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.
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting
company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b2 of the Exchange
Act. (Check one):
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
State the aggregate
market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter. $5,762,963. (For purposes of determining this amount, only directors, executive
officers and shareholders with voting power of 10% or more of our stock have been deemed affiliates.)
Indicate the number
of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Portions of the registrant's
definitive Proxy Statement for the 2021 Annual Meeting of Shareholders, to be filed with the Commission not later than 120 days
after the close of the registrant’s fiscal year, have been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.
PART 1
Caution Regarding Forward Looking Statements
This Annual Report
contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to ensure 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 Annual 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, or 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 that may cause or contribute to such differences include, but
are not limited to, those discussed in more detail in Item 1 (Business) and Item 1A (Risk Factors) of Part I and Item 7
(Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of this Annual Report
on Form 10-K. 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, except as otherwise required by law.
Inrad Optics, Inc.
(the “Company,” “Inrad,” or “we”), was incorporated in New Jersey in 1973. The Company develops,
manufactures and markets products and services for use in photonics enabled industry sectors.
The Company is a vertically
integrated manufacturer specializing in crystal-based optical components and devices, custom optical components from both glass
and metal, and precision optical and opto-mechanical assemblies. Manufacturing capabilities include solution and high temperature
crystal growth, extensive optical fabrication capabilities including precision diamond turning and the ability to handle large
substrates, proprietary optical contacting processes, thin film coatings, and high resolution in-process metrology.
Inrad Optics’
customers include leading corporations in the defense, aerospace, laser systems, process control and metrology sectors of the photonics
industry, as well as the U.S. Government, National Laboratories and universities worldwide.
Administrative,
engineering and manufacturing operations are in a 42,000 square foot building located in Northvale, New Jersey.
The products produced
by Inrad Optics, Inc. fall into two main categories: Optical Components and Laser Devices/Instrumentation.
The Optical Components
category is heavily focused on custom optics manufacturing. The Company specializes in high-end precision components and sub-assemblies.
It develops, manufactures and delivers precision custom optics and thin film optical coating services through its Custom and Metal
Optics operations. Glass, metal, and crystal substrates are processed using complex processes and techniques to manufacture components,
deposit optical thin films, and assemble sub-components used in advanced photonic systems. The majority of custom optical components
and optical coating services supplied are used in defense and aerospace electro-optical systems, inspection, laser, medical and
process control systems.
The Laser Devices/Instrumentation
category includes the growth and fabrication of crystalline materials with electro-optic (EO) and non-linear optical properties
for use in both standard and custom products. This category also includes crystal-based devices and associated instrumentation.
The majority of crystals, crystal components and laser devices are used in laser systems, defense and security EO systems, medical
lasers and research and development applications by engineers within corporations.
The following table
summarizes the Company’s net sales by product categories during the past two years. Laser Devices/Instrumentation includes
all non-linear and electro-optical crystal components.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Category (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Optical Components
|
|
$
|
8,341
|
|
|
|
92.6
|
|
|
$
|
8,796
|
|
|
|
87.9
|
|
Laser Devices/Instrumentation
|
|
|
667
|
|
|
|
7.4
|
|
|
|
1,212
|
|
|
|
12.1
|
|
Total
|
|
$
|
9,008
|
|
|
|
100.0
|
|
|
$
|
10,008
|
|
|
|
100.0
|
|
Products Manufactured by the Company
Optical Components
a) Custom Optics
and Optical Coating Services
Manufacturing of high-performance
custom optics is a major product area for Inrad Optics and is addressed in the marketplace by the Company’s Custom and Metal
Optics product lines.
The Custom Optics
product line focuses on products manufactured to specific customer requirements. It specializes in the manufacture of optical components,
optical coatings (ultra-violet wavelengths through infra-red wavelengths) and subassemblies for the aerospace, industrial medical
marketplace and military. Planar, prismatic and spherical components are fabricated from glass and synthetic crystals, including
fused silica, germanium, magnesium fluoride, quartz, silicon, zinc selenide, and zinc sulfide. Components consist of cavity optics
for lasers, large form factor transmission flats, optical windows for airborne applications, multi-element optical assemblies,
lenses, mirrors, polarizing optics, prisms, wave plates, and x-ray monochromators.
Most optical components
and sub-assemblies require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect
and transmit specific wavelengths. The Custom Optics optical coating specialties include anti-reflective high laser damage resistance,
highly reflective, infra-red, polarizing, and coating to complex multi-wavelength requirements on a wide range of substrate materials.
Coating deposition process technologies employed included electron beam, ion and plasma assisted deposition systems and thermal.
The Metal Optics product
line is a fully integrated precision metal optics and optical assembly operation which employs high precision diamond machining,
polishing, and plating of aluminum, AlBeMet™, beryllium, and stainless steel. The Metal Optics product line offers opto-mechanical
design and assembly services as part of its manufactured deliverables and can support prototyping through production of arc-second
accuracy polygons, diamond machined precision aspheres, large and small metal mirrors, low RMS surface finish polished mirrors,
planar mirrors, reflective Porro prisms, and thermally stable optical mirrors. Plating specialties include void-free gold and electroless
nickel.
b) UV Filter Optical
Components
This
product line consists of crystals and crystal devices including UV filter materials of both patented and proprietary formulations
with unique transmission and absorption characteristics. These materials are used in critical applications in defense systems such
as missile warning sensors.
Laser Devices/Instrumentation
This product line
consists of crystal-based products that are used in, or alongside, laser systems. Developing growth processes for high quality
synthetic crystals is a core competency of the Crystals and Devices manufacturing team. These crystals are embedded in our value-added
devices and instrumentation products manufactured in our Northvale facility and include crystals for wavelength conversion, modulation
and polarization, Pockels cells, and wavelength conversion instruments. In addition to the filter materials used in the UV Filter
Optical components described above, current materials produced include beta barium borate (BBO), lithium niobate, potassium dideuterium
phosphate, potassium dihydrogen phosphate, Stilbene, and zinc germanium diphosphide. Applications for these materials include defense,
homeland security, industrial processing lasers and surgical lasers.
The Crystals and Devices
manufacturing team is also engaged in ongoing research and development efforts to develop new materials for evolving applications.
Some of the major products produced for the photonics marketplace include:
a) Crystal
Components
The Company grows
and fabricates electro-optic and nonlinear crystal devices for altering the intensity, polarization or wavelength of a laser beam.
Other crystal components, produced as part of the Crystals and Devices product line, are used in laser research, in commercial
laser systems and in detection of fast neutrons.
b) Pockels
Cells and Drivers
A line of Pockels
cells and associated electronics is manufactured for sale in multiple market sectors. Pockels cells are devices that include one
or more crystal components and are used in applications that require fast switching of the polarization direction of a beam of
light. These uses include Q-switching of laser cavities to generate pulsed laser light, coupling light into and out from regenerative
amplifiers, and light intensity modulation. These devices are sold to medical and industrial laser original equipment manufacturers
(“OEM”), research institutes and laser system design engineers.
Sales by Market
The photonics industry
serves a broad, fragmented, and expanding set of markets. As technologies are discovered, developed, and commercialized, the applications
for photonic systems and devices, and the components embedded within those devices, expand across traditional market boundaries.
While a significant part of the Company’s business remains firmly in the process control and metrology and defense and aerospace
markets, other markets served include OEM manufacturers in the medical and industrial laser market, university research institutes
and national labs worldwide. Scanning, detection and imaging technologies for homeland security and surface inspection also provide
opportunities for the Company and these sectors are expected to continue to account for potential future growth and demand for
our products and capabilities.
In 2020 and 2019,
the Company’s product sales were made to customers in the following market areas:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Market (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Aerospace & Defense
|
|
$
|
3,916
|
|
|
|
43.5
|
|
|
$
|
3,710
|
|
|
|
37.0
|
|
Process Control & Metrology
|
|
|
3,328
|
|
|
|
36.9
|
|
|
|
4,189
|
|
|
|
41.9
|
|
Laser Systems
|
|
|
667
|
|
|
|
7.4
|
|
|
|
1,212
|
|
|
|
12.1
|
|
Scientific / R&D
|
|
|
1,097
|
|
|
|
12.2
|
|
|
|
897
|
|
|
|
9.0
|
|
Total
|
|
$
|
9,008
|
|
|
|
100.0
|
|
|
$
|
10,008
|
|
|
|
100.0
|
|
Aerospace & Defense
This market consists
of sales to OEM defense electro-optical systems and subsystems manufacturers, U.S. based prime defense contractors, and direct
sales to governments where the products have the same end-use.
End-use applications
for the Company’s products in the aerospace and defense sector include military laser systems, military electro-optical systems,
satellite-based systems, and missile warning sensors and systems that protect aircraft. The dollar volume of shipments of product
within this sector depends in large measure on the U.S. Defense Department budget and its priorities, that of foreign governments,
the timing of their release of contracts to their prime equipment and systems contractors, and the timing of competitive awards
from this customer community to the Company.
Sales in the aerospace and
defense market represented approximately 43.5% and 37.0% of sales in 2020 and 2019, respectively. Sales increased by approximately $0.2
million, or 5.6% from 2019. The increase in sales is primarily due to the increase in military and defense spending in 2020.
The Company believes
that the aerospace and defense sector will continue to represent a significant market for the Company’s products and offers
an ongoing opportunity for growth given the Company’s capabilities in specialty crystal, glass and metal precision optics.
Process Control and Metrology
This market
consists of capital equipment manufacturers whose products are used in the areas of manufacturing process and control,
optics-based metrology, quality assurance, and inventory and product control. Examples of applications for such equipment
include semiconductor wafer inspection, nanoscale surface defect analysis, and optical sensing systems
Sales in the Process
Control and Metrology (PC&M) market decreased by approximately $0.9 million, or 20.6% in 2020, compared to 2019, and
represented 36.9% and 41.9% of sales in 2020 and 2019 respectively. Decreased sales to two OEM customers resulted in the
decrease in 2020.
The Company believes
that the optical and x-ray inspection segment of the semiconductor industry offers continued growth opportunities which match its
capabilities in precision optics, crystal products, and monochromators However, COVID-19-related temporary customer shutdowns impacted
the sales in this market during 2020. Stronger bookings in the second half of 2020 indicate a rebound for our products in the PC&M
market.
Laser Systems
This market consists
principally of customers who are OEM manufacturers of industrial, medical, and R&D lasers, which the Company serves as an OEM
supplier of standard and custom optical components and laser accessories. The Company also serves a number of smaller customers
in other niche markets and international distributors.
Sales in this market
were 7.4% of total sales in 2020 compared to 12.1% of total sales in 2019. The decrease of approximately $0.5 million, or 45%,
from the prior year was due the sharp reduction in demand for products serving the laser markets and excess inventory in the distribution
channel.
Scientific / R&D
These sales consist
of product sales directly to researchers at various educational and research institutions and through distributors into that same
market internationally. Sales to customers within the Scientific / R&D market consist primarily of x-ray monochromators, non-linear
crystals for laser research, and Pockels cells. Sales in 2020 increased approximately $0.2 million, or 22.3%, and as a percentage
of total sales increased from 9.0% in 2019 to 12.2% in 2020 due to demand for our monochromators as a result of expanded applications
in the R&D market.
Major Customers
The Company’s
sales have historically been concentrated within a small number of customers, although the top customers have varied from year
to year.
In 2020, the Company’s
sales to its top three customers accounted for 30.6% of sales. These customers included a two U.S. based defense contractors
of electro-optical systems for U.S. and foreign governments and one OEM manufacturer of process control and metrology equipment.
These customers represented 17.1%, 7.0%, and 6.5% of total sales during the year.
Sales to the Company’s
top five customers represented approximately 43.0% and 47.2% of sales, in 2020 and 2019, respectively. All these customers
are OEM manufacturers either within the defense, process control and metrology or laser systems sector.
Export Sales
The Company’s
export sales are primarily to customers in Europe, Israel, and Asia and amounted to approximately 29.4% and 31.9% of product sales
in 2020 and 2019, respectively.
Long-Term Contracts
Certain of the Company’s
agreements with customers provide for periodic deliveries at fixed prices over a long period of time. In such cases, the Company
negotiates to obtain firm price commitments, as well as cash advances from its customers for the purchase of the materials necessary
to fulfill the order.
Marketing and Business Development
The Company markets
its products domestically, through the coordinated efforts of the sales, marketing and customer service team.
The Company has moved
towards a strategy of utilizing these combined sales and marketing resources for cross-selling all products across all business
lines. This strategy is well suited to the diverse and fragmented markets that utilize photonic technologies.
Independent sales
agents are used in major non-U.S. markets, including the United Kingdom, the European Union, Israel, and Japan.
Sales and marketing efforts
are coordinated by the Vice President, Sales and Marketing, to promote our product lines through various means including, participation
in trade shows, internet-based marketing, media and non-media advertising and promotions, customer visits, and management of international
sales representatives and distributors. Our sales efforts were significantly impacted by COVID-19-related government mandates and limitations
on travel.
Backlog
The Company’s order backlog at December
31, 2020, was $5.9 million. The Company’s order backlog as of December 31, 2019, was $5.1 million.
We anticipate shipping a substantial majority
of the present backlog during fiscal year 2021. However, our backlog at any given date may consist of orders with delivery schedules
that extend beyond 12 months into the future.
Competition
Within each product
category in which the Company’s business units are active, there is competition.
Our optical components
manufacturing capabilities offer unique solutions designed for highly specialized applications. We are an industry leader in supplying
bent crystal analyzers used in x-ray photoelectron spectroscopy, synchrotron beamline focusing, and plasma diagnostics in controlled
nuclear fusion research facilities. We are a leading supplier of large precision flats produced in volume for semiconductor defect
inspection tools and metrology systems. We have a broad range of materials expertise to produce products across the spectrum from
the ultraviolet to the far infrared. Specialized custom optical and opto-mechanical components that we produce are used in military
imaging platforms and early warning missile sensing systems. By utilizing a team of scientists, engineers, and manufacturing experts
we believe we have a competitive advantage over traditional optical component manufacturers.
The Laser Devices/Instrumentation
products have the advantage of vertical integration within our facility that includes crystal growth, fabrication, and design and
assembly of instrumentation. Our crystals and devices are used in critical laser applications such as laser surgery, quantum technology,
and scientific research. We are a sole supplier of Stilbene scintillation crystals to the nuclear science and radiation detection
community and produce associated instrumentation. We believe our vertical integration provides best in class control of quality,
delivery, and traceability in our products and allows us to respond quickly to market trends and newly innovative demands from
our customers.
Although price is
a principal factor in many product categories, competition is also based on product design, performance, customer confidence, quality,
delivery, and customer service. Based on its performance to date, the Company believes that it can continue to compete successfully,
although no assurances can be given in this regard.
Competitors for our
custom optical components used in military and process control applications include several large publicly traded, broad capability,
photonics companies. There is also competition from a range of smaller niche businesses catering to a limited set of product
offerings. In metal optics, we have competition for mirrors used in aerospace telescopes and EO/IR modules from large and
well-capitalized public companies. Our laser devices compete with several small and midsize companies both in the U.S., as
well as Asia and Europe. There is also limited competition from commodity supply chain optics value added resellers.
Human Capital
We believe that each
employee contributes to our culture of integrity, innovation, and teamwork.
We offer a variety
of benefits such as health insurance, paid and unpaid leave, retirement, life and disability/accident coverage as applicable.
Our commitment to
diversity and inclusion is an important driver of company performance.
Our workplace health
and safety programs include robust policies, procedures, training programs, and self-audits. Our manufacturing facility is in Northvale,
NJ, where we maintain high standards of workplace safety and employee protection. We have also been demonstrating a focus on health
and safety in our response to the COVID-19 pandemic, including work-from-home flexibility and requiring those who may be sick to
stay home. Measures adopted onsite include multiple COVID-19 safety protocols, such as social distancing, use of personal protective
equipment, enhanced cleaning practices, regular internal communication regarding impacts of the COVID-19 pandemic, daily health
certifications, and restrictions on domestic and international travel.
For our manufacturing activities,
the speed at which we can recruit, train and deploy quality new and replacement personnel is an important part of our ability to ramp
up and maintain our production capacity. We rely upon both employees and resources from staffing firms to meet our needs for direct labor.
We face strong competition from companies in a variety of technology fields to secure the engineering and fabrication talent that we
require.
As of the close of business
on March 29, 2021, the Company had 51 full-time employees.
Patents and Licenses
The Company mainly
relies on its manufacturing and technological expertise, know-how, and trade secrets in addition to its exclusive license patent,
to maintain its competitive position in the industry. The Company takes precautionary and protective measures to safeguard its
technical design and manufacturing processes. The Company executes nondisclosure agreements with its employees and, where appropriate,
with its customers, suppliers, and other associates.
Regulation
Foreign sales of certain
of the Company’s products to certain countries may require export licenses from the United States Department of Commerce
and/or Department of State. Such licenses are obtained when required. All requested export licenses of Inrad Optics products have
been granted or deemed not-required.
International Traffic
in Arms Regulations (“ITAR”) governs much of the Company’s domestic defense sector business, and the Company
is capable of handling its customers’ technical information under these regulations. Inrad Optics, Inc. is registered with
the United States Department of State Directorate of Defense Trade Controls, and utilizes a supplier base of similarly registered
companies.
There are no other
federal regulations or any unusual state regulations that directly affect the sale of the Company’s products other than those
environmental compliance regulations that generally affect companies engaged in manufacturing operations in New Jersey.
Availability of Reports
Our
principal executive offices are located at 181 Legrand Avenue, Northvale, N.J. 07647, which also houses our manufacturing operations.
Our telephone number is 201-767-1910, and our corporate website address is www.inradoptics.com. We include our website address
in this annual report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website.
The information on our website is not incorporated by reference in this annual report on Form 10-K.
Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports, as well as other documents we file with
the Securities and Exchange Commission, are available free of charge on our web site at www.inradoptics.com as soon as reasonably
practicable after such reports are electronically filed with, or furnished to the Securities and Exchange Commission (“SEC”)
(www.sec.gov). We will also provide electronic or paper copies of such reports free of charge upon request made to our Corporate
Secretary.
The Company cautions
investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. The risks
described below are those we currently consider to be material. However, there may be other risks, which we now consider immaterial,
or which are unknown or unpredictable, with respect to our business, the markets in which we operate, our competition, the regulatory
environment or otherwise that could have a material adverse effect on our business, financial condition, or results of operations.
|
a)
|
The Company has a history of losses
|
We recorded a net
loss of $0.8 million for each of the years ended December 31, 2020 and 2019. Our history of losses has had an adverse effect on
our working capital, total assets, and shareholders’ equity. We are unable to predict, with certainty, whether we will be
profitable after 2020, and our inability to achieve and sustain profitability may negatively affect our business, financial condition,
results of operations, and cash flows.
|
b)
|
The Company may need to raise additional capital to repay indebtedness and to fund our operations
|
We may need to raise
additional financing to repay our outstanding indebtedness of approximately $2.6 million, net of the PPP Loan proceeds of $1.0
million forgiven in January 2021, as well as, to fund our current level of operations. Additional financing, which is not in place
at this time, may be from the sale of equity or convertible or other debt securities in a public or private offering, or from an
additional credit facility. We may be unable to raise sufficient additional capital on favorable terms, if at all, to supply the
working capital needs of our existing operations or to expand our business.
|
c)
|
A pandemic, epidemic or outbreak of an infectious disease in the United States and globally may adversely affect our business.
|
A
pandemic, epidemic or outbreak of an infectious disease occurring in the United States and/or worldwide, may adversely affect
production. The spread of an infectious disease, including the COVID-19 virus, which was declared a pandemic by the
World Health Organization on March 11, 2020, may also result in the inability of our suppliers to deliver on a timely basis
or at all. In addition federal, state, and local governments may curtail and restrict business activities, as well as the
ability for our employees to work. Such events may result in a period of business disruption, and in reduced operations,
which could materially affect our business, financial condition and results of operations. Any significant infectious disease
outbreak, including the COVID-19 pandemic, could result in a widespread health crisis that could adversely affect the
economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial
condition and results of operations, including our ability to obtain additional funding, if needed.
The
spread of COVID-19 has negatively impacted the global economy and has had an impact our operations, including the curtailment
of certain of our production activities and disruptions in our supply chain. The extent to which the global coronavirus pandemic
continues to impact our business will depend on future developments, which are highly uncertain and cannot be predicted, including
new information that may emerge concerning the severity of COVID-19, and the actions to contain or treat its impact, among others.
The Company continues to monitor safety protocols and enhance its business continuity plans for potential exposure in the event
of infection in our offices and production facility, or in response to potential mandatory quarantines.
|
d)
|
The Company has exposure to Government Markets
|
Sales to customers
in the defense industry represent a significant part of our business. These customers in turn generally contract with government
agencies. Most governmental programs are subject to funding approval through congressional appropriations which can be modified
or terminated without warning upon the determination of a legislative or administrative body. Appropriations can also be affected
by legislation that addresses larger budgetary issues of the U.S. Government which could reduce available funding for most federal
agencies, including the Department of Defense. It is difficult to assess how this may impact our defense industry customers and
the business we do with them in the future. The loss or failure to obtain certain contracts or a loss of a major government customer
could have a material adverse effect on our business, results of operations, or financial condition.
|
e)
|
The Company’s revenues are concentrated in its largest customer accounts
|
For the year ended
December 31, 2020, five customer accounts represented approximately 43.0% of total revenues. Only one of these customers accounted
for more than 10% of revenues. We are a supplier of custom manufactured components to OEM customers, and have a number of large
customers in both the commercial and defense markets, but the relative size and identity of our largest customers change year to
year. In the short term, the loss of any of these large customer accounts or a decline in demand in the markets which they represent
could have a material adverse effect on our business, results of operations, or financial condition.
|
f)
|
The Company depends on, but may not succeed in, developing and acquiring new products and processes
|
To meet the Company’s
strategic objectives, the Company needs to continue to develop new processes, improve existing processes, and manufacture and market
new products. As a result, the Company may continue to make investments in process development and additions to its product portfolio.
There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products
and processes in a way that achieves market acceptance or other pertinent targeted results. The Company also cannot be sure that
it will have the human or financial resources to pursue or succeed in such activities.
|
g)
|
The Company’s stock price may fluctuate widely
|
The Company’s
stock is thinly traded. Many factors, including, but not limited to, future announcements concerning the Company, its competitors
or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other
variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding the Company’s
industries in the financial press or investment advisory publications, could cause the market price of the Company’s stock
to fluctuate substantially. In addition, the Company’s stock price may fluctuate widely for reasons which may be unrelated
to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military
conflicts, or market or related declines, may materially affect the market price of the Company’s common stock. In addition,
any information concerning the Company, including projections of future operating results, appearing in investment advisory publications
or on-line bulletin boards or otherwise emanating from a source other than the Company could in the future contribute to volatility
in the market price of the Company’s common stock.
|
h)
|
The Company’s business success depends on its ability to recruit and retain key personnel
|
The Company depends
on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and
on the Company’s ability to recruit additional personnel. There is competition for the services of these personnel, and there
is no assurance that the Company will be able to retain or attract the personnel necessary for its success, despite the Company’s
efforts to do so. The loss of services of the Company’s key personnel could have a material adverse effect on its business,
results of operations, or financial condition.
|
i)
|
Many of the Company’s customers are in cyclical industries
|
The
Company’s business is significantly dependent on the demand its customers experience for their products. Many of their
end users are in industries that historically have experienced a cyclical demand for their products. The industries include,
but are not limited to, the defense electro-optics industry and the manufacturers of process control capital equipment for
the semiconductor tools industry. As a result, demand for the Company’s products is subject to cyclical fluctuations,
and this could have a material effect on our business, results of operations, or financial condition.
|
j)
|
The Company’s manufacturing processes require products from limited sources of supply
|
The Company utilizes
many relatively uncommon materials and compounds to manufacture its products. Many of the materials have long lead times and the
Company’s suppliers could fail to deliver sufficient quantities of these necessary materials on a timely basis, or deliver
contaminated or inferior quality materials, or markedly increase their prices. Any such actions could have an adverse effect on
the Company’s business, despite the Company’s efforts to secure long term commitments from its suppliers. Adverse results
might include reducing the Company’s ability to meet commitments to its customers, compromising the Company’s relationship
with its customers, adversely affecting the Company’s ability to meet expanding demand for its products, or causing the Company’s
financial results to deteriorate.
|
k)
|
The Company faces competition
|
The Company encounters
substantial competition from other companies positioned to serve the same market sectors. Some competitors may have financial,
technical, capacity, marketing or other resources more extensive than ours, or may be able to respond more quickly than the Company
to new or emerging technologies and other competitive pressures. Some competitors have manufacturing operations in low-cost labor
regions such as the Far East and Eastern Europe and can offer products at lower prices than the Company. The Company may not be
successful in winning orders against the Company’s present or future competitors, and competition may have a material adverse
effect on our business, results of operations, or financial condition.
|
l)
|
The Company may not be able to fully protect its intellectual property
|
The Company currently
holds one patent for a material applicable to an important product, but does not in general rely on patents to protect its products
or manufacturing processes. The Company generally relies on a combination of trade secrets and employee non-compete and nondisclosure
agreements to protect its intellectual property rights. There can be no assurance that the steps the Company takes will be adequate
to prevent misappropriation of the Company’s technology. In addition, there can be no assurance that, in the future, third
parties will not assert infringement claims against the Company. Asserting the Company’s rights or defending against third-party
claims could involve substantial expense, thus materially and adversely affecting the Company’s business, results of operations,
or financial condition.
|
m)
|
Data breach and breakdown of information and communication technologies
|
In the course of our
business, we collect and store sensitive data, including intellectual property. We could be subject to service outages or breaches
of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security
breaches of our network or data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks
by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information.
Although we have not experienced an incident, if we are unable to prevent such security or privacy breaches, our operations would
be disrupted or we could suffer, financial loss, property damage, reputational damage, or regulatory penalties because of lost
or misappropriated information.
|
Item 1B.
|
Unresolved Staff Comments
|
None
Administrative, engineering,
and manufacturing operations are housed in a 42,000 square foot building located in Northvale, New Jersey. The lease for the Northvale
facility was renewed for a term of three years from June 1, 2019 to May 31, 2022, along with an option to renew the lease for three
additional one-year terms running through May 31, 2025, at substantially the same terms. We believe that our existing facility
is adequate to meet current and future projected production needs.
|
Item 3.
|
Legal Proceedings
|
We are not party to
any legal proceedings as of the date hereof.
|
Item 4.
|
Mine Safety Disclosures
|
Not Applicable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 2020
1.
|
Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates
|
|
|
a. Nature
of Business and Operations
Inrad Optics, Inc.
and Subsidiaries (the “Company”), was incorporated in the state of New Jersey and is a manufacturer of crystals, crystal
devices, electro-optic and optical components, and sophisticated laser devices and instruments. The Company has administrative
offices and manufacturing operations in Northvale, New Jersey.
The Company’s
principal customers include commercial instrumentation companies and OEM laser systems manufacturers, research laboratories, government
agencies, and defense contractors. The Company’s products are sold domestically using its own sales staff, and in major overseas
markets, principally Europe, Israel, Japan, and Asia, using independent sales agents.
b. Liquidity
As of December 31,
2020, the Company had working capital of $3.5 million and cash and cash equivalents of $1.1 million. Management believes based
on the Company’s operations and its existing working capital resources together with existing cash flows, the Company has
sufficient cash flows to fund operations through at least March 31, 2022.
c. Principles of consolidation
The accompanying consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. Upon consolidation, all inter-company
accounts and transactions are eliminated.
d. Use
of estimates
The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the
consolidated financial statements and accompanying notes. These estimates include, but are not limited to, determining our allowance
for doubtful accounts, our allowance for inventory obsolescence, the fair value and depreciable lives of long-lived tangible and
intangible assets, and deferred taxes and the associated valuation allowance. Actual results could differ from these estimates.
e. Cash
and cash equivalents
The
Company considers cash-on-hand and highly liquid investments with original maturity dates of three months or less at the date of
purchase to be cash and cash equivalents.
f. Accounts
receivable
Accounts receivable
are carried at net realizable value, net of write-offs and allowances. The Company establishes an allowance for doubtful accounts
based on estimates as to the collectability of accounts receivable. Management specifically analyzes past-due accounts receivable
balances and, additionally, considers bad debt history, customer credit-worthiness, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful accounts. Uncollectible accounts receivable are written-off
when it is determined that the balance will not be collected.
g. Inventories
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.
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.
h. Plant
and Equipment
Plant and
equipment are depreciated using the straight-line method over the estimated useful lives of the related assets which range
between five and seven years. Amortization of leasehold improvements is computed using the straight-line method over the
lesser of 10 years or the remaining term of the lease including optional renewal periods, as appropriate, when failure to
renew the lease imposes an economic penalty on the Company in such an amount that renewal appears to be probable. In
determining the amount of the economic penalty, management considers such factors as (i) the costs associated with the
physical relocation of the offices, manufacturing facility and equipment, (ii) the economic risks associated with business
interruption and potential customer loss during relocation and transition to new premises, (iii) the significant costs of
leasehold improvements required at any new location to custom fit our specific manufacturing requirements, and (iv) the
economic loss associated with abandonment of existing leasehold improvements or other assets whose value would be impaired by
vacating the facility.
Maintenance and repairs
of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition
of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and a gain or loss is recorded.
i. Income
taxes
Deferred 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 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% 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.
The Company had no
unrecognized tax benefits or liabilities, and no adjustment to its financial position, results of operations, or cash flows relating
to uncertain tax positions taken on all open tax years. The Company is no longer subject to federal income tax examinations by
tax authorities for the years before 2017 and state or local income tax examinations by tax authorities for the years before 2017.
j. Impairment
of long-lived assets
Long-lived assets,
such as plant and equipment and purchased intangibles with finite lives, which are subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Long-lived assets
held for sale would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell and would no longer be depreciated.
k. 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.
l. Revenue
recognition
The
Company adopted the provisions of ASU 2014-09, “Revenues from Contracts with Customers (ASC 606)” on January 1, 2018,
which requires recognition of revenue at the time performance obligations are satisfied. 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). See Note 2.
m. Internal
research and development costs
Internal research
and development costs are charged to expense as incurred.
n. Precious
metals
Precious metals are
stated at cost and consist of various fixtures used in the high temperature crystal growth manufacturing process. From time to
time the quoted market values of these precious metals may be below cost. Management evaluates these market adjustments on a recurring
basis and if it is determined that they are other than temporary the carrying value would be adjusted.
o. Advertising
costs
Advertising costs
included in selling, general and administrative expenses were $18,000 and $45,000 for the years ended December 31, 2020 and 2019,
respectively. Advertising costs are charged to expense when the related services are incurred or related events take place.
p. Concentrations
and credit risk
The concentration
of credit risk in the Company’s accounts receivable is mitigated by the Company’s credit evaluation process, familiarity
with its small base of recurring customers and reasonably short collection terms and the geographical dispersion of revenue. The
Company generally does not require collateral but, in some cases, the Company negotiates cash advances prior to the undertaking
of the work. These cash advances are recorded as current liabilities on the balance sheet until corresponding revenues are realized.
The Company utilizes
many relatively uncommon materials and compounds to manufacture its products and relies on outside vendors for certain manufacturing
services. Therefore, any failure by its suppliers to deliver materials of an adequate quality and quantity could have an adverse
effect on the Company’s ability to meet the commitments of its customers.
For the year ended
December 31, 2020, the Company had three customers who had sales representing 17.1%, 7.0% and 6.5% of total revenues. For the year
ended December 31, 2019, the Company had three customers who had sales representing 18.5%, 14.7% and 6.1% of total revenues. Since
the Company is a supplier of custom manufactured components to OEM customers, the relative size and identity of the largest customer
accounts changes somewhat from year to year. In the short term, the loss of any one of these large customer accounts could have
a material adverse effect on business, results of operations, and financial condition.
q. Fair
value measurements
The Company follows
U.S. GAAP accounting guidance which establishes a framework for measuring fair value and expanded related disclosures. The framework
requires fair value to be determined based on the exchange price that would be received for an asset, or paid to transfer a liability
(an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants.
The valuation techniques
required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect the Company’s market assumptions. The accounting guidance requires the following fair value
hierarchy:
|
·
|
Level 1 - Quoted prices (unadjusted) for identical assets and liabilities in active markets that the Company has the ability to access at the measurement date.
|
|
|
|
|
|
|
·
|
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation.
|
|
|
|
|
|
·
|
Level 3 - Values determined by models, significant inputs to which are unobservable and are primarily based on internally derived assumptions regarding the timing and amount of expected cash flows.
|
|
|
Long-lived assets may
be measured at fair value if such assets are held for sale or if there is a determination that the asset is impaired. Management’s
determination of fair value, although highly subjective, is based on the best information available, including internal projections
of future earnings and cash flows discounted at an appropriate interest rate, quoted market prices when available, market prices
for similar assets, broker quotes and independent appraisals, as appropriate.
r. Recent
Accounting Pronouncements
In June 2016,
the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments" (“ASU 2016-13”) which amended guidance on the accounting for credit losses on financial
instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the
incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the
use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim
and annual periods beginning in 2023, with earlier application permitted. The Company is currently evaluating the impact of
adoption on its consolidated financial statements.
In February 2016,
the FASB issued ASU 2016-02, “Leases” (ASC 842), and subsequently issued updates as part of ASU 2018-11, “Leases,
Targeted Improvements.” The new guidance requires organizations that lease assets with lease terms of more than 12 months
to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The Company
adopted ASC 842, effective January 1, 2019. The Company entered into an amendment and extension of its building lease on July 8,
2019, retroactive to June 1, 2019, and accordingly recorded an initial right-of-use asset of $0.8 million. See Note 12a. Lease
Commitments. The adoption of ASU 842 and ASU 2018-11 did not have a material impact on the Company’s statements of operations
or cash flows.
In June 2018,
the FASB issued ASU 2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Shared-Based Payment Accounting.
The ASU update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from
nonemployees. The Company adopted ASU 2018-07 effective January 1, 2019. The adoption did not have a material impact on its financial
statements and related disclosures.
In December 2019,
the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective
for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, on a prospective
basis, with early adoption permitted. The Company is currently evaluating the impact of adoption of this guidance and does not
expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06,
Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic
815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU update is intended to simplify
the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with
characteristics of liabilities and equity. This guidance is effective for the Company for fiscal years beginning after December
15, 2023, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have
a material impact on the Company’s consolidated financial statements.
Management has performed an evaluation of subsequent events through the date that the financial statements were issued
and has determined that it does not have any additional material subsequent events to disclose in these financial statements.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Market (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Aerospace & Defense
|
|
$
|
3,916
|
|
|
|
43.5
|
|
|
$
|
3,710
|
|
|
|
37.0
|
|
Process Control & Metrology
|
|
|
3,328
|
|
|
|
36.9
|
|
|
|
4,189
|
|
|
|
41.9
|
|
Laser Systems
|
|
|
667
|
|
|
|
7.4
|
|
|
|
1,212
|
|
|
|
12.1
|
|
Scientific / R&D
|
|
|
1,097
|
|
|
|
12.2
|
|
|
|
897
|
|
|
|
9.0
|
|
Total
|
|
$
|
9,008
|
|
|
|
100.0
|
|
|
$
|
10,008
|
|
|
|
100.0
|
|
The Company’s
revenues are comprised of product sales as well as products and services provided under long-term government contracts with its
customers. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract (either implicit
or explicit) by transferring the promised product or service to its customer either when (or as) its customer obtains control of
the product or service. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer.
A contract’s transaction price is allocated to each distinct performance obligation. The majority of the Company’s
contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable
from other promises in the contract and, therefore, not distinct. For contracts with multiple performance obligations, the Company
allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of standalone
selling price for each distinct product or service in the contract, which is generally based on an observable price.
Revenue is
measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing
services. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales, value added,
and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from
revenues) basis. Shipping and handling costs are included in cost of goods sold.
The
Company’s performance obligations under long-term government contracts are generally satisfied over time. Revenue from products
or services transferred to customers over time accounted for approximately 1.8% and 3.1% of revenue for 2020 and 2019, respectively.
Revenue under these long-term government contracts is generally recognized over time using an input measure based upon the proportion
of actual costs incurred to estimated total project costs, which is a method used to best depict the Company’s performance
to date under the terms of the contract.
Accounting for these
long-term government contracts involves the use of various techniques to estimate total revenue and costs. The Company estimates
profit on these long-term government contracts as the difference between total estimated revenue and expected costs to complete
a contract and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project
the outcome of future events that may span several years. These assumptions include, among other things, labor productivity, costs
and availability of materials, and timing of funding by the U.S. government. The nature of these long-term agreements may give
rise to several types of variable consideration, such as claims, awards and incentive fees. Historically, these amounts of variable
consideration are not considered significant. Additionally, contract estimates may include additional revenue for submitted contract
modifications if there exists an enforceable right to the modification, the amount can be reasonably estimated and its realization
is probable. These estimates are based on historical collection experience, anticipated performance, and the Company’s best
judgement at the time. These amounts are generally included in the contract’s transaction price and are allocated over the
remaining performance obligations. Changes in judgments on these above estimates could impact the timing and amount of revenue
recognized with a resulting impact on the timing and amount of associated income. Under these long-term government contracts, the
Company may receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the
right to consideration becomes unconditional. In the event a contract loss becomes known, the entire amount of the estimated loss
is recognized in the Consolidated Statements of Operations.
The
majority of the Company’s revenue is from products and services transferred to customers at a point in time and were approximately
98.2% and 96.9% of revenue for 2020 and 2019, respectively. The Company recognizes revenue at the point in time in which the customer
obtains control of the product or service, which is generally when product title passes to the customer upon shipment. In limited
cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location.
Net sales by timing to transfers of goods
and services is as follows:
|
|
For the years ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Transfer at point in time
|
|
$
|
8,842
|
|
|
$
|
9,696
|
|
Transfer over time
|
|
|
166
|
|
|
|
312
|
|
Total net sales
|
|
$
|
9,008
|
|
|
$
|
10,008
|
|
Inventories
are comprised of the following and are shown net of inventory reserves of approximately $2.5 million at December 31, 2020 and 2019:
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
1,130
|
|
|
$
|
1,248
|
|
Work in process, including manufactured parts and components
|
|
|
1,718
|
|
|
|
1,090
|
|
Finished goods
|
|
|
358
|
|
|
|
496
|
|
|
|
$
|
3,206
|
|
|
$
|
2,834
|
|
Plant and equipment
are comprised of the following:
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Office and computer equipment
|
|
$
|
1,474
|
|
|
$
|
1,345
|
|
Machinery and equipment
|
|
|
11,405
|
|
|
|
11,334
|
|
Leasehold improvements
|
|
|
2,312
|
|
|
|
2,312
|
|
|
|
|
15,191
|
|
|
|
14,991
|
|
Less accumulated depreciation and amortization
|
|
|
(14,564
|
)
|
|
|
(14,310
|
)
|
|
|
$
|
627
|
|
|
$
|
681
|
|
Depreciation expense
recorded by the Company totaled approximately $254,000 and $256,000 for 2020 and 2019, respectively. No fully depreciated assets
were written off in 2020, and $16,000 were written off in 2019.
The Company evaluates
its property and equipment for impairment when events or circumstances indicate and impairment may exist. Based on this evaluation,
the Company concluded that, at December 31, 2020, its long-lived assets were not impaired.
|
5.
|
Related Party Transactions
|
On July 22, 2020,
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, 2024, from April 1, 2021. The
notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be
converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000
units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to
acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement to extend the maturity date of the
notes, the expiration dates of the warrants were extended from April 1, 2022 to April 1, 2027.
The Company paid $0.2
million and $0.1 million for interest on the subordinated convertible promissory notes in 2020 and 2019, respectively. Accrued
interest of $37,500 and $112,500 is included in Accounts payable and accrued liabilities as of December 31, 2020 and 2019, respectively.
Other Long-Term Notes
consist of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
U.S. Small Business Administration term note
payable in equal monthly installments of $1,922 and bearing an interest rate of 4.0% and expiring in July 2029.
|
|
$
|
177
|
|
|
$
|
183
|
|
Less current portion
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Long-term debt, excluding current portion
|
|
$
|
161
|
|
|
$
|
167
|
|
Other Long-Term Notes mature as follows:
Year ending December 31:
|
(In thousands)
|
2021
|
|
$
|
16
|
|
2022
|
|
|
17
|
|
2023
|
|
|
18
|
|
2024
|
|
|
18
|
|
2025
|
|
|
19
|
|
Thereafter
|
|
|
89
|
|
|
|
$
|
177
|
|
|
7.
|
Payroll Protection Program
|
On May 6, 2020, the
Company received loan proceeds of approximately $973,000 (the “PPP Loan”), under the Paycheck Protection Program (“PPP”).
The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was enacted
March 27, 2020. The PPP Loan, which is in the form of a promissory note, dated May 4, 2020, issued by the Company, matures on May
4, 2022, and bears interest at a rate of 1.0% per annum.
The CARES Act and
the PPP provide a mechanism for forgiveness of up to the full amount borrowed. The amount of loan proceeds eligible for forgiveness
is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during
the 24-week period after the loan origination for certain eligible purposes including payroll costs, interest on certain mortgage
obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount
is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels;
and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and
other eligible costs during a covered eight-week or twenty-four-week period qualify for forgiveness. Any forgiveness of the PPP
Loan is subject to approval by the Small Business. At December 31, 2020, the PPP Loan is included in other long-term notes on the
accompanying balance sheet.
On January 19, 2021,
the Company received notification from the Small Business Association that the Company’s Forgiveness Application of the PPP
Loan and accrued interest, totaling $980,000, was approved in full, and the Company had no further obligations related to the PPP
Loan.
|
8.
|
Accounts Payable and Accrued Liabilities
|
Accounts payable and
accrued expenses are comprised of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Trade accounts payable and accrued purchases
|
|
$
|
454
|
|
|
$
|
507
|
|
Accrued payroll
|
|
|
-
|
|
|
|
133
|
|
Accrued 401K company matching contribution
|
|
|
138
|
|
|
|
114
|
|
Accrued expenses – other
|
|
|
125
|
|
|
|
224
|
|
|
|
$
|
717
|
|
|
$
|
978
|
|
The Company did not
record a current provision for either state tax or federal tax due to losses incurred for both income tax and financial reporting
purposes.
A reconciliation of
the income tax provision computed at the statutory Federal income tax rate to our effective income tax rate follows (in percent):
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal statutory rate
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
State statutory rate
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Reduction in State rate due to tax rate change
|
|
|
-
|
|
|
|
-
|
|
Change in Valuation Allowance
|
|
|
3
|
|
|
|
2
|
|
Permanent Differences
|
|
|
11
|
|
|
|
14
|
|
Other
|
|
|
16
|
|
|
|
14
|
|
Effective income tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
At December 31, 2020
and 2019, the Company had estimated Federal net operating loss carry forwards of approximately $10.4 million and $9.3 million,
respectively, and state net operating loss carry forwards of approximately $5.1 million and $5.8 million, respectively. The 2020
and 2019 net operating loss carryforwards have no expiration dates.
Internal Revenue Code
Section 382 places a limitation on the utilization of Federal net operating loss and other credit carry forwards when an ownership
change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs.
Accordingly, the actual utilization of the net operating loss and carryforwards for tax purposes may be limited annually to a percentage
(based on the risk-free interest rate) of the fair market value of the Company at the time of any such ownership change. The Company
has not prepared an analysis of ownership changes, but does not believe that a greater than 50% change of ownership has occurred
and such limitations would not apply to the Company.
Deferred tax assets
(liabilities) are comprised of the following:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Account receivable reserves
|
|
$
|
25
|
|
|
$
|
4
|
|
Inventory reserves
|
|
|
692
|
|
|
|
697
|
|
Inventory capitalization
|
|
|
101
|
|
|
|
89
|
|
Depreciation
|
|
|
182
|
|
|
|
252
|
|
Loss carry forwards
|
|
|
2,636
|
|
|
|
2,332
|
|
Gross deferred tax assets
|
|
|
3,636
|
|
|
|
3,374
|
|
Valuation allowance
|
|
|
(3,636
|
)
|
|
|
(3,374
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
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 that
is consistent with the plans and estimates management is using to manage the underlying business. A significant piece of objective evidence
evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2019.
On the basis of this
evaluation, as of December 31, 2020, the valuation allowance was increased by $262,000. The valuation allowance decreased as of
December 31, 2019, by $19,000. The company concluded it was more likely than not that it would not be able to realize a significant
portion of the benefit on the deferred tax assets and adjusted the valuation allowance accordingly.
The Company files
income tax returns in the United States, which typically provides for a three-year statute of limitations on assessments. The Company
is no longer subject to federal, state or local income tax examinations by tax authorities for the years before 2017.
The guidance for accounting
for uncertainties in income taxes requires that we recognize the financial statement effects of a tax position when it is more
likely than not, based on the technical merits, that the position will be sustained upon examination. There were no unrecognized
tax benefits that impacted our effective tax rate and accordingly, there was no material effect to our financial position, results
of operations or cash flows.
Our policy is to recognize
interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been
no interest or penalties charged to us in relation to the underpayment of income taxes.
We do not anticipate
that our unrecognized tax benefits will significantly increase in the next 12 months.
|
10.
|
Equity Compensation Program and Stock-based Compensation
|
|
a.
|
2020 Equity Compensation Program
|
On February 12,
2020, the Inrad Optics Board of Directors, adopted the Inrad Optics, Inc. 2020 Equity Compensation Program (the “2020 Program”),
and received shareholder approval on June 23, 2020. The 2020 Program provides for grants of options, stock appreciation rights
and restricted stock awards to employees, officers, directors, and others who render services to the Company. The 2020 Program
is comprised of four parts including: (i) the Incentive Stock Option Plan which provides for grants of “incentive stock options,”
(ii) the Supplemental Stock Option Plan which provides for grants of stock options that shall not be “incentive stock options,”
(iii) the Stock Appreciation Rights Plan which allows the granting of stock appreciation rights and, (iv) the Restricted Stock
Award Plan which provides for the granting of restrictive shares of Common Stock and restricted stock units. The 2020 Program is
administered by the Compensation Committee of the Board of Directors. Under the 2020 Program, an aggregate of up to 4,000,000 shares
of common stock may be granted.
|
b.
|
2010 Equity Compensation Program
|
The Company’s
2010 Equity Compensation Program (the “2010 Program”) provided for grants of options, stock appreciation rights and
restricted stock awards to employees, officers, directors, and others who render services to the Company. The 2010 Program expired
on March 23, 2020. All outstanding grants of options, stock appreciation rights and performance shares issued under the 2010 Program
will remain outstanding and shall expire on the date determined by the terms of the original grant. The latest date of expiration
for outstanding grants under the 2010 Program is March 23, 2030.
The Company's results
for the years ended December 31, 2020 and 2019, include stock-based compensation expense for stock option grants totaling $112,000
and $133,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold
($29,000 and $37,000 for 2020 and 2019, respectively), and selling, general and administrative expenses ($83,000 and $96,000 for
2020 and 2019, respectively).
As of December 31,
2020, and 2019, there were $98,000 and $199,000 of unrecognized compensation costs, net of estimated forfeitures, related to non-vested
stock options, which are expected to be recognized over a weighted average period of approximately 1.16 years and 1.89 years, respectively.
The weighted average
estimated fair value of stock options granted in the two years ended December 31, 2020 and 2019, was $1.41 and $0.76, respectively.
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award. The Company
assumes a dividend yield of zero, as the Company has not paid dividends in the past and does not expect to in the foreseeable future.
The expected volatility is based upon the historical volatility of our common stock which the Company believes results in the best
estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of
future volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant with maturity
dates approximately equal to the expected life at the grant date. The expected life is based upon the period of expected benefit
based on the Company’s evaluation of historical and expected future employee exercise behavior.
The following range of weighted-average
assumptions were used for to determine the fair value of stock option grants during the years ended December 31, 2020 and 2019:
|
|
Years Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Expected Volatility
|
|
|
122.22
|
%
|
|
|
126.86
|
%
|
Risk-free interest rate
|
|
|
1.96
|
%
|
|
|
2.90
|
%
|
Expected term
|
|
|
10 years
|
|
|
|
10 years
|
|
Stock Option Activity
A summary of the Company’s
outstanding stock options as of and for the years ended December 31, 2020 and 2019, is presented below:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Stock Options
|
|
Options
|
|
|
Option
|
|
|
Term (years)
|
|
|
Value(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2019
|
|
|
1,058,208
|
|
|
$
|
0.64
|
|
|
|
5.58
|
|
|
|
337,997
|
|
Granted
|
|
|
200,000
|
|
|
|
0.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(110,941
|
)
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2019 (b)
|
|
|
1,147,267
|
|
|
$
|
0.63
|
|
|
|
6.29
|
|
|
$
|
718,840
|
|
Granted
|
|
|
22,500
|
|
|
|
1.48
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(18,900
|
)
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2020 (b)
|
|
|
1,150,867
|
|
|
$
|
0.64
|
|
|
|
6.61
|
|
|
$
|
107,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
940,027
|
|
|
$
|
0.58
|
|
|
|
5.68
|
|
|
$
|
107,573
|
|
(a) Intrinsic
value for purposes of this table represents the amount by which the fair value of the underlying stock, based on the respective
market prices as of December 31, 2020, exceeds the exercise prices of the respective options.
(b) Based
on the Company’s historical forfeiture rate, the number of options expected to vest is the same as the total outstanding
at December 31, 2020.
The following table
represents non-vested stock options granted, vested, and forfeited for the year ended December 31, 2020:
|
|
Weighted-average
|
|
|
|
Grant-date Fair Value
|
|
|
|
Options
|
|
|
($)
|
|
Non-Vested - January 1, 2020
|
|
|
371,669
|
|
|
|
0.80
|
|
Granted
|
|
|
22,500
|
|
|
|
1.41
|
|
Vested
|
|
|
(183,329
|
)
|
|
|
0.77
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-Vested - December 31, 2020
|
|
|
210,840
|
|
|
|
0.89
|
|
The total weighted
average grant date fair value of options vested during the years ended December 31, 2020 and 2019, was $142,000 and $109,000, respectively.
The following table
summarizes information about stock options outstanding at December 31, 2020:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
$0.18 - $0.35
|
|
|
402,167
|
|
|
|
5.13
|
|
|
$
|
0.29
|
|
|
|
402,167
|
|
|
$
|
0.29
|
|
$0.50 - $1.00
|
|
|
711,200
|
|
|
|
6.56
|
|
|
$
|
0.79
|
|
|
|
532,860
|
|
|
$
|
0.79
|
|
$1.40 - $1.80
|
|
|
37,500
|
|
|
|
9.89
|
|
|
$
|
1.61
|
|
|
|
5,000
|
|
|
$
|
1.80
|
|
|
11.
|
Net (Loss) Income per Share
|
Basic
income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding.
Diluted income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares
and common stock equivalents outstanding, calculated on the treasury stock method for options, stock grants and warrants using
the average market prices during the period, including potential common shares issuable upon conversion of outstanding convertible
notes, except if the effect on the per share amounts is anti-dilutive.
For
the year ended December 31, 2020, and 2019, all common equivalent shares outstanding have been excluded from the diluted computation
because their effect is anti-dilutive. This included 1,150,867 common stock equivalents
related to outstanding options, in addition to 2,500,000 common shares issuable upon conversion of outstanding convertible notes
and 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes.
|
12.
|
Commitments and Contingencies
|
The Company entered
into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019. Under the guidance of ASU 2016-02,
Leases (Topic 842), the Company determines if such an arrangement contains a lease and whether that lease meets the classification
criteria of a finance or operating lease at inception of the arrangement. The Company determined that this lease is
an operating lease and presented as a right-of-use lease asset, short term lease liability and long-term lease liability on the
consolidated balance sheet. These assets and liabilities are recognized at the commencement date based on the present value
of remaining lease payments over the lease term using the Company’s incremental borrowing rate.
Lease expense is recognized
on a straight-line basis over the lease term and is included in cost of sales and general and administrative expenses on the consolidated
statement of operations.
An initial right-of-use
asset of approximately $0.8 million was recognized as a non-cash asset addition with the signing of the July 8, 2019, lease amendment.
Cash paid for amounts included in the present value of the operating lease liability was $0.3 million during the year ended December
31, 2020, and is included in operating cash flows.
The following table
presents information about the amount and timing of cash flows arising from the Company’s operating and capital leases as of
December 31, 2020:
Maturity of Lease Liability
|
|
(in thousands)
|
|
2021
|
|
$
|
322
|
|
2022
|
|
|
143
|
|
2023
|
|
|
3
|
|
Total undiscounted operating and capital lease payments
|
|
|
468
|
|
|
|
|
|
|
Less: imputed interest
|
|
|
(19
|
)
|
Present value of lease liabilities
|
|
$
|
449
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
Remaining lease term (in months)
|
|
|
|
|
Operating lease
|
|
|
17
|
|
Capital lease
|
|
|
26
|
|
Discount rate for operating lease
|
|
|
5.80
|
%
|
Discount rate for capital lease
|
|
|
3.99
|
%
|
The Company’s
total rent expense for the year ended December 31, 2020 and 2019, was $0.3 million and $0.3 million, respectively.
The Company also paid
real estate taxes and insurance premiums under the terms of the lease that totaled approximately $0.1 million in 2020 and 2019.
The Company maintains
a 401(k) savings plan (the “Plan”) for all eligible employees (as defined in the plan). The 401(k) Plan allows employees
to contribute up to 70% of their compensation on a salary reduction, pre-tax basis up to the statutory limitation. The 401(k) Plan
also provides that the Company, at the discretion of the Board of Directors, may match employee contributions based on a pre-determined
formula.
In 2020, the
Company’s 401(k) matching contribution for employees was $138,000. This will be funded by way of a cash contribution of
$34,000 and a contribution of 142,329 shares of the Company’s common stock, which will be issued to the Plan in April, 2021.
In 2019, the Company’s 401(k) matching contribution for employees was $124,000. This was funded by way of a contribution of
89,751 shares of the Company’s common stock, which were issued to the Plan in June, 2020. The Company records the distribution
of the common shares in the Consolidated Statement of Shareholders’ Equity as of the date of distribution to the 401(k) Plan
administrator.
|
13.
|
Product Sales, Foreign Sales and Sales to Major
Customers
|
The Company’s
export sales, which are primarily to customers in countries within Europe, Israel, Asia and Japan, amounted to approximately 29.4%
and 31.9% of product sales in 2020 and 2019, respectively.
The
Company had sales to three major customers which accounted for approximately 30.6% of sales in 2020. One customer, a division of a major
U.S. defense industry corporation that manufactures electro-optical systems for U.S. and foreign governments accounted for 17.1% of 2020
sales. The two other customers included two foreign-based manufacturers of process control and metrology equipment whose sales represented
7.0% and 6.5% of sales, respectively. For 2019, the top three customers represented 18.5%, 14.7%, and 6.1% respectively.
During the past two
years, sales to the Company’s top five customers represented approximately 43.0% and 47.2%, respectively. Given the concentration
of sales within a small number of customers, the loss of any of these customers would have a significant negative impact on the
Company and its business units.
|
a.
|
Common shares reserved for future issuances at December 31, 2020, are as follows:
|
2020 Equity compensation plan
|
|
|
4,000,000
|
|
2010 Equity compensation plan
|
|
|
1,150,867
|
|
Subordinated convertible notes
|
|
|
2,500,000
|
|
Warrants issuable on conversion of Subordinated convertible notes
|
|
|
1,875,000
|
|
|
|
|
9,525,867
|
|
The Company had no
outstanding warrants as of December 31, 2020 and 2019.
|
15.
|
Fair Value of Financial Instruments
|
The methods and assumptions
used to estimate the fair value of the following classes of financial instruments were:
Current Assets and
Current Liabilities: The carrying amount of cash, current receivables and payables and certain other short-term financial instruments
approximate their fair value as of December 31, 2020, due to their short-term maturities.
Long-Term Debt: The fair
value of the Company’s long-term debt, including the current portion, for notes payable and subordinated convertible debentures,
was estimated using a discounted cash flow analysis, based on the Company’s assumed incremental borrowing rates for similar types
of borrowing arrangements. The fair value of long-term debt is estimated to be $3.1 million compared to its carrying amount of $3.6 million
as of December 31, 2020.