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Inrad Optics, Inc. - Quarter Report: 2004 June (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

 

 

 

 

 

 

 

ý

 

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

 

 

 

 

 

 

 

For the quarterly period ended  JUNE 30, 2004

 

OR

 

 

 

 

 

o

 

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

 

 

 

PHOTONIC PRODUCTS GROUP, Inc.

(Exact name of registrant as specified in its charter)

 

New Jersey

 

22-2004247

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer
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         ý            No           o

 

Indicate by check mark whether the registrant is an accelerated filer ) as defined in Rule 12b-2 of the Exchange Act).

 

Yes         o            No           ý

 

Common shares of stock outstanding as of August 1, 2004:

7,160,903

 

 



 

PHOTONIC PRODUCTS GROUP, INC.

 

INDEX

 

 

 

 

 

Page Number

Part I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2004, (unaudited) and December 31, 2003

3

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (unaudited)

5

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

9

 

 

 

 

 

 

Liquidity and Capital Resources

12

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

13

 

 

 

 

 

Item 4.

Controls and Procedures

13

 

 

 

 

 

Part II.

OTHER INFORMATION

14

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

14

 

 

Signatures

15

 

2



 

PHOTONIC PRODUCTS GROUP, INC AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,
2004

 

December 31,
2003

 

 

 

Unaudited

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,755,605

 

$

1,282,160

 

Accounts receivable (after allowance for doubtful accounts of $40,000 in 2004 and 2003)

 

805,890

 

973,415

 

Inventories

 

2,125,511

 

2,219,116

 

Unbilled contract costs

 

 

191,767

 

Other current assets

 

109,951

 

76,941

 

Total Current Assets

 

4,874,957

 

4,743,399

 

Plant and equipment,

 

 

 

 

 

Plant and equipment at cost

 

10,385,421

 

9,824,498

 

Less: Accumulated depreciation and amortization

 

(6,893,095

)

(6,572,278

)

Total plant and equipment

 

3,492,326

 

3,252,220

 

Precious Metals

 

309,565

 

309,565

 

Intangible Assets

 

443,750

 

443,750

 

Other Assets

 

203,368

 

102,187

 

Total Assets

 

$

9,245,966

 

$

8,851,121

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Note payable -Other

 

$

55,800

 

$

68,292

 

Accounts payable and accrued liabilities

 

1,232,005

 

993,150

 

Current obligations under capital leases

 

99,664

 

99,664

 

Total current liabilities

 

1,387,469

 

1,161,106

 

 

 

 

 

 

 

Secured and Convertible Notes Payable

 

5,200,000

 

4,200,000

 

Other Long Term Notes

 

88,819

 

116,728

 

Capital Lease Obligations

 

40,309

 

88,848

 

Total liabilities

 

6,716,597

 

5,566,682

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

10% convertible preferred stock, Series A no par value; 500 shares issued and outstanding respectively

 

500,000

 

500,000

 

 

 

 

 

 

 

10% convertible preferred stock, Series B no par value; 2,100 shares issued and outstanding respectively

 

2,100,000

 

2,100,000

 

 

 

 

 

 

 

Common stock: $.01 par value; 40,000,000 authorized 5,579,903 shares issued at June 30, 2004 and 5,445,953 issued December 31, 2003

 

55,799

 

54,459

 

Capital in excess of par value

 

9,698,003

 

9,534,523

 

Accumulated deficit

 

(9,809,483

)

(8,889,593

)

 

 

2,544,319

 

3,299,389

 

Less - Common stock in treasury, at cost (4,600 shares respectively)

 

(14,950

)

(14,950

)

Total Shareholders’ Equity

 

2,529,369

 

3,284,439

 

Total Liabilities & Shareholders’ Equity

 

$

9,245,966

 

$

8,851,121

 

 

See Notes to Consolidated Financial Statements

 

3



 

Photonic Products Group, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30

 

2004

 

2003

2004

 

2003

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

1,917,221

 

1,147,117

 

3,723,123

 

2,347,960

 

 

 

 

 

 

 

 

 

 

 

Cost and Expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

1,384,632

 

945,261

 

2,913,536

 

1,866,018

 

Selling, general & administrative expenses

 

705,667

 

544,477

 

1,361,505

 

1,093,744

 

Internal R & D expenses

 

16,688

 

25,343

 

52,096

 

80,911

 

Total Cost and Expenses

 

2,106,987

 

1,515,081

 

4,327,137

 

3,040,673

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(189,766

)

(367,964

)

(604,014

)

(692,713

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(76,470

)

(71,383

)

(153,537

)

(105,837

)

Other

 

1,514

 

1,160

 

2,486

 

2,496

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

(264,722

)

(438,187

)

(755,065

)

(796,054

)

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

(164,820

)

(53,600

)

(164,820

)

(53,600

)

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common shareholders

 

$

(429,542

)

$

(491,787

)

$

(919,885

)

$

(849,654

)

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.08

)

$

(0.09

)

$

(0.17

)

$

(0.16

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

5,480,386

 

5,283,690

 

5,457,759

 

5,283,690

 

 

See Notes to Consolidated Financial Statements

 

4



 

PHOTONIC PRODUCTS GROUP, INC AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months Ended June 30,

 

2004

 

2003

 

 

(Unaudited)

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(755,065

)

$

(796,045

)

 

 

 

 

 

 

Adjustments to reconcile net loss to cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

320,817

 

284,170

 

401K common stock contribution

 

 

11,870

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

167,525

 

207,868

 

Inventories

 

93,605

 

(221,578

)

Unbilled contract costs

 

191,769

 

75,301

 

Other current assets

 

(33,010

)

(28,778

)

Other assets

 

(101,181

)

(2,603

)

Accounts payable and accrued liabilities

 

238,855

 

46,943

 

 

 

 

 

 

 

Total adjustments

 

878,378

 

373,193

 

Net cash provided by (used in) operating activities

 

123,313

 

(422,852

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(560,928

)

(52,205

)

 

 

 

 

 

 

Net cash used in investing activities

 

(560,928

)

(52,205

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from secured notes payable

 

 

 

1,700,000

 

Proceeds from senior convertible debenture

 

1,000,000

 

 

 

Principal payments of bank debt

 

 

 

(1,678,623

)

Principal payments of notes

 

(40,401

)

(74,950

)

Principal payments of capital lease obligations

 

(48,539

)

(49,719

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

911,060

 

(103,292

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

473,445

 

(578,349

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,282,160

 

1,155,074

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

1,755,605

 

$

576,725

 

 

See Notes to Consolidated Financial Statements

 

5



 

PHOTONIC PRODUCTS GROUP, INC. AND SUSIDIARIES

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

 

 

Common Stock

 

Preferred

 

Stock

 

Preferred

 

Stock

 

(Series A)

(Series B)

Shares

 

Amount

Shares

 

Amount

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2001

 

5,135,603

 

$

51,356

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

14,037

 

140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

134,000

 

1,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

5,283,640

 

$

52,836

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

28,263

 

283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

134,000

 

1,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

5,445,903

 

$

54,459

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

134,000

 

1,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2004

 

5,579,903

 

$

55,799

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

 

 

 

Capital in
excess of
par value

 

Deficit

 

Payable/
Receivable

 

Treasury
Stock

 

Total
Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2001

 

$

9,331,194

 

$

(5,222,112

)

$

 

$

(14,950

)

$

6,745,488

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

20222

 

 

 

 

 

 

20,362

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

119260

 

(120,600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

(1,715,972

)

 

 

(1,715,972

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

$

9,470,676

 

$

(7,058,684

)

$

 

$

(14,950

)

$

5,049,878

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

11,587

 

 

 

 

11,870

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

52,260

 

(53,600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

(1,777,309

)

 

 

(1,777,309

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

$

9,534,523

 

$

(8,889,593

)

$

 

$

(14,950

)

$

3,284,439

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

163,480

 

(164,825

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

(755,065

)

 

 

 

 

(755,065

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2004

 

$

9,698,003

 

$

(9,809,483

)

$

 

$

(14,950

)

$

2,529,369

 

 

See notes to consolidated financial statements

 

6



 

PHOTONIC PRODUCTS GROUP, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 -SUMMARY OF ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of PHOTONIC PRODUCTS GROUP, Inc. (the “Company”) reflect all adjustments, which are of a normal recurring nature, and disclosures which, in the opinion of management, are necessary for a fair statement of results for the interim periods.  It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements as of December 31, 2003 and 2002 and for the years then ended and notes thereto included in the Company’s report on Form 10-K, filed with the Securities and Exchange Commission.

 

Inventory Valuation

 

Inventories are valued on a lower of cost (first-in-first-out basis) or market basis (net realizable value).  Work In Process inventory for the period is stated at actual cost, not in excess of estimated realizable value.

 

Inventories are comprised of the following:

 

 

 

June 30,
2004

 

December 31,
2003

 

 

 

 

 

 

 

Raw materials

 

$

548,836

 

$

543,116

 

Work in process, including manufactured parts and components

 

1,002,106

 

1,275,000

 

Finished goods

 

574,569

 

401,000

 

 

 

$

2,125,511

 

$

2,219,116

 

 

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 statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.  A valuation allowance is established when deferred tax assets are not likely to be realized.

 

Net Loss Per Share

 

Basic and diluted net loss per share is computed using the weighted average number of common shares outstanding for the period ended June 30, 2004.  The potential dilutive effect of securities, which are common share equivalents, options, warrants, convertible notes and convertible preferred stock and their associated dividends have been excluded from the diluted computation because their effect is antidilutive.

 

Stock Based Compensation

 

The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation costs for options has been recognized in the financial statements.  The chart below set forth the company’s net loss per share for the three and six months ended June 30, 2004 and 2003, as reported on a pro forma basis as if the compensation cost of stock options had been determined in accordance with SFAS 123.

 

 

 

For the three months ended

 

For the six months end

 

June 30,
2004

 

June 30,
2003

June 30,
2004

 

June 30,
2003

 

 

 

 

 

 

 

 

 

 

Net Loss, as reported

 

$

(429,542

)

$

(491,787

)

$

(919,885

)

$

(849,654

)

Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax effects

 

(33,414

)

(47,124

)

(66,827

)

(94,248

)

 

 

 

 

 

 

 

 

 

 

Pro forma net loss

 

$

(462,956

)

$

(538,911

)

$

(986,712

)

$

(943,902

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted income per share:

 

 

 

 

 

 

 

 

 

As Reported

 

(.08

)

(.09

)

(.17

)

(.16

)

Pro forma

 

(.08

)

(.16

)

(.18

)

(.18

)

 

7



 

NOTE 2- CHANGES IN LONG TERM DEBT

 

At the end of the fourth quarter of 2002 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in January 2006 and bears an interest rate of 6%. The note was amended in 2004 to clarify its conversion features. Interest accrues yearly and along with principal may be converted into Common Stock, (and/or securities convertible into common shares), at a conversion rate equal to the purchase price of stock issued (and/or securities issued that are convertible into Common Stock) for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twenty four months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.

 

In January 2003 the Company was in violation of certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the asset based loan and working capital revolver to APC Investments.  In June 2003 the Company paid off the loan held by APC with $1,700,000 in proceeds received from the issuance of a Secured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note is for a period of 30 months and bears interest at the rate of 6.5% per annum.  The Company’s Board of Directors approved the issuance of 200,000 warrants to the major investor as a fee for the issuance of the Note and in the 1st quarter of 2004 approved the issuance of an additional 200,000 warrants as a fee for extending the note to January 31, 2005. The warrants are exercisable at $0.425 per share and $1.08 per share, respectively, approximately a 15% discount to market, and expire in March 2008 and May 2008. The Note is secured by all assets of the Company.

 

At the end of the fourth quarter of 2003 the Company received $1,500,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in January 2006 and bears an interest rate of 6%.  The note was amended in 2004 to clarify its conversion features.  Interest accrues yearly and along with principal may be converted into Common Stock, and/or securities convertible into Common Stock, at a conversion rate equal to the purchase price of stock issued, and/or securities issued that are convertible into Common Stock, for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twelve months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.  The proceeds from the Note are intended for use in the Company’s acquisition program.

 

In April 2004 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in March 2007 and bears an interest rate of 6%. Interest accrues yearly and along with principal may be converted into Common Stock, (and/or securities convertible into common shares), at a conversion rate equal to the purchase price of stock issued (and/or securities issued that are convertible into Common Stock) for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twenty four months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.

 

The conversion of the above convertible notes in the aggregate principal amount of $3,500,000 is subject to a conversion price equal to the price at which equity is first raised for cash after the issuance of the notes.  During the 2nd quarter of 2004 the Company entered into an agreement to raise equity via a private placement, as described in the Capital and Liquidity Resources section. As a result of the private placement the Notes are now convertible into an aggregate of 3,500,000 Units consisting of 3,500,000 shares of common stock and Warrants to acquire 2,625,000 shares of common stock at a price of $1.35 per share.

 

8



 

ITEM 2.                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

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 our plans or strategies, projected or anticipated benefits of acquisitions to be made by us, projections involving anticipated revenues, earnings, or other aspects of our 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. We caution 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 our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Actual results may vary from these forward-looking statements for many reasons, including the following factors: adverse changes in economic or industry conditions in general or in the markets served by the Company and its customers, actions by competitors, and inability to add new customers and/or maintain customer relationships.  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.  Investors are encouraged to review the risk factors set forth in the Company’s most recent Form 10-K as filed with the Securities and Exchange Commission in April 2004. Any one or more of these uncertainties, risks, and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise.

 

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.

 

Critical Accounting Policies

 

Our significant accounting polices are described in Note 1 of the consolidated financial statements, that were prepared in accordance with accounting principles generally accepted in the United States of America.  In preparing our financial statements we made estimates and judgments that affect the results of our operations and the value of assets and liabilities we report.  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 “Managements Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on form 10-K for the year ended December 31, 2003.

 

RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the Company’s un-audited consolidated financial statements presented elsewhere herein.  The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.

 

Total Revenue

 

Total sales for the three months ended June 30, 2004 were $1,917,000 as compared with total sales of $1, 147,000 for the same three months in 2003; up 67 %. Total sales for the six months ended June 30, 2004 were $3,723,000 as compared with $2,348,000 for the same period last year; up 59%. Sales of INRAD laser accessories to both OEM’s and researchers was stronger than in the same period a year ago, as were deliveries of INRAD optical components to defense sector OEM’s.  Sales of custom optical components by the “new” Laser Optics (the business unit formed in December 2003 from the merger of the assets of Laser Optics, Inc. and those of INRAD custom optics) was strong to customers in the aerospace, defense, and process control and metrology sectors. Sales to one aerospace customer represented 21% of revenues in this quarter. Sales to one process control and metrology sector customer represented 15% of revenues in this quarter.

 

Bookings for the second quarter were $2,400,000 as compared with $1,798,000 for the same period last year, up 34%. Bookings for the first half of the year were $5,429,000 vs. $2,912,000 for the same period in 2003, up 86%.

 

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The book-to-bill ratio for the second quarter of 2004 was 1.25 compared with 1.59 for the same quarter of 2003, and compared with a ratio of 1.12 for all of 2003, indicating continued strong demand from the Company’s customer base for its products. However, customer and competitive pressures have, as anticipated, continued to cause us to hold our prices firm in most instances.

 

In this year’s second quarter, OEM order intake was strong for optical components from both INRAD and Laser Optics, and for INRAD laser accessories. Orders from four major OEM customers accounted for 65% of the total bookings in this quarter. One order was from a major defense industry OEM, ATK Missile Systems Division, who placed another follow-on production order for INRAD proprietary filter crystals used in their anti-aircraft missile warning systems. Another order was from Northrop Grumman Defensive Systems Division for proprietary filter crystals used in their anti-aircraft missile warning systems. The third and fourth were from a major defense electro-optical systems OEM and from a process control and metrology sector major OEM for relatively large quantities of various precision custom optical components from our Laser Optics business unit.

 

Bookings in the first half of the year usually include OEM orders from INRAD customers placed in the first half for goods deliverable over the coming twelve months.  This seasonal trend was absent in the first quarter of 2003, when major OEM accounts pushed out new orders to the second and third quarters due to high inventory levels. Due to this trend, the bookings in the second half of 2004 are not anticipated to equal those in the first half.

 

 The backlog at June 30, 2004 was up 106% to $3,890,000 as compared to $1,890,000 on June 30, 2003.  The Backlog increased 70% during the second half of 2004, up from $2,286,000 on December 31, 2003.

 

The backlog on June 30, 2004 and high first half order intake indicates continued strong sales performance is anticipated in the 3rd quarter.

 

Cost of Goods Sold

 

For the six-month period ended June 30, 2004, the cost of goods sold as a percentage of product revenues was 78.3% vs. 79.5% for the same period last year. For the full year 2003, the actual cost of good sold percentage was 83.9%. Gross profit margin for the first six months was 21.7%, compared with 20.5% for the first half of 2003.

 

In dollar terms, the cost of goods sold was $2,914,000 for the first half of 2004 compared with $1,847,000 for first half of 2003, up 58%. Product revenues were up 60% year to year for the same period.

 

The increase in gross margin percentage in the first six months in comparison to the same period last year, was the result of increased sales volume as well as the capitalization of certain overhead costs associated with the building renovations required as a result of the relocation of Laser Optics, Inc. to NJ. This increase resulted despite increased labor costs related to all personnel within Northvale, NJ-based operations being restored to full work-hours and full salaries, as required to meet the needs of the Company’s increasing backlogs, following two years of reduced work-hours. As well, this increase was despite inefficiencies associated with preparation in the first quarter for discontinuance of Connecticut-based operations acquired from Laser Optics, Inc. late last year and inefficiencies associated with start-up of Laser Optics operations in Northvale, NJ in the second quarter.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the current six-month period were $1,362,000 vs. $1,094,000 for the same period in the prior year, up 24%.  Second quarter expenses were $706,000 for the current year vs. $554,000 for the second quarter of FY 2003.  The expenses increased due to increases in selling and general management personnel resulting from the acquisition of the assets of the former Laser Optics, Inc., and merger of their operations and personnel with INRAD custom optics to form the “new” Laser Optics business unit of PPGI. The increase was also attributable to increased costs of advisory services and travel expenses incurred in connection with the company’s merger and acquisition program, as well as increased costs for advertising and travel expenses related to increased sales efforts during the period. At the beginning of FY 2004 directors’ fees and officers’ salary reductions of 15% that went into effect during FY 2002 were restored.  Also, all temporary layoffs affecting other personnel were eliminated during FY 2004.  As a result, labor costs increased without a corresponding increase in the number of employees.

 

Internal Research and Development Expenses

 

Research and development expenses for the quarter ended June 30, 2004 were $17,000 compared to $25,000 for the quarter ended June 30, 2003.  Independent research and development expenditures for the first half of 2004 were $52,000 compared with $81,000 in the first half of 2003. The decrease was the result of partially re-focusing engineering efforts to production in this quarter.

 

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Interest expense

 

Interest expense for the first half of the year was $154,000 compared to $106,000 incurred in the first half of 2003.  Interest expense increased over prior periods due to the increased borrowing needs experienced by the Company, and 1.5% higher interest rates. Borrowing needs increased due to the need for capital for the laser Optics acquisition.  During 2003, a secured note in the principle amount of $1,700,000 at 6.0% interest was issued to pay off bank debt that was at rates approximating the prime rate of interest. In 2003, a $1,500,000 subordinated convertible note and in 2004 a $1,000,000 subordinated convertible note were issued to provide funds for acquisition purposes. Interest on the secured and convertible notes is accrued, and payment is due upon the maturity of the notes

 

Net Loss

 

Net loss for the six months ended June 30, 2004 was $(755,000) compared to a net loss of $(796,000) as compared to the same period in FY 2003. Net loss for the quarters ending June 30 was $(265,000) for FY 2004 and $(438,000) for FY 2003.

 

Loss from operations for the first six months was $(604,000) in 2004 as compared with $(693,000) in 2003.  Second quarter operating loss was $(190,000) in 2004 and $(368,000)  in 2003.

 

Earnings Per Share

 

Basic earnings per share available to common shareholders was calculated by adjusting the net loss by $165,000 in 2004 and by $54,000 in 2003 for the common stock dividend paid on Company preferred stock, divided by the weighted shares outstanding.  Diluted earnings per share for the six months ended June 30, 2004 and June 30, 2003 were not calculated because the effect of outstanding options, warrants and convertible securities was anti-dilutive.

 

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Liquidity and capital resources

 

Capital expenditures, including purchases and a portion of applicable internal labor and overhead charges, for the six months ended June, 2004 and 2003 were $561,000 and $52,000, respectively.  Capital expenditures for all of 2003 were $101,000.  The increase in costs represent expenditures for replacement of capital equipment at the end of its useful life and for the restructuring of the Northvale, NJ operations to accommodate the merge-in of operations from the former Connecticut –based operations of Laser Optics.

 

Management will continue to make investments in capital acquisitions from time to time, both in equipment and acquisition of complementary businesses, to pursue its objective of growth in shareholder value and to maintain a competitive edge in the markets that it serves.

 

The Company currently has capital on-hand to continue its acquisition plan for the near term.  The Company continues to search for additional sources for infusion of capital to be used for additional acquisitions to follow.

 

During the six month period ended June 30, 2004, cash outflows were funded from cash proceeds from subordinated convertible promissory notes received in 2004, 2003 and 2002.  Where possible, the Company will seek to increase sales, and improve margins to improve future operating results and cash flows.  Management expects that cash flow from operations and use of its existing cash reserves, will provide adequate liquidity for the Company’s operations in 2004.  The current six month period yielded positive cash flow from operations in the amount of $123,000.

 

At the end of the fourth quarter of 2002 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in January 2006 and bears an interest rate of 6%. The note was amended in 2004 to clarify its conversion features. Interest accrues yearly and along with principal may be converted into Common Stock, (and/or securities convertible into common shares), at a conversion rate equal to the purchase price of stock issued (and/or securities issued that are convertible into Common Stock) for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twenty four months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.

 

In January 2003 the Company was in violation of certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the asset based loan and working capital revolver to APC Investments.  In June of 2003 the Company paid off the loan held by APC with $1,700,000 in proceeds received from the issuance of a Secured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note is for a period of 30 months and bears interest at the rate of 6.5% per annum.  The Company’s Board of Directors approved the issuance of 200,000 warrants to the major investor as a fee for the issuance of the Note and in the 2nd quarter of 2004 approved the issuance of an additional 200,000 warrants as a fee for extending the note to January 31, 2005. The warrants are exercisable at $0.425 per share and $1.08 per share, respectively, approximately a 15% discount to market, and expire in March 2008 and May 2008. The Note is secured by all assets of the Company.

 

At the end of the fourth quarter of 2003 the Company received $1,500,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in January 2006 and bears an interest rate of 6%.  The note was amended in 2004 to clarify its conversion features.  Interest accrues yearly and along with principal may be converted into Common Stock, and/or securities convertible into Common Stock, at a conversion rate equal to the purchase price of stock issued, and/or securities issued that are convertible into Common Stock, for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twelve months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.  The proceeds from the Note are intended for use in the Company’s acquisition program.

 

In April 2004 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in March 2007 and bears an interest rate of 6%. Interest accrues yearly and along with principal may be converted into Common Stock, (and/or securities convertible into common shares), at a conversion rate equal to the purchase price of stock issued (and/or securities issued that are convertible into Common Stock) for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twenty four months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.

 

During the 2nd quarter of 2004 the Company entered into an agreement with an investment banking firm to raise equity via a private placement that was not registered with the Securities and Exchange Commission. In July 2004, the Company issued 1,581,000 Units consisting of 1,581,000 shares and warrants to acquire an additional 1,185,750 shares at $1.35 per share.  The Company also issued 276,675 warrants at an exercise price of $1.35 to the placement agent engaged for the private offering. This resulted in net proceeds to the Company of approximately $1,350,000. The funds are to be utilized in the furtherance to the company’s M&A program, capital equipment purchases and to meet general working capital requirements. The conversion of the above convertible notes in the aggregate

 

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principal amount of $3,500,000 is subject to a conversion price equal to the price at which equity is first raised for cash. As a result of the private placement the Notes are now convertible into an aggregate of 3,500,000 Units consisting of 3,500,000 shares of common stock and Warrants to acquire 2,625,000 shares of common stock at a price of $1.35 per share.

 

Item 3.                    Quantitative and Qualitative Disclosures About Market Risk
 

The Company believes that it has limited exposure to changes in interest rates from investments in certain money market accounts.  The Company does not utilize derivative instruments or other market risk sensitive instruments to manage exposure to interest rate changes.  The Company believes that a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company’s interest sensitive money market accounts at June 30, 2004.

 

ITEM 4.      CONTROLS AND PROCEDURES

 

Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic SEC filings. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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PART II.    OTHER INFORMATION

 

ITEM 2.      CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

During the 2nd quarter of 2004 the Company entered into an agreement with an investment banking firm to raise equity via a private placement that was not registered with the Securities and Exchange Commission. In July, 2004 the Company issued 1,462,425 Units consisting of 1,581,000 shares of common stock and warrants to acquire an additional 1,462,425 shares at $1.35 per share.  This resulted in net proceeds to the Company of approximately $1,350,000. The offering was subscribed to by approximately fifty six investors comprised of institutional funds and accredited investors. The funds are to be utilized in the furtherance of the Company’s M&A program, capital equipment purchases and to meet general working capital requirements.

 

The offering closed on July 30, 2004.  As part of the offering agreement the Company will undertake efforts to register the stock issued as part of the offering with the Securities and Exchange Commission and there can be no “piggy back” registration of any other shares, issued but not registered, as part of this registration.  Directors, officers and a major shareholder of the Company have signed an agreement prohibiting them from selling shares of the Company stock in their possession for a period of six months commencing from the date of the first offering in May 2004.

 

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

 

(A)       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        Certification of Principle executive Officer pursuant to rule 13a-14(a)/15d-14(a)

 

31.2        Certification of Principle executive Officer pursuant to rule 13a-14(a)/15d-14(a)

 

The following exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that Section.  In addition Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

32           Certification of Principal Executive Officer and Principle Financial Officer pursuant to 18 U.S.C. Section 1350

 

(B)       Reports on Form 8-K:

 

On July 12, 2004, under Item 5, Other Events, summarizing the first closing of a private placement.

 

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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.

 

 

 

PHOTONIC PRODUCTS GROUP, Inc.

 

 

 

 

 

 

 

By:

/s/  Daniel Lehrfeld

 

 

 

Daniel Lehrfeld

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

By:

/s/  William S. Miraglia

 

 

William S. Miraglia

 

Chief Financial Officer

 

 

Date:   August 4, 2004

 

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