
|
(875
|
)
|
Net cash (used in) investing activities
|
|
|
(291,320
|
)
|
|
|
(130,950
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on notes payable-other
|
|
|
(71,017
|
)
|
|
|
(9,308
|
)
|
Net cash (used in) financing activities
|
|
|
(71,017
|
)
|
|
|
(9,308
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash and cash equivalents
|
|
|
(373,244
|
)
|
|
|
90,456
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,185,553
|
|
|
|
799,953
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
812,309
|
|
|
$
|
890,409
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
119,556
|
|
|
$
|
105,490
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Significant non-cash activities:
|
|
|
|
|
|
|
|
|
Lease right-of-use asset
|
|
$
|
819,622
|
|
|
$
|
-
|
|
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 $15,000 at September 30, 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 of $2,403,000 and $2,486,000 at September 30, 2019 and December 31, 2018, respectively:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
1,256
|
|
|
$
|
1,143
|
|
Work in process, including manufactured parts and components
|
|
|
1,190
|
|
|
|
1,389
|
|
Finished goods
|
|
|
527
|
|
|
|
484
|
|
|
|
$
|
2,973
|
|
|
$
|
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 year 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 September
30, 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 $3,366.000 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 and nine months ended September
30, 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.
For the three and nine months ended September
30, 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) 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 and nine months ended September
30, 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, 1,208,367 common stock options in each respective period, were excluded from the
computation of basic and diluted net income per common share because their effect is anti-dilutive.
For the three and nine months ended September
30, 2018, a total of 2,500,000 common shares and 1,875,000 common shares from warrants issuable upon conversion of outstanding
related party convertible notes were excluded from the computation of diluted net income per share because their effect would have
been antidilutive.
A reconciliation of the shares used in
the calculation of basic and diluted earnings (loss) per common share is as follows:
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
(Loss)
|
|
$
|
(293,675
|
)
|
|
|
13,735,177
|
|
|
$
|
(0.02
|
)
|
|
$
|
306,715
|
|
|
|
13,627,888
|
|
|
$
|
0.02
|
|
Effect of dilutive securities:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued Interest on Convertible
Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock
Options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
365,037
|
|
|
|
-
|
|
Diluted Income (Loss)
Per Share:
|
|
$
|
(293,675
|
)
|
|
|
13,735,177
|
|
|
$
|
(0.02
|
)
|
|
$
|
306,715
|
|
|
|
13,992,925
|
|
|
$
|
0.02
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
(Loss)
|
|
$
|
(671,021
|
)
|
|
|
13,658,808
|
|
|
$
|
(0.05
|
)
|
|
$
|
584,981
|
|
|
|
13,541,331
|
|
|
$
|
0.04
|
|
Effect of dilutive securities:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued Interest on Convertible
Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock
Options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
380,285
|
|
|
|
-
|
|
Diluted Income (Loss)
Per Share:
|
|
$
|
(671,021
|
)
|
|
|
13,658,808
|
|
|
$
|
(0.05
|
)
|
|
$
|
584,981
|
|
|
|
13,921,616
|
|
|
$
|
0.04
|
|
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 February 2016, the FASB created Topic
842 and issued ASU 2016-02, Leases (Topic 842), which created new accounting and reporting guidelines for leasing arrangements.
The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the
rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent
with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily
will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial
statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the requirements of
the new standard effective January 1, 2019, using the modified retrospective transition method, which applies the provisions of
the standard at the effective date without adjustment to the comparative periods presented. The Company adopted the following
practical expedients and elected the following accounting policies related to this standard:
|
·
|
Carry forward of historical lease classifications
and accounting treatment;
|
|
·
|
Short-term lease accounting policy election
allowing lessees to not recognize right-of-use assets and liabilities for leases with a term of 12 months or less; and
|
|
·
|
The option to not separate lease and non-lease
components for certain equipment lease categories such as office printers and copiers.
|
Adoption of this standard had no effect
on the consolidated balance sheet as of January 1, 2019, and therefore, did not materially impact operating results or liquidity.
The Company signed an amended lease on its facility effective June 1, 2019, and recognized a lease right-of-use asset and corresponding
lease liability of $0.8 million at June 1, 2019. Disclosures related to the amount, timing and uncertainty of cash flows arising
from this lease are included in Note 7.
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
under these performance obligations accounted for approximately 3.8% and 5.3% of revenue for the nine months ended September 30,
2019 and 2018, respectively. This revenue is generally recognized 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 96.2% and 94.7% of revenue for
the nine months ended September 30, 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.
The following table summarizes the Company’s
sales by market area:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Aerospace & Defense
|
|
$
|
749,225
|
|
|
$
|
522,471
|
|
|
$
|
2,768,786
|
|
|
$
|
1,947,759
|
|
Process Control & Metrology
|
|
|
950,248
|
|
|
|
1,349,598
|
|
|
|
3,064,590
|
|
|
|
4,463,700
|
|
Laser Systems
|
|
|
361,817
|
|
|
|
324,115
|
|
|
|
971,089
|
|
|
|
1,202,034
|
|
Scientific / R&D
|
|
|
162,461
|
|
|
|
592,679
|
|
|
|
639,969
|
|
|
|
1,201,274
|
|
Total
|
|
$
|
2,223,751
|
|
|
$
|
2,788,863
|
|
|
$
|
7,444,434
|
|
|
$
|
8,814,767
|
|
Net sales by timing of transfers of goods
and services is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Transfer at point in time
|
|
$
|
2,148,170
|
|
|
$
|
2,630,850
|
|
|
$
|
7,161,704
|
|
|
$
|
8,350,606
|
|
Transfer over time
|
|
|
75,581
|
|
|
|
158,013
|
|
|
|
282,730
|
|
|
|
464,161
|
|
Total net sales
|
|
$
|
2,223,751
|
|
|
$
|
2,788,863
|
|
|
$
|
7,444,434
|
|
|
$
|
8,814,767
|
|
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 also 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 September 30, 2019 or 2018. At September 30, 2019 and 2018, the remaining revenue to be recognized from the long-term government
contracts was $29,000 and $386,000, respectively.
On September 30, 2019, the Company had
approximately $5.4 million of performance obligations, which is also referred to as backlog. Approximately 2.3% of the September
30, 2019 backlog is related to projects that will extend beyond September 30, 2020.
NOTE 3 - EQUITY COMPENSATION PROGRAM AND STOCK BASED
COMPENSATION
The Company's results of operations for
the three months ended September 30, 2019 and 2018, include stock-based compensation expense for stock option grants totaling $35,031
and $27,192, respectively. The Company's results of operations for the nine months ended September 30, 2019 and 2018, include stock-based
compensation expense for stock option grants totaling $97,750 and $53,192, respectively. The following table shows the amounts
for stock-based compensation included in cost of sales and selling, general and administrative expense for the three and nine months
ended September 30, 2019 and 2018:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of sales
|
|
$
|
9,492
|
|
|
$
|
7,599
|
|
|
$
|
27,211
|
|
|
$
|
14,695
|
|
Selling, general and administrative
|
|
|
25,539
|
|
|
|
19,593
|
|
|
|
70,539
|
|
|
|
38,497
|
|
Total stock-based compensation expense
|
|
$
|
35,031
|
|
|
$
|
27,192
|
|
|
$
|
97,750
|
|
|
$
|
53,192
|
|
As of September 30, 2019 and 2018, there
were $231,066 and $207,725 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 1.96 years and 1.7 years, respectively.
There were 200,000 and 175,000 stock options
granted during the nine months ended September 30, 2019 and 2018 respectively. The following range of weighted-average assumptions
were used to determine the fair value of stock option grants during the nine months ended September 30, 2019 and 2018:
|
|
Nine months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Expected Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Expected Volatility
|
|
|
125.13
|
%
|
|
|
140.00
|
%
|
Risk-free interest rate
|
|
|
2.83
|
%
|
|
|
2.60
|
%
|
Expected term
|
|
|
10
years
|
|
|
|
10
years
|
|
The following table represents stock options
granted, exercised and forfeited during the nine months ended September 30, 2019:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Stock Options
|
|
Options
|
|
|
Option
|
|
|
Term (years)
|
|
|
Value
|
|
Outstanding January 1, 2019
|
|
|
1,058,208
|
|
|
$
|
0.64
|
|
|
|
5.58
|
|
|
$
|
337,997
|
|
Granted
|
|
|
200,000
|
|
|
|
0.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(49,841
|
)
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2019
|
|
|
1,208,367
|
|
|
$
|
0.61
|
|
|
|
6.79
|
|
|
$
|
1,222,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
836,698
|
|
|
$
|
0.57
|
|
|
|
4.92
|
|
|
$
|
769,655
|
|
The following table represents non-vested
stock options granted, vested and forfeited for the nine months ended September 30, 2019:
|
|
Weighted-average
|
|
|
|
Grant-date Fair Value
|
|
|
|
Options
|
|
|
($)
|
|
Non-Vested - January 1, 2019
|
|
|
349,491
|
|
|
|
0.74
|
|
Granted
|
|
|
200,000
|
|
|
|
0.76
|
|
Vested
|
|
|
(172,822
|
)
|
|
|
0.63
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
|
0.79
|
|
Non-Vested - September 30, 2019
|
|
|
371,669
|
|
|
|
0.80
|
|
NOTE 4 - STOCKHOLDERS’ EQUITY
The Company approved a matching contribution
to participants in the Inrad Optics 401k Plan (the “Plan”) for the year ended December 31, 2018, in February 2019.
Cash in the amount of $31,196 and 98,189 common shares of Inrad Optics, Inc. were 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, 2018. The notes bear interest at an
annual rate of 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 September 30, 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:
|
|
September 30,
|
|
|
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 July 2029.
|
|
$
|
187
|
|
|
$
|
258
|
|
Less current portion
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Long-term debt, excluding current portion
|
|
$
|
174
|
|
|
$
|
245
|
|
NOTE 7 – LEASE AMENDMENT
The Company entered into an amendment and
extension of its building lease on July 8, 2019, retroactive to June 1, 2019. Under the guidance of ASU 2016-02, Leases (Topic
842), the Company determines if such an arrangement contains a lease and whether that lease meets the classification criteria of
a finance or operating lease at inception of the arrangement. The Company determined that this lease is an operating
lease and presented as a right-of-use lease asset, short term lease liability and long term lease liability on the consolidated
balance sheet. These assets and liabilities are recognized at the commencement date based on the present value of remaining
lease payments over the lease term using the Company’s incremental borrowing rate.
Lease expense is recognized on a straight-line
basis over the lease term and is included in cost of sales and general and administrative expenses on the consolidated statement
of operations.
An initial right-of-use asset of $0.8 million
was recognized as a non-cash asset addition with the signing of the July 8, 2019, lease amendment. Cash paid for amounts included
in the present value of operating lease liability was $0.1 million during the nine months ended September 30, 2019, and is included
in operating cash flows.
Operating lease costs were $0.1 million
and $0.2 million during the three and nine months ended September 30, 2019.
The following table presents information
about the amount and timing of cash flows arising from the Company’s operating lease as of September 30, 2019:
Maturity of Lease Liability
|
|
(in thousands)
|
|
2019 (Remaining)
|
|
$
|
77
|
|
2020
|
|
|
306
|
|
2021
|
|
|
306
|
|
2022
|
|
|
128
|
|
Total undiscounted operating lease payments
|
|
|
817
|
|
|
|
|
|
|
Less: imputed interest
|
|
|
(62
|
)
|
Present value of operating lease liability
|
|
$
|
755
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
Remaining lease term (in months)
|
|
|
32
|
|
Discount rate for operating leases
|
|
|
5.80
|
%
|
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 condensed 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 September
30, 2019, were $2.2 million, a decrease of 20.3%, or $0.6 million, compared to $2.8 million for the three months ended September
30, 2018. For the nine months ended September 30, 2019, sales were $7.4 million a decrease of 15.5%, or $1.4 million, compared
to sales of $8.8 million for the nine month period ending September 30, 2018.
Sales to the defense/aerospace market increased
by $0.2 million or 43.3% to $0.7 million in the three months ended September 30, 2019, compared to $0.5 million for the three months
ended September 30, 2018. For the nine months ending September 30, 2019, sales to the defense/aerospace market increased $0.8 million,
or 42.2%, to $2.8 million compared to sales of $1.9 million in the nine month period ending September 30, 2018. The significant
increase is mainly attributable to increased demand for our products as military and defense spending has increased over the past
year.
Process control and metrology (“PC&M”)
sales were $1.0 million for the three months ended September 30, 2019, a decrease of $0.4 million, or 29.6%, from $1.4 million
for the three months ended September 30, 2018. For the nine months ended September 30, 2019, sales were $3.1 million compared to
$4.5 million for the year ago period, a decrease of $1.4 million or 31.3%. The continued reduction in demand for certain products
in our PC&M market and the delayed delivery schedules from certain customers, particularly in the semi-conductor industry,
has negatively impacted the sales for the three and nine months ended September 30, 2019, compared to September 30, 2018.
For the three months ended September 30,
2019, sales to customers in the laser systems market were $0.4 million, an increase of $0.1 million, or 11.6%, from $0.3 million
for the three months ended September 30, 2018. For the nine months ended September 30, 2019, sales in the laser systems market
were $1.0 million compared to sales of $1.2 million for the nine months ended September 30, 2018, a decline of $0.2 million or
19.2%. The increase in sales for the three months ended September 30, 2019, compared to the three months ended September 30, 2018,
was due to increases in shipments to several newer customers. The decrease in sales for the nine months ended September 30, 2019,
compared to September 30, 2018, is due to the timing of delivery schedules to an international distributor and one large OEM, partially
offset by increases in shipments to several newer customers.
Sales to customers in the Scientific/R&D
market decreased by $0.4 million, or 72.6%, to $0.2 million for the three months ended September 30, 2019, compared to sales of
$0.6 million for the three months ended September 30, 2018. Sales to customers in the Scientific/R&D market for the nine month
period ending September 30, 2019, were $0.6 million, compared to $1.2 million, a decrease of $0.6 million or 46.7% for the nine
month period ending September 30, 2018. The decrease for the quarter and nine months ending September 30, 2019, compared to the
quarter and nine months ending September 30, 2018, is attributable to, in part, reduced revenue on a federal government R&D
contract and reduced orders from one national lab.
For the three months ended September 30,
2019 and 2018, there were two customers each period that represented 10.0% or more of total sales. For the nine months ended September
30, 2019 and September 30, 2018, there were two customers that represented more than 10.0% of total sales in each period.
The Company’s top five customers
represented 46.1% of sales in the three month period ended September 30, 2019, compared to 54.5% in the same period in 2018. For
the nine month period ended September 30, 2019 and 2018, the Company’s top five customers represented 45.9% and 53.3% of
sales, respectively.
Orders booked during the first nine months
of 2019, totaled $6.7 million, compared to $8.6 million for the same period last year.
Order backlog at September 30, 2019 and
2018, was $5.4 million and $6.3 million, respectively. A significant portion of the year-over-year decrease in the order backlog
is due to a delay in anticipated orders from several customers in the PC&M and Scientific/R&D markets.
Cost of Goods Sold
For the three months ended September 30,
2019 and 2018, cost of goods sold was $1.9 million, in each period, or 84.1% and 66.8% of total revenues, respectively. The impact
of increased labor and service costs, as well as manufacturing overhead, resulted in an increase in costs of goods sold as a percentage
of sales.
For the nine months ended September 30,
2019, cost of goods sold were $6.0 million, compared to $6.5 million, a decrease of $0.5 million or 7.1%, compared to the nine
month period ending September 30, 2018. The decrease is largely due to the decrease in sales, partially offset by an increase in
material costs and labor costs year over year reflecting the mix of sales for the Company’s products. As a percent of total
revenues, cost of goods sold for the nine months ended September 30, 2019 and 2018, were 80.6% and 73.3% of total revenues respectively.
The increase in cost of goods sold as a percentage of sales reflects the increase in material and labor costs due to the sales
mix.
Gross profit for the three months ended
September 30, 2019, was $0.4 million or 15.9% of sales, compared to $0.9 million or 33.2% in the same quarter last year. Gross
profit for the nine months ended September 30, 2019, was $1.4 million, or 19.4% of sales, compared to $2.4 million or 26.7% of
sales, the decline reflecting the reduction in total sales and the impact of the material and labor costs related to the sales
mix.
Selling, General and Administrative
Expenses
Selling, general and administrative expenses
(“SG&A” expenses) in the three and nine months ended September 30, 2019, amounted to $0.6 million, or 27.3% of
sales, and $2.0 million, or 26.9% of sales, compared to $0.6 million, or 20.8% of sales, and $1.6 million, or 18.7% of sales, respectively,
for the same period a year ago. The increase in SG&A expenses reflects costs related to recruiting and increased staffing,
increased travel and marketing expenses, and other administrative costs for the year to date period.
Income (Loss) from Operations
The Company incurred a net loss from operations
of $0.3 million for the three months ended September 30, 2019, compared with operating income of $0.3 million in the three months
ended September 30, 2018. The decrease in income primarily reflects the impact of the Company’s lower sales in the three
months ended September 30, 2019, compared to the same period last year, coupled with an increase in the cost of goods sold and
SG&A costs. The Company incurred a net loss from operations of $0.6 million for the nine months ended September 30, 2019, compared
with operating income of $0.7 million for the nine months ended September 30, 2018. The decrease in operating income for year to
date period reflects lower sales, combined an increase in certain SG&A costs.
Other Income and Expense
There was no significant change in net
interest expense for the three months ended September 30, 2019, compared to the same period in 2018, as there was no significant
change in the Company’s borrowing level. Net interest expense for the nine months ended September 30, 2019, compared to September
30, 2018, was $116,000 and $119,000, respectively. The decrease represents the lower overall outstanding debt balance.
Income Taxes
For the three months and nine months ended
September 30, 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 and nine months ended
September 30, 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 $0.3 million
for the three months ended September 30, 2019, compared to a net income of $0.3 million for the three months ended September 30,
2018. The net loss primarily reflects the decrease in sales for the three months ended September 30, 2019, compared to the 2018
period, combined with the increase in costs of goods sold and SG&A expenses. For the nine months ended September 30, 2019,
the Company incurred a net loss of $0.7 million, compared with net income of $0.6 million. Lower sales, combined with a less favorable
product mix, higher related material costs and higher SG&A costs led to the decrease in net income.
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 September 30, 2019 and December 31,
2018, the Company had cash and cash equivalents of $0.8 million and $1.2 million, respectively.
The Company occupies approximately 42,000
square feet of space located at 181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease which was amended on July 8,
2019, retroactive to June 1, 2019, for an additional three year term. Under the terms of the lease, the Company is obligated for
all real estate taxes, maintenance and operating costs of the facility.
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 an
annual rate of 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 September 30, 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 nine months ended September 30, 2019 and 2018:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(11
|
)
|
|
$
|
230
|
|
Net cash (used in) investing activities
|
|
|
(291
|
)
|
|
|
(131
|
)
|
Net (used in) financing activities
|
|
|
(71
|
)
|
|
|
(9
|
)
|
Net (decrease) in cash and cash equivalents
|
|
$
|
(373
|
)
|
|
$
|
(139
|
)
|
Net cash used in operating activities was
$11,000 for the nine months ended September 30, 2019, compared to net cash provided by operations of $230,000 in the same period
last year. Net cash used in operating activities in the nine months ended September 30, 2019, resulted primarily from the net loss
incurred for the period and a reduction in accounts receivable. The net cash provided by operating activities of $230,000 in the
nine months ended September 30, 2018, resulted primarily from operating profits as well as reductions in accounts receivable, reductions
in accounts payable and accrued liabilities, and lower contract liabilities.
Net cash used in investing activities was
$291,000 during the nine months ended September 30, 2019, compared to $131,000 in the same period last year reflecting capital
expenditures in both periods. Net cash used in financing activities during the nine months ended September 30, 2019 and 2018, relates
to required principal payments.
Overall, cash and cash equivalents decreased
by $373,000 for the nine months ended September 30, 2019 and increased $90,000 in the 2018 period.
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 November 14, 2020.