INRAD OPTICS, INC. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.
Critical Accounting Policies
The Company's significant accounting policies are described in Note 1 of the
Consolidated Financial Statements. The Company's consolidated financial
statements were prepared in accordance with accounting principles generally
accepted in
Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosure. The Company believes that the following summarizes critical accounting policies that require significant judgments and estimates in the preparation of the Company's consolidated financial statements:
Revenue Recognition
Revenue from the Company's sales continue to generally be recognized either when products are shipped (i.e., point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e., over time), which approximates the previously used percentage-of-completion method of accounting.
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost of manufactured goods includes material, labor and overhead.
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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.
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 estimated 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.
Income Taxes
Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
Leases
The Company entered into an amendment and extension of its building lease on
Results of Operations
The following table sets forth, for the past two years, the percentage relationship of statement of operations categories to total revenues.
Years ended December 31,
2022 2021
% %
Revenues:
Product sales 100.0 % 100.0 %
Costs and expenses:
Cost of goods sold 70.8 69.4
Gross profit margin 29.2 30.6
Selling, general and administrative expenses 26.2 22.4
Operating income (loss) 3.0 8.2
Net income (loss) 1.4 15.4
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Revenues
Sales were
Sales to the defense and aerospace market in 2022 decreased 21.3% or
Sales in the process control and metrology market increased
In 2022, the Company served as an OEM supplier of custom optical components
within the non-military laser industry. Sales to this and related markets in
2022 were
Sales to customers within the Scientific / R&D market were
Bookings
The Company booked new orders totaling approximately
Cost of Goods Sold and Gross Profit Margin
Cost of goods sold as a percentage of sales was 70.8% and 69.4% for years ended
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were
Operating Income
The Company had operating income of
Other Income and Expenses
Net interest expense was
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Income Taxes
The Company did not record a current provision for income taxes in 2022 or 2021, due to the availability of net operating loss carryforwards to offset taxable income for both federal and state tax purposes.
Net Income (Loss)
As a result of the foregoing, the Company recorded net income of
Liquidity and Capital Resources
The Company's primary source of liquidity is cash and cash equivalents and on-going collection of our accounts receivable. The Company's major uses of cash in the past three years have been for operating expenses, capital expenditures, and for repayment and servicing of outstanding debt and accrued interest.
As of
On
The Company paid
In total, the Company paid
Capital expenditures were
The Company had a net increase in cash of
On
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Cash flows pertaining to our source and use of cash are presented below (in
thousands):
Years Ended
December 31,
2022 2021
(in thousands)
Net cash provided by operating activities
(539) (222)
Principal payments on debt obligations (35) (8)
Overview of Financial Condition
The Company recorded net income of
The Company's order backlog extends beyond 2022. The Company's management
expects that future cash flows from operations and its existing cash reserves
will provide adequate liquidity for the Company's operations and working capital
requirements through at least
Contractual Obligations
Subordinated Convertible Promissory Notes
As of
Notes Payable Other
At
Impact of COVID-19 to Operations
We are conducting business to ensure the safety of our employees and associates actively and earnestly, following all best practice CDC guidelines for prevention in the workplace. We have applied social distancing in our operations and implemented a connected, remote workforce where practicable. We cannot predict what actions may be required by federal, state, or local authorities in the future. Nor can we predict what additional actions or new mandates may have on our customers and suppliers. We continue to actively monitor the situation and may be required to take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our financial results.
The Company's bookings were stronger in 2022, compared to 2021 and our sales have increased over last year. While sales and marketing efforts were severely impacted by COVID-19 during 2021, such efforts improved significantly in 2022. The Company continues to be impacted by COVID-related restrictions in certain areas and the Company expects that restrictions and other limitations may continue for the foreseeable future. The total impact of the global emergence of COVID-19 on our business and financial results are not completely known, and we cannot predict what impact it may have on our continuing operations and the effect to our financial results.
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