UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

SEPTEMBER 30, 2017

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________ to_________________

 

Commission file number

0-11668

 

INRAD OPTICS, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey		22-2003247
(State or other jurisdiction of incorporation		(I.R.S. Employer
or organization)		Identification Number)

 

181 Legrand Avenue, Northvale, NJ 07647

(Address of principal executive offices)

(Zip Code)

 

(201) 767-1910

(Registrant’s telephone number, including area code)

(Former name, former address and formal fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer, accelerated filer, smaller reporting company” and “emerging growth company” in Rule 12b-2 of the exchange Act. (Check one):

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x
		Emerging growth company	¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

The number of shares of the registrant’s common stock outstanding, $0.01 par value, as of November 10, 2017 was 13,508,267

 

 

INRAD OPTICS, INC AND SUBSIDIARIES

 

INDEX

 

Part I.	CONDENSED FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Condensed consolidated balance sheets as of September 30, 2017 (unaudited) and December 31, 2016	1
	Condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (unaudited)	2
	Condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 (unaudited)	3
	Notes to condensed consolidated financial statements (unaudited)	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	13
Item 4.	Controls and Procedures	13
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 1A.	Risk Factors	14
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3.	Defaults upon Senior Securities	14
Item 4.	Mine Safety Disclosures	14
Item 5.	Other Information	14
Item 6.	Exhibits	14
Signatures		15

 

 

INRAD OPTICS, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2017				2016
		(Unaudited)				(Audited)
Assets
Current assets:
Cash and cash equivalents		$	567,231			$	973,333
Accounts receivable (net of allowance for doubtful accounts of $15,000 in 2017 and 2016)			1,280,045				1,204,908
Inventories, net			3,150,830				2,739,864
Other current assets			90,512				143,970
Total current assets			5,088,618				5,062,075
Plant and equipment:
Plant and equipment,  at cost			14,701,959				14,607,155
Less: Accumulated depreciation and amortization			(13,951,858	)			(13,729,985	)
Total plant and equipment			750,101				877,170
Precious Metals			613,647				613,647
Intangible Assets, net			91,229				151,402
Other Assets			38,298				30,338
Total Assets		$	6,581,893			$	6,734,632
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of other long term notes		$	11,500			$	107,801
Accounts payable and accrued liabilities			1,247,488				1,074,671
Customer advances			777,579				599,340
Total current liabilities			2,036,567				1,781,812
Related Party Convertible Notes Payable			2,500,000				2,500,000
Other Long Term Notes, net of current portion			261,780				270,722
Total liabilities			4,798,347				4,552,534
Commitments
Shareholders’ Equity:
Common stock: $.01 par value; 60,000,000 authorized shares; 13,512,867 shares issued at September 30, 2017 and 13,156,544 shares issued at December 31, 2016			135,130				131,567
Capital in excess of par value			18,865,125				18,699,852
Accumulated deficit			(17,201,759	)			(16,634,371	)
			1,798,496				2,197,048
Less - Common stock in treasury, at cost (4,600 shares)			(14,950	)			(14,950	)
Total shareholders’ equity			1,783,546				2,182,098
Total Liabilities and Shareholders’ Equity		$	6,581,893			$	6,734,632

 

See Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Total revenue		$	2,529,623				2,440,332			$	7,300,874			$	7,429,769
Cost and expenses:
Cost of goods sold			1,891,036				1,863,068				5,926,224				5,999,387
Selling, general and administrative expenses			638,590				570,029				1,821,219				1,845,959
			2,529,626				2,433,097				7,747,443				7,845,346
(Loss) income from operations			(3	)			7,235				(446,569	)			(415,577	)
Other expense:
Interest expense—net			(39,860	)			(41,712	)			(120,819	)			(126,469	)
			(39,860	)			(41,712	)			(120,819	)			(126,469	)
Net loss before income taxes			(39,863	)			(34,477	)			(567,388	)			(542,046	)
Income tax (provision) benefit			—				—				—				—
Net loss		$	(39,863	)		$	(34,477	)		$	(567,388	)			(542,046	)
Net loss per common share— basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.04	)		$	(0.04	)
Weighted average shares outstanding— basic and diluted			13,508,267				13,151,944				13,318,228				12,872,787

 

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,
		2017				2016
Cash flows from operating activities:
Net (loss)		$	(567,388	)		$	(542,046	)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			282,046				339,903
401K common stock contribution			124,289				135,193
Stock based compensation			44,547				23,930
Changes in operating assets and liabilities:
Accounts receivable			(75,137	)			584,533
Inventories, net			(410,966	)			303,538
Other current assets			53,458				(124	)
Other assets			(7,960	)			—
Accounts payable and accrued liabilities			172,817				(142,705	)
Customer advances			178,239				176,642
Total adjustments and changes			361,333				1,420,910
Net cash (used in) provided by operating activities			(206,055	)			878,864
Cash flows from investing activities:
Capital expenditures			(94,804	)			(72,343	)
Capitalized license fees			—				(28,750	)
Net cash (used in) investing activities			(94,804	)			(101,093	)
Cash flows from financing activities:
Principal payments on notes payable-other			(105,243	)			(127,419	)
Net cash (used in)  financing activities			(105,243	)			(127,419	)
Net increase (decrease) in cash and cash equivalents			(406,102	)			650,352
Cash and cash equivalents at beginning of period			973,333				673,685
Cash and cash equivalents at end of period		$	567,231			$	1,324,037
Supplemental disclosure of cash flow information:
Interest paid		$	122,278			$	90,460
Income taxes paid		$	1,050			$	800

 

See Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

INRAD OPTICS, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Inrad Optics, Inc. and its subsidiaries (collectively, the “Company”).  All significant intercompany balances and transactions have been eliminated.

 

The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.  For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.

 

Management Estimates

 

These unaudited condensed consolidated financial statements and related disclosures have been prepared in conformity with U.S. GAAP which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions.  Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

 

Inventories

 

Inventories are stated at the lower of cost (first-in-first-out basis) and net realizable value. The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow-moving or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues.

 

Inventories are comprised of the following and are shown net of inventory reserves, in thousands:

 

		September 30, 2017				December 31, 2016
		(Unaudited)
Raw materials		$	973			$	1,041
Work in process, including manufactured parts and components			1,594				1,115
Finished goods			584				584
		$	3,151			$	2,740

 

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statements carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

 

For the three and nine months ended September 30, 2017 and 2016 the Company did not record a current provision for either state or federal income tax due to the losses incurred for both income tax and financial reporting purposes or the availability of net operating loss carry-forwards to offset against federal and state income tax.

 

In evaluating the Company’s ability to recover deferred tax assets in future periods, management considers the available positive and negative factors, including the Company’s recent operating results, the existence of cumulative losses and near term forecasts of future taxable income consistent with the plans and estimates that management uses to manage the underlying business. A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2016 and the nine months ended September 30, 2017. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.

 

On the basis of this evaluation as of September 30, 2017, the Company’s management concluded that it is more likely than not that the Company will not be able to realize any portion of the benefit on the net deferred tax balance of $5,200,000 and therefore the Company continues to maintain a valuation allowance for the full amount of the net deferred tax balance.

 

When sufficient positive evidence exists, the Company’s income tax expense will be charged with the increase or decrease in its valuation allowance. An increase or reversal of the Company’s valuation allowance could have a significant negative or positive impact on the Company’s future earnings.

 

Net (Loss) Income per Common Share

 

Basic net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options, stock grants and warrants using the average market prices during the period, including potential common shares issuable upon conversion of outstanding convertible notes, except if the effect on the per share amounts is anti-dilutive.

 

For the three months and nine months ended September 30, 2017, all common stock equivalents were excluded from the computation of diluted net loss per share because their effect is anti-dilutive. This included 2,500,000 common shares and 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes in each respective period, in addition to 911,341 common stock options, in each respective period.

 

For the three and nine months ended September 30, 2016, all common stock equivalents were excluded from the computation of diluted net loss per share because their effect is anti-dilutive. This included 2,500,000 common shares and 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes in each respective period, in addition to 779,547 common stock options, in each respective period.

 

Stock-Based Compensation

 

Stock-based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.

 

 

New Accounting Guidance

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) which provides guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification (ASC) Section 606, “Revenue from Contracts with Customers”, which establishes a comprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised 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. The Company has performed a review of the requirements of the new guidance and has identified which of its revenue streams will be within the scope of ASC 606. The Company has applied the five-step model of the new standard to a selection of contracts within each of its revenue streams and has compared the results to its current accounting practices. Based on this analysis, the Company does not currently expect a material impact on the Company’s consolidated financial statements. The Company is expecting to utilize the modified retrospective transition method of adoption. The Company is continuing to work through the remaining steps of the adoption plan to facilitate adoption effective January 1, 2018. As part of this, the Company is assessing changes that might be necessary to information technology systems, processes, and internal controls to capture new data and address changes in financial reporting. The Company will be revising its revenue recognition accounting policy and expanding revenue disclosures to reflect the requirements of ASC 606, which include disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgements and assets recognized from the costs to obtain or fulfill a contract.

 

In May 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The Company is currently evaluating the impact the adoption of ASU 2016-12 will have on its consolidated financial statements

 

In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” The amendments clarify two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The update is effective for annual periods beginning after December 15, 2017 including interim reporting periods therein. The Company is currently evaluating the impact the adoption of ASU 2016-10 will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payments, including income tax consequences, application of award forfeitures to expense, classification on the statement of cash flows, and classification of awards as either equity or liabilities. This guidance was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this guidance has no material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB created Topic 842 and issued ASU 2016-02, Leases. The guidance in this update supersedes Topic 840, Leases. This ASU requires lessees to recognize a right-of-use assets and a lease liability, initially measured at the present value of the lease payments on the balance sheet. For public companies, the amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and disclosure.

 

NOTE 2 – EQUITY COMPENSATION PROGRAM AND STOCK BASED COMPENSATION

 

a)

Stock Option Expense

 

The Company's results of operations for the three months ended September 30, 2017 and 2016 include stock-based compensation expense for stock option grants totaling $14,975 and $8,370, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations within cost of goods sold in the amount of $4,027 ($2,311 for 2016), and selling, general and administrative expenses in the amount of $10,948 ($6,059 for 2016).

 

 

The Company's results of operations for the nine months ended September 30, 2017 and 2016 include stock-based compensation expense for stock option grants totaling $44,547 and $23,930, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations within cost of goods sold in the amount of $12,274 ($6,194 for 2016), and selling, general and administrative expenses in the amount of $32,273 ($17,736 for 2016).

 

As of September 30, 2017 and 2016, there were $104,467 and $56,886 of unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock options, which are expected to be recognized over a weighted average period of approximately 1.5 years and 1.5 years, respectively.

 

There were 180,000 and 163,500 stock options granted during the nine months ended September 30, 2017 and 2016, respectively. The following range of weighted-average assumptions were used to determine the fair value of stock option grants during the nine months ended September 30, 2017 and 2016:

 

		Nine Months Ended
		September 30,
		2017		2016
Expected Dividend yield		—%		—%
Expected Volatility		133 - 134%		128%
Risk-free interest rate		2.2 - 2.3%		2.1%
Expected term		10 years		10 years

 

b)

Stock Option Activity

 

The following table represents stock options granted, exercised and forfeited during the nine month period ended September 30, 2017:

 

Stock Options		Number of Options				Weighted Average Exercise Price per Option				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value
Outstanding at January 1, 2017			760,214			$	.60				4.8			$	109,168
Granted			180,000				.58
Exercised			—				—
Expired/Forfeited			(28,873	)			1.09
Outstanding at September 30, 2017			911,341			$	.59				5.4			$	710,880
Exercisable at September 30, 2017			580,846			$	.66				3.9			$	315,445

 

The following table represents non-vested stock options granted, vested and forfeited for the nine months ended September 30, 2017.

 

		Options				Weighted-Average Grant-Date Fair Value ($)
Non-vested  - January 1, 2017			272,167				.28
Granted			180,000				.56
Vested			(121,672	)			.27
Forfeited			—				—
Non-vested – September 30, 2017			330,495				.44

 

 

NOTE 3 – STOCKHOLDERS’ EQUITY

 

In April 2017, the Company issued a total of 356,323 common shares to the Inrad Optics 401k plan as a match to employee contributions for the year ended December 31, 2016.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

On June 9, 2016, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2019 from April 1, 2017. The notes bear interest at 6%. Interest accrues quarterly and is payable on maturity. Unpaid interest, along with principal, may be converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement, the expiration dates of the warrants were extended from April 1, 2020 to April 1, 2022. As of September 30, 2017, the Company had accrued interest in the amount of $75,000 associated with these notes.

 

NOTE 5 – OTHER LONG TERM NOTES

 

Other Long Term Notes consist of the following:

 

		September 30,				December  31,
		2017				2016
		(in thousands)
Term Note Payable, payable in equal monthly installments of $13,953 and bearing an interest rate of 4.35% and expiring in July 2017		$	—			$	96
U.S. Small Business Administration term note payable in equal monthly installments of $1,922, including principle and interest, and bearing an interest rate of 4.0% and expiring in April 2032.			273				282
			273				378
Less current portion			(11	)			(108	)
Long-term debt, excluding current portion		$	261			$	270

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Caution Regarding Forward Looking Statements

 

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to insure that any forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. The events described in the forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of the Company’s plans or strategies, projected or anticipated benefits of acquisitions made by the Company, projections involving anticipated revenues, earnings, or other aspects of the Company’s operating results. The words “may”, “will”, “expect”, “believe”, “anticipate”, “project”, “plan”, “intend”, “estimate”, and “continue”, and their opposites and similar expressions are intended to identify forward-looking statements. The Company cautions you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond the Company’s control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect the Company’s results include, but are not limited to, the risks and uncertainties discussed in Items 1A, 7 and 7A of the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 31, 2017. Any one or more of these uncertainties, risks, and other influences could materially affect the Company’s results of operations and whether forward-looking statements made by the Company ultimately prove to be accurate. Readers are further cautioned that the Company’s financial results can vary from quarter to quarter, and the financial results for any period may not necessarily be indicative of future results. The foregoing is not intended to be an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by the Company. The Company’s actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are described in Note 1 of the accompanying consolidated financial statements and further discussed in our annual financial statements included in our annual report on Form 10-K for the year ended December 31, 2016. In preparing our condensed consolidated financial statements, we made estimates and judgments that affect the results of our operations and the value of assets and liabilities we report. These include estimates used in evaluating intangibles for impairment such as market multiples used in determining the fair value of reporting units, discount rates applicable in determining net present values of future cash flows, projections of future sales, earnings and cash flow and capital expenditures. It also includes estimates about the amount and timing of future taxable income in determining the Company’s valuation allowance for deferred income tax assets. Our actual results may differ from these estimates under different assumptions or conditions.

 

For additional information regarding our critical accounting policies and estimates, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report filed with the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2016.

 

Results of Operations

 

Inrad Optics, Inc.’s business falls into two main categories: Optical Components and Laser System Devices/Instrumentation.

 

The Optical Components category is focused on custom optics manufacturing. The Company specializes in high-end precision components. It develops, manufactures and delivers precision custom optics and thin film optical coating services through its Custom and Metal Optics operations. Glass, metal, and crystal substrates are processed using modern manufacturing equipment, complex processes and techniques to manufacture components, deposit optical thin films, and assemble sub-components used in advanced photonic systems. The majority of custom optical components and optical coating services supplied are used in inspection, process control systems, defense and aerospace electro-optical systems, laser system applications, industrial scanners, and medical system applications.

 

 

The Laser System Devices/Instrumentation category includes the growth and fabrication of crystalline materials with electro-optic (EO) and non-linear optical properties for use in both standard and custom products. This category also includes the manufactured crystal based devices and associated instrumentation. The majority of crystals, crystal components and laser devices manufactured are used in laser systems, defense EO systems, medical lasers and R&D applications by engineers within corporations, universities and national laboratories.

 

The Company operates a manufacturing facility in Northvale, New Jersey and has its corporate offices in the same location.

 

Revenue

 

For the three months ended September 30, 2017, sales increased by $89,000 or 3.7% to $2,530,000 from $2,440,000 for the comparable period last year. For the nine months ended September 30, 2017, sales were $7,301,000, a decrease of 1.7% or $129,000, compared to $7,430,000 for the nine months ended September 30, 2016.

 

Sales to customers in the defense/aerospace market increased by 28.7% for the three months ended September 30, 2017 compared to the same period last year, offsetting a decrease in sales in the first six months of 2017 compared to the same period in 2016. The third quarter sales increase in this market resulted from a significant increase in shipments to one large defense contractor. This was partially offset by a reduction in sales to another defense contractor compared to the prior year. Sales for the nine months ended September 30, 2017 in the defense/aerospace market were down 4.5% compared to the same period last year.

 

Sales to customers in the process control and metrology market increased by 25.1% and 15.6% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in the prior year. Increased shipments to one major customer were primarily attributable for the increase during the three and nine months ended September 30, 2017 in addition to general business activity across the market which was higher.

 

Sales in the laser systems and related products market decreased by 54.9% and 40.2% for the three and nine months ended September 30, 2017 compared to the same periods last year. This was primarily due to reduced sales to one large original equipment manufacturer.

 

Sales for the three months ended September 30, 2017 in the university and national lab market were down 18.8% compared to the same period last year but increased by 18.5% in the nine months ended September 30, 2017 compared to the same period last year on increased sales to one large national lab.

 

For the three months ended September 30, 2017 the Company had two customers whose sales represented more than 10% of total sales. One customer was in the defense/aeronautic market and the other customer was in the process control and metrology market. These two same customers also represented sales of more than 10% of total sales for the nine months ended September 30, 2017

 

The Company’s top five customers represented 45.7% of total sales in the nine months ended September 30, 2017, compared to 38.6% in the same period in 2016. For the three months ended September 30, 2017 and 2016, sales for the top five customer group represented 46.4% and 39.2%, respectively.

 

Orders booked in the nine months ended September 30, 2017 were $8.3 million, up 10.3% compared to $7.6 million in the comparable period last year.

 

Order backlog was $7.3 million at September 30, 2017, compared to $5.4 million at September 30, 2016.

 

 

Cost of Goods Sold

 

Cost of goods sold was $ 1,891,000 and $1,863,000 for the three months ended September 30, 2017 and 2016, respectively. This represented an increase of $28,000 or 1.5%. For the nine months ended September 30, 2017, cost of goods sold were $ 5,926,000, a decrease of $73,000 or 1.2% compared to $5,999,000 in the same period in 2016.

 

Material costs as a percentage of sales for the three and nine months ended September 30, 2017 increased as compared to the same period in 2016, primarily due to an increase in sales mix to products with a higher component of material costs.

 

For the three months ended September 30, 2017, manufacturing salaries and wages and related fringe benefits increased by approximately 2.4% or $25,000 from the comparable period in 2016. For the nine months ended September 30, 2017, manufacturing salaries and wages and related fringe benefits decreased by approximately 2.7% or $142,000 from the nine months ended September 30, 2016.

 

Manufacturing expenses increased by 7.0% in the third quarter compared to the same period in 2016 and were down 2.9% in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The changes over the three and nine months ended September 30, 2017 and 2016 related primarily to the timing of production supplies and repair and maintenance expenditures in the respective periods.

 

Gross profit for the three months ended September 30, 2017 was $639,000 or 25.2% of sales compared to $577,000 or 23.7% of sales in the same quarter last year. Gross profit for the nine months ended September 30, 2017 and 2016 was $1,375,000 or 18.8% and $1,430,000 or 19.3% of sales, respectively.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (“SG&A” expenses) in the three months ended September 30, 2017 amounted to $639,000 or 25.2% of sales compared to $570,000 or 23.4% of sales in the comparable period last year. In the nine months ended September 30, 2017 and 2016, SG&A expenses were $1,821,000 and $1,846,000 or 24.9% and 24.8% of sales, respectively.

 

SG&A salary, wages and fringe benefits increased by approximately $20,000 or 6.5% for the three months ended September 30, 2017 but decreased $83,000 or 8.3% for the nine months ended September 30, 2017, compared to the same periods last year reflecting average head count levels in the respective periods.

 

SG&A expenses, excluding salary, wages and fringe benefits, increased by approximately $47,000 or 20% and $56,000 or 7.4% in the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016, respectively. SG&A expenses were negatively impacted by the timing of trade show expenditures which were approximately $33,000 higher in the quarter despite being relatively unchanged on a year to date basis. SG&A expense increases were mainly due to higher recruiting costs and higher information technology service costs during the nine months ending September 30, 2017 versus 2016.

 

Loss from Operations

 

The Company had a loss from operations of $0 in the three months ended September 30, 2017 compared to income from operations of $7,000 in the three months ended September 30, 2016. For the nine months ended September 30, 2017, the Company’s operating loss was $447,000 compared with an operating loss of $416,000 in the same period last year.

 

Other Income and Expense

 

Net interest expense for the three months ended September 30, 2017 was $40,000 compared to $42,000 in the same period in 2016. Net interest expense for the nine months ended September 30, 2017 was $121,000 compared to $126,000 in the same period in 2016.

 

 

Income Taxes

 

For the three and nine months ended September 30, 2017 and 2016, the Company did not record a current provision for either state tax or federal tax due to the losses incurred for both income tax and financial reporting purposes.

 

Net Income (Loss)

 

The Company had a net loss of $40,000 compared to a net loss of $34,000 in the three months ended September 30, 2017 and 2016, respectively. Higher sales and margins in the three months ended September 30, 2017 were offset by increases in SG&A expenses compared to the previous year.

 

For the nine months ended September 30, 2017 and 2016, the Company had a net loss of $567,000 and $542,000, respectively. The impact of lower sales and margins in the nine months ended September 30, 2017 were partially offset by lower SG&A and interest expense compared to the prior year.

 

Liquidity and Capital Resources

 

The Company’s primary source of liquidity is cash and on-going collection of accounts receivable. The Company’s major use of cash in recent years has been for financing operating losses, payment of accrued and current interest on convertible debt, servicing of long term debt and capital expenditures.

 

As of September 30, 2017 and December 31, 2016, the Company had cash and cash equivalents of $567,000 and $973,000, respectively.

 

On July 26, 2012, the Company entered into a term loan agreement with Valley National Bank, Wayne, NJ, in the amount of $750,000. The loan is secured with a security interest in equipment acquired by the Company in the amount of $825,000 which enhances the Company’s thin film coating capabilities. The loan is repayable in equal monthly installments over five years beginning in August 2012 and bears an annual interest rate of 4.35%. In July 2017, the term loan agreement with Valley National Bank was paid off, in full.

 

On June 9, 2016, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2019 from April 1, 2017. The notes bear interest at 6%. Interest accrues quarterly and is payable on maturity. Unpaid interest, along with principal, may be converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement, the expiration dates of the warrants were extended from April 1, 2020 to April 1, 2022. As of September 30, 2017, the Company had accrued interest in the amount of $75,000 associated with these notes.

 

The following table summarizes net cash (used in) operating, investing and financing activities for the nine months ended September 30, 2017 and 2016:

 

		Nine Months Ended
		September 30,
		2017				2016
		(In thousands)
Net cash (used in) provided by operating activities		$	(206	)		$	878
Net cash (used in) investing activities			(95	)			(101	)
Net cash (used in) financing activities			(105	)			(127	)
Net (decrease) increase in cash and cash equivalents		$	(406	)		$	650

 

Net cash used in operating activities was $206,000 for the nine months ended September 30, 2017 compared to net cash provided by operating activities of $878,000 in the same period last year.

 

 

Net cash used in operating activities in the nine months ended September 30, 2017 was primarily related to increased accounts receivable and inventory partially offset by increased accounts payable and customer advances. In the nine months ended September 30, 2016 net cash provided by operations resulted from reductions in accounts receivable, inventory and increased customer advances partially offset by reductions in accounts payable during the period.

 

Net cash used in investing activities was $95,000 during the nine months ended September 30, 2017 compared to $101,000 last year. Capital expenditures in 2017 and 2016 were primarily for operating equipment. In addition the Company paid for and capitalized license fees in 2016. Net cash used in financing activities was $105,000 and $127,000 during the nine months ended September 30, 2017 and 2016, respectively, and were related to principal payments on other long term notes.

 

Overall, the Company had a net decrease in cash and cash equivalents of $406,000 in the nine months ended September 30, 2017 compared with a net increase of $650,000 for the nine months ended September 30, 2016.

 

The Company’s management believe that existing cash resources and cash resources anticipated to be generated from future operating activities are sufficient to meet working capital requirements, anticipated capital expenditures, debt servicing payments and other contractual obligations over the next twelve months from the date of issuance of this report.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is a smaller reporting company and not required to provide the information required under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

a.

Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2017 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (2) is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

 

b.

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not applicable

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UNDER SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

11.

An exhibit showing the computation of per-share earnings is omitted because the computation can be clearly determined from the material contained in this Quarterly Report on Form 10-Q.

31.1

Certificate of the Registrant’s Chief Executive Officer, Amy Eskilson, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

Certificate of the Registrant’s Chief Financial Officer, William J. Foote, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

Certificate of the Registrant’s Chief Executive Officer, Amy Eskilson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.2

Certificate of the Registrant’s Chief Financial Officer, William J. Foote, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS

XBRL Instance Document*

101.SCH

XBRL Taxonomy Extension Schema*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase*

101.DEF

XBRL Taxonomy Extension Definition Linkbase*

101.LAB

XBRL Taxonomy Extension Label Linkbase*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase*

 

*

Filed herewith

**

Furnished herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Inrad Optics, Inc.
	By:	/s/ Amy Eskilson
		Amy Eskilson
		President and Chief Executive Officer
	By:	/s/ William J. Foote
		William J. Foote
		Chief Financial Officer,
		Secretary and Treasurer

 

Date: November 14, 2017