UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One) | |||
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended: December 31, | ||
OR | ||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission file number: 0-11668 | ||
Inrad Optics, Inc.
(Exact name of registrant as specified in its charter)
New Jersey | 22-2003247 | |
State or other jurisdiction of incorporation or organization | (I. R. S. Employer Identification No.) | |
181 Legrand Avenue, Northvale, NJ | 07647 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code 201-767-1910201-767-1910
Securities registered pursuant to Section 12(b) of the Act:None
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Title of each class | Trading Symbol | Name of each exchange on which registered | |||
N/A | | N/A | | N/A | |
Securities registered pursuant to section 12(g) of the Act:
Common stock, par value $.01 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. Yeso◻. No ý⌧.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o◻. No ý⌧.
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 | ⌧ | No | ◻ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý Noo
Yes | ⌧ | No | ◻ |
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):
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | ◻ | No | ☒ |
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. $9,489,437.$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.
Common Shares outstanding as of March 30, 2020 – 13,730,5772022 –14,022,320 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant'sregistrant’s definitive Proxy Statement for the 20202022 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.
Inrad Optics, Inc.
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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 Item 1.Business 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 Inrad Optics’ customers include leading corporations in the 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 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 4insureensure 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 lookingforward-looking statements, whether from new information, future events, or otherwise, except as otherwise required by law.Item 1.Businesscrystal-basedglass, crystal, and metal based optical components, and devices, custom optical components from both glass and metal, and precision optical and opto-mechanical assemblies.sub-assemblies. Manufacturing capabilities include solution and high temperature crystal growth, extensive optical fabrication capabilities includingcapacity, super-precision optical surfacing, precision diamond turning and the ability to handle large substrates, proprietary optical contacting processes, thin film coatings, and high resolution in-process metrology.defense, aerospace, laser systems,semiconductor equipment, process control and metrology, defense, aerospace, and laser systems sectors of the broad set of photonics industry,enabled industries, as well as the U.S. Government, National Laboratories and universities and institutions worldwide.coating services through its Custom and Metal Optics operations.coatings. 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.crystal basedcrystal-based electro-optical devices and associated instrumentation.
The majority of crystals, crystal components and laser devicesthe Company’s products are used in laseroptical inspection applications, process control systems, defense and security EOaerospace systems, laser systems, industrial scanners, medical laserslaser applications, and in physics research and development applications by engineers within corporations.
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applications.
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, | ||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||
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| Years Ended December 31, | ||||||||||||||||||||||||
| | 2021 |
| 2020 | ||||||||||||||||||||||
| Category (In thousands) | Net Sales | % | Net Sales | % | | Net Sales |
| % | | Net Sales |
| % | ||||||||||||||
| Optical Components | $ | 8,796 | 87.9 | $ | 9,939 | 86.5 | | $ | 10,629 | | 93.6 | | $ | 8,341 | | 92.6 | ||||||||||
| Laser Devices/Instrumentation | 1,212 | 12.1 | 1,550 | 13.5 |
| | 724 |
| 6.4 |
| | 667 |
| 7.4 | ||||||||||||
| Total | $ | 10,008 | 100.0 | $ | 11,489 | 100.0 | | $ | 11,353 |
| 100.0 | | $ | 9,008 |
| 100 | ||||||||||
Products Manufactured by the Company
Optical Components
a) Custom Optics and Optical Coating Services
| a) | Custom Optics and Optical Coatings |
Manufacturing of high-performance custom optics and optical assemblies 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 OpticsOptics. This product line focuses on products manufactured to specific customer requirements. Itrequirements and specializes in the manufacture of optical components and sub-assemblies from crystal, glass, and metal, and optical coatings (ultra-violet wavelengths through infra-redinfrared 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, zinc sulfide, and zinc sulfide.other optical glasses. 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, and wave plates,plates.
The Company produces a full line of x-ray monochromators, which is a type of bent single crystal assembly that focuses x-ray emissions. Monochromators are used in a variety of applications, including x-ray photoelectron spectroscopy (XPS) for elemental surface analysis, synchrotron beamline focusing, and x-ray monochromators.plasma diagnostics in controlled nuclear fusion research facilities.
Metal substrate optics are produced to customer specifications utilizing high precision diamond machining, polishing, and plating of aluminum, AlBeMet™, beryllium, and stainless steel. The metal optics product area manufactures precision aspheres, large and small metal mirrors, low RMS surface finish polished mirrors, reflective Porro prisms, and thermally stable optical mirrors. Plating specialties include void-free gold and electroless nickel.
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 opticalOptical 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 MetalCompany’s Custom 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 OpticsOptical Coatings 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 aspheric, 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.requirements.
b) UV Filter Optical Components
| b) | UV Filter Optical Components |
This product line consists of crystals and crystal devices including UV filter materialscrystals 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
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in our value addedvalue-added devices and instrumentation products manufactured in our Northvale facility and include crystals for wavelength conversion, modulation and polarization, and EO Pockels cells, and wavelength conversion instruments.cell devices. 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,potassium acid phthalate and zinc germanium diphosphide.stilbene. Applications for these materials include defense, homeland security, industrial processing lasersand commercial and surgical lasers.lasers systems.
The Crystals and Devices teamCompany 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 |
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a) Crystal Components
The Company grows and fabricates electro-optic and nonlinear crystal devicescrystals for altering the intensity, polarization or wavelength of a laser beam. Other crystal components, produced as part of the Crystalsmaterials are grown for use in novel x-ray monochromators and Devices product line, are used in laserphysics research in commercial laser systems and in detection of fast neutrons.
b) Pockels Cells and Drivers
| 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 20192021 and 2018,2020, the Company’s product sales were made to customers in the following market areas:
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| Market (In thousands) | Net Sales | % | Net Sales | % |
| Net Sales |
| % |
| Net Sales |
| % | | ||||||||||||||
| Aerospace & Defense | $ | 3,710 | 37.0 | $ | 2,585 | 22.5 | | $ | 3,824 | | 33.7 | | $ | 3,916 | | 43.5 |
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| Process Control & Metrology | 4,189 | 41.9 | 5,891 | 51.3 |
| | 5,656 |
| 49.8 |
| | 3,328 |
| 36.9 | | ||||||||||||
| Laser Systems | 1,212 | 12.1 | 1,550 | 13.5 |
| | 724 |
| 6.4 |
| | 667 |
| 7.4 | | ||||||||||||
| Scientific / R&D | 897 | 9.0 | 1,463 | 12.7 |
| | 1,149 |
| 10.1 |
| | 1,097 |
| 12.2 | | ||||||||||||
| Total | $ | 10,008 | 100.0 | $ | 11,489 | 100.0 | | $ | 11,353 |
| 100.0 | | $ | 9,008 |
| 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.
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Sales in the aerospace and defense market represented approximately 37.0%33.7% and 22.5%43.5% of sales in 20192021 and 2018,2020, respectively. Sales increaseddecreased by approximately $1.1$0.1 million, or 43.5%2.3% from 2018. The increase in military and defense spending resulted in increase in demand for our products in 2019.2020.
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
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Sales in the Process Control and Metrology (PC&M) market decreasedincreased by $1.7approximately $2.3 million, or 28.9%70.0% in 2019,2021, compared to 20182020, and represented 41.9%49.8% and 36.9% of sales compared to 51.3% in 2021 and 2020 respectively. Increased sales were a result of the prior year. Decreased demand for critical components in thestrong semiconductor capital equipment market negatively impacted sales in 2019. The reduced demand and delayed delivery schedules from two OEM customers resulted in the decrease in 2019, while an increase in bookings in late 2017 and early 2018 to two OEM customers resulted the strong shipments in 2018.2021.
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.monochromators The stronger bookings from the second half of 2020 led to the strong rebound for our products in the PC&M market in 2021. COVID-19 related temporary customer shutdowns negatively impacted the sales in this market during 2020.
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.lasers. The Company also serves a number of smaller customers in other niche markets and international distributors.
Sales in this market were 12.1%6.4% of total sales in 2019,2021 compared to 13.5%7.4% in 2018. The decrease of $0.32020. Sales in the laser systems market increased $0.1 million, or 21.8%, from the prior year was due to cancelation of ordersreflecting stronger demand from one international customer.
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 2019 decreased by $0.62021 increased approximately $0.1 million, or 38.4%4.7%, anddue to demand for our monochromators as a percentageresult of total sales decreased from 12.7% to 9.0%expanded applications in 2019. Reduced revenue on a federal government contract, combined with reduced orders from a national lab, led to the decline in revenue.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 2019,2021, the Company’s sales to its top three customers accounted for 39.2%43.4% of sales. These customers included a USone U.S.- based defense contractor of electro-optical systems for U.S. and foreign governments, and two OEM manufacturers of process control and metrology equipment. These customers represented 18.5%20.3%, 14.7%13.6%, and 6.1%9.5% of total sales during the year, respectively. Two of those same customers represented 12.9% and 22.3% of sales in 2018.year.
Sales to the Company’s top five customers represented approximately 47.2%53.9% and 56.1% of sales,43.0%, in 20192021 and 2018,2020, respectively. All of 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 31.9%,36.6% and 40.0%29.4% of product sales in 20192021 and 2018,2020, respectively.
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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 Canada, 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.
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Our sales efforts continue to be impacted by COVID-19-related government mandates and limitations on travel.
Backlog
The Company’s order backlog at December 31, 2019,2021, was $5.1$12.4 million. The Company’s order backlog as of December 31, 20182020, was $6.5$5.9 million. This significant increase in order backlog is due in large part to high demand for optical and x-ray components from customers in the process control and metrology sector.
We anticipate shipping a substantial majority of the present backlog during fiscal year 2020.2022. However, our current backlog at any given date may consistconsists 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.
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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.
EmployeesHuman Capital
We believe that each employee contributes to the culture of integrity, respect, and commitment to our customers through innovation and teamwork.
We offer a variety of benefits such as health insurance, paid and unpaid leave, retirement, and 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, and have limited employee 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 increase and strengthen 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 27, 2020,30, 2022, the Company had 5853 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.
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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 iswww.inradoptics.com. 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 atwww.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.
Item 1A.Risk Factors
The Company cautions investors that its performance (and, therefore, any forward lookingforward-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 |
WeWhile we were profitable in 2021, we recorded a net loss of approximately $0.8 million for each of the yearyears ended December 31, 2020 and 2019. We had net income in 2018 of $0.7 million, and a net loss of $0.6 million in 2017. Our past history of losses has had an adverse effect on our working capital, total assets, and shareholders’ equity. We were profitable in 2021, but are unable to predict, with certainty, whether we will continue to be profitable after 2019,2021, 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 $2.7$2.6 million as well as,and 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 on 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.
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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, 2019,2021, five customer accounts represented approximately 47.2%53.9% of total revenues and two of theserevenues. Two customers each 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 from 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.
6
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,Also, 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 areis subject to cyclical fluctuations, and this could have a material adverse effect on our business, results of operations, or financial condition.
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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.
7
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 breachesWe rely on our information technology systems to effectively manage our operational and financial functions. We increasingly rely on information technology systems to process, transmit, and store electronic information. In addition, a significant portion of internal communications, as well as communication with customers and suppliers, depends on information technology. We are exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of intellectual property, other sensitive information or cash or may be the result of unintentional events. Like most companies, our network or data,information technology systems may be vulnerable to interruption due to a variety of events beyond our control, including, but not limited to, physical or electronic break-ins, vendor service outages, terrorist attacks, telecommunications failures, computer viruses, attacks by hackers, foreign governments, and other security issues. We have technology security initiatives and data recovery plans in place to mitigate our risk to these vulnerabilities, but these measures may not be adequate, or similar breachesimplemented properly, or executed timely to ensure that our operations are not disrupted. We have insurance coverage for cyber liability, but there can create system disruptions, shutdowns,be no assurances that the amount of coverage will be adequate or unauthorized disclosure of confidential information. that insurance proceeds will be available for a particular claim.
Although we have not experienced an incident, if we are unablepotential consequences of a material cyber incident include damage to prevent suchour reputation, litigation, system disruptions, shutdowns, unauthorized disclosure of confidential information, and increased cyber security or privacy breaches,protection and remediation costs. Such consequences could materially and adversely affect our operations would be disrupted or we could suffer, financial loss, property damage, reputational damage, or regulatory penalties becauseresults of lost or misappropriated information.operations.
n) | The Company may be impacted by global political and economic conditions, including acts of |
A pandemic, epidemic or outbreak
Terrorism, armed conflict, and acts of an infectious disease occurringwar (or the expectation of such events), both in the United States and/orUS and abroad, could also have a significant impact on Inrad Optics’ business and the worldwide mayeconomy. For instance, the Russia-Ukraine conflict could adversely affect production. On March 11, 2020, the World Health Organization declared the COVID-19 virus a pandemic. The spread
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impact, our operations, including the potential interruption of our production activities or our supply chain. The spread of an infectious disease, including COVID-19, may also result in the inabilityamong other things, certain of our suppliers to deliver timely basis or at all. In addition federal, state,customers. The ongoing economic sanctions may further disrupt the supply chain 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 periodincrease costs where there are limited sources of business disruption, and in reduced operations, which could materially affect our business, financial condition and results of operations. The extent to which the recent global coronavirus pandemic impacts 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. 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 Company is currently working to enhance its business continuity plans to include measures to protect our employees in the event of infection in our offices and production facility, or in response to potential mandatory quarantines.certain raw materials.
Item 1B.Unresolved Staff Comments
None
Item 2.Properties
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
8
PART II
Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters
| a) | Market |
a) Market Information
The Company’s Common Stock, with a par value of $0.01 per share, is traded on the OTC Pink Sheets under the symbol “INRD.”
b) Shareholders
| b) | Shareholders |
As of March 27, 2020,30, 2022, there were approximately 123122 shareholders of record of our Common Stock based on the `Shareholders’ Listing provided by the Company’s transfer agent. As of the same date, the Company estimates there are an additional 240 beneficial shareholders.
c) Dividends
| c) | Dividends |
The Company has not historically paid cash dividends. Payment of cash dividends is at the discretion of the Company’s Board of Directors and depends, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company does not anticipate paying cash dividends in the foreseeable future.
d) Recent Sales of Unregistered Securities
| d) | Recent Sales of Unregistered Securities |
There have been no sales of unregistered securities during the past year.
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The following selected statement of operations data for the years ended December 31, 2019 and 2018, is derived from our audited financial statements included within this Annual Report.
| As of December 31, or | ||||||||||||||||||||
| For the Year Ended December 31, | ||||||||||||||||||||
| (in thousands, except share and per share data) | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Revenues | $ | 10,008 | $ | 11,489 | $ | 9,859 | $ | 9,767 | $ | 10,492 | ||||||||||
| Net (loss) income | (776 | ) | 707 | (683 | ) | (605 | ) | (480 | ) | |||||||||||
| Earnings (loss) per share | ||||||||||||||||||||
| Basic (loss) earnings per share | (0.06 | ) | 0.05 | (0.05 | ) | (0.05 | ) | (0.04 | ) | |||||||||||
| Diluted (loss) earnings per share | (0.06 | ) | 0.05 | (0.05 | ) | (0.05 | ) | (0.04 | ) | |||||||||||
| Weighted average shares | ||||||||||||||||||||
| Basic | 13,672,235 | 13,561,207 | 13,357,622 | 12,926,471 | 12,570,867 | |||||||||||||||
| Diluted | 13,672,235 | 13,930,708 | 13,357,622 | 12,926,471 | 12,570,867 | |||||||||||||||
| Total assets | 7,135 | 6,932 | 6,543 | 6,735 | 7,075 | |||||||||||||||
| Long-term obligations | 3,082 | 2,745 | 2,758 | 2,771 | 2,879 | |||||||||||||||
| Shareholders’ equity | 2,017 | 2,567 | 1,685 | 2,182 | 2,622 | |||||||||||||||
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.
Critical Accounting Policies
The Company’s significant accounting policies are described in Note 1 of the Consolidated Financial Statements thatStatements. The Company’s Consolidated Financial were prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the Company’s financial statements, the Company made certain estimates and judgments that affect the results of its operations and the value of assets and liabilities the Company reports. The Company’s actualWe base these significant judgments and estimates on historical experience and other applicable assumptions we believe to be reasonable based upon information presently available. These estimates may change as new events occur, as additional information is obtained, and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Actual results maycould materially differ from these estimates.our estimates under different assumptions, judgments or conditions.
Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosure. The Company believes that the following summarizes critical accounting policies that require significant judgments and estimates in the preparation of the Company’s consolidated financial statements:
Revenue Recognition
The Company adopted the provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e., point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e., over time), which approximates the previously used percentage-of-completion method of accounting. As such, the adoption of ASU 2014-09 had no material impact to the Company’s financial position or results of operations.
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost of manufactured goods includes material, labor and overhead.
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.
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Stock-based compensation
Stock based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.
Income Taxes
Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
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The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
Leases
The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019. Under the guidance of ASU 2016-02, Leases (Topic 842), the Company must determine 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 termlong-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.
Results of Operations
The following table sets forth, for the past two years, the percentage relationship of statement of operations categories to total revenues.revenues.
| Years ended December 31, | |||||||||||||
| 2019 | 2018 | ||||||||||||
| | | | | | ||||||||
|
| Years ended December 31, |
| ||||||||||
|
| 2021 |
| 2020 |
| ||||||||
| Revenues: |
| % |
| % | | ||||||||
| Product sales | 100.0 | % | 100.0 | % |
| 100.0 |
| 100.0 | | ||||
| Costs and expenses: |
|
|
|
| | ||||||||
| Cost of goods sold | 80.1 | 73.0 |
| 69.4 |
| 80.1 | | ||||||
| Gross profit margin | 19.9 | 27.0 |
| 30.6 |
| 19.9 | | ||||||
| Selling, general and administrative expenses | 26.1 | 19.4 |
| 22.4 |
| 28.2 | | ||||||
| Operating (loss) income | (6.2 | ) | 7.5 | ||||||||||
| Net (loss) income | (7.6 | ) | 6.1 | ||||||||||
Operating income (loss) |
| 8.2 |
| (8.3) | | ||||||||
Net income (loss) |
| 15.4 |
| (10.0) | | ||||||||
Revenues
Sales were $10.0$11.4 million in 2019, a decrease2021, an increase of 12.8%26.0% or $1.5$2.3 million, compared to $11.5$9.0 million in 2018.2020. The increase in sales from 2020 to 2021 was due to the increase in orders booked in 2021, particularly in the process control and metrology market.
Sales to the defense and aerospace market in 2019 increased 43.5%2021 decreased 2.3% or $0.1 million to $3.7$3.8 million from $2.6$3.9 million in 2018, representing 37.0%2020. Sales in the defense and 22.5%aerospace market represented 33.7% and 43.5% of total sales in 2021 and 2020, respectively. The increasedecrease in militaryrevenue in this market was due to timing of contracts and defense spending has resulted in stronger demand for our products in 2019.deliveries.
Sales in the process control and metrology market decreasedincreased $2.3 million, or 70.0% to $4.2$5.7 million in 2019,2021 from $5.9$3.3 million in 2018, down $1.7 million, or 28.9%. These sales2020. Sales in the process control and metrology represented 41.9%49.8% and 51.3%36.9% of total sales in 20192021 and 2018,2020, respectively. DecreasedIncreased demand for process control and metrology components, including critical components in the semiconductor capital equipment market negativelypositively impacted sales in 2019. The reduced demand2021 and delayed delivery schedules from two OEM customers resulted in the decrease in 2019.
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2020.
The Company serves as an OEM supplier of standard and custom optical components and laser accessories within the non-military laser industry. Sales to this and related markets were $1.2$0.7 million in 2019each of 2021 and $1.6 million in 2018.2020. Overall, sales of laser devices and related products represented 12.1%6.4% and 7.4% of revenues in 2019, a decrease of $0.3 million or 21.8%. The decrease in 2019 was due to the cancelation of orders from one international customer.2021 and 2020, respectively.
Sales to customers within the Scientific / R&D market decreased in 2019 to $0.9were $1.1 million from $1.5 million in 2018. This 38.4% decrease is mainly due to reduced revenue on a federal government contract, combined with reduced orders from a national lab.for each of the years ended December 31, 2021 and 2020. As a percentage of total sales, this market represented 9.0%10.1% and 12.7%12.2% of total sales in 20192021 and 2018,2020, respectively.
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Bookings
The Company booked new orders totaling approximately $8.8$17.9 million in 2019, net of $242,000 in cancelation of orders from an international customer.2021. The Company’s backlog as of December 31, 2019,2021, was $5.1$12.4 million, compared to $6.5$5.9 million as of December 31, 2018.2020. The significant increase in year over year bookings is due in large part to extraordinary demand for optical and x-ray components from customers in the process control and metrology sector.
Cost of Goods Sold and Gross Profit Margin
Cost of goods sold as a percentage of sales increased to 80.0% in 2019, compared to 73.0%was 69.4% and 80.1% for the yearyears ended December 31, 2018, or 4.4%.
2021 and 2020, respectively. The cost of goods sold in 20192021 was $8.0$7.9 million compared to $8.4$7.2 million in 2018, a decrease2020, an increase of $0.4$0.7 million mainly attributable to the increase in sales. While direct material increased due to the increase in sales year over year, sales mix and an overall decrease in labor and overhead as a percentage of sales coupled with a changeresulted in sales mix.an increase in gross profit margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $2,614,000$2.5 million in 2019, comparedeach of the years ended December 31 2021 and 2020. SG&A expenses were flat due to $2,234,000 in 2018, an increase of $380,000 or 17%. The increase is attributable to increased SG&A salaries,lower wages and associatedfringe benefits of approximately $223,000, due to investments in our Sales group and other sales and marketing related expenses, as planned.
offset by higher depreciation and corporate insurance. As a percentage of sales, SG&A was 26.1%22.4% of sales in 2019,2021 compared to 19.4% in 2018, primarily due to higher28.2% of sales in 2018.2020, primarily reflecting the increase in sales in 2021.
Operating Income (Loss)
The Company had operating income of $0.9 million in 2021, compared to an operating loss of $622,000$0.7 million in 2019, compared to operating income of $867,000 in 2018.2020.
Other Income and Expenses
Net interest expense was $154,000$0.2 million in 2019, a slight decrease from $159,000each of the years ended December 31, 2021 and 2020. Other income reflects the gain on the forgiveness of the PPP loan of $1.0 million recognized in 2018.2021.
Income Taxes
In 20192021, Company did not record a current provision for income taxes due to the availability of net operating loss carryforwards to offset taxable income for both federal and 2018,state tax purposes
In 2020, the Company did not record a current provision for either state tax or federal alternative minimum taxtaxes due to carry forward losses incurred in prior years for both income tax and financial reporting purposes.
Net Income (Loss)
As a result of the foregoing, the Company recorded net income of $1.7 million in 2021, compared to a net loss of $776,000$0.9 million in 2019, compared to net income of $707,000 in 2018.2020.
Liquidity and Capital Resources
The Company’s primary source of liquidity is cash and cash equivalents and on-going collection of our accounts receivable. The Company’s major uses of cash in the past three years have been for operating expenses, capital expenditures, and for repayment and servicing of outstanding debt and accrued interest.
As of December 31, 20192021 and December 31, 2018,2020, cash and cash equivalents were $951,000$1.8 and $1,186,000,$1.1 million, respectively.
On April 12, 2018,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, 2021,2024, from April 1, 2019.2021. The notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be
16
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, 20222024 to April 1, 2024.
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2027.
The Company paid $112,500 and $187,500$0.2 million for interest on the subordinated convertible promissory notes in 2019each of the years ended December 31, 2021 and 2018, respectively.2020. Accrued interest of $112,500 and $75,000$37,500 is included in Accountsaccounts payable and accrued liabilities as of December 31, 20192021 and 2018, respectively.
2020.
In total, the Company paid $121,000 and $198,000$0.2 million of interest in 2019each of the years ended December 31, 2021 and 2018, respectively2020, on its outstanding debt, including interest paid on the subordinated convertible promissory notes.
In 2019both 2021 and 2018,2020, the Company had capital expenditures of $310,000 and $154,000, respectively. The increase$0.2 million. Capital spending in capital spending2021 reflects the Company’s investment in new manufacturing equipment and upgrades. Capital spending in 2020 reflects the Company’s investment in information and technology system upgrades to our large diamond turning center, our in-process metrology capabilities,address cybersecurity requirements and the installation of a new redundant power system to support our crystal growth and IT infrastructure.
manufacturing equipment upgrades.
The Company had a net decreaseincrease in cash of $235,000$0.7 million for the twelve months ended December 31, 20192021, compared to a net increase in cash of $386,000$0.2 million for the twelve months ended December 31, 2018.2020.
On May 6, 2020, the Company received loan proceeds of approximately $973,000, under the Paycheck Protection Program (“PPP”). The PPP Loan, which was in the form of a promissory note dated May 4, 2020, issued by the Company, originally matured on May 4, 2022, bearing interest at a rate of 1.0% per annum.
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. Accordingly, the Company recognized a gain from forgiveness on PPP Loan for the year ended December 31, 2021.
Cash flows pertaining to our source and use of cash are presented below (in thousands):
| | | | | | |
|
| Years Ended | ||||
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Net cash provided by (used in) operating activities | | $ | 861 | | $ | (587) |
Capital expenditures and purchase of precious metals | |
| (222) | |
| (201) |
PPP Loan Proceeds | |
| — | |
| 973 |
Principal payments on debt obligations | |
| (8) | |
| (6) |
| Years Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Net cash provided by (used in) operating activities | $ | 150 | $ | 552 | ||||
| Capital expenditures and purchase of precious metals | (310 | ) | (155 | ) | ||||
| Principal payments on debt obligations | (75 | ) | (12 | ) | ||||
Overview of Financial Condition
The Company recorded net income of $1.7 million and a net loss of $776,000$0.9 million for the twelve months ended December 31, 2019, compared to net income of $707,000 in the same period last year.2021 and 2020, respectively. The Company’s cash and cash equivalents decreasedincreased to $951,000$1.8 million at December 31, 2019,2021, from $1,186,000$1.1 million at December 31, 2018.2020.
The Company’s order backlog extends beyond 2022. The Company’s management expects that future cash flows from operations and its existing cash reserves will provide adequate liquidity for the Company’s operations and working capital requirements through at least March 31, 2021.2023.
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Contractual Obligations
The following table describes our contractual obligations asSubordinated Convertible Promissory Notes
As of December 31, 2019 (in thousands):
| Less than | 4-5 | Greater | ||||||||||||||||||
| Contractual Obligations | Total | 1 Year | 1-3 Years | Years | Than 5 | |||||||||||||||
| Convertible notes payable, including interest | $ | 2,988 | $ | 150 | $ | 2,838 | $ | - | $ | - | ||||||||||
| Notes payable-other, including interest | 220 | 23 | 69 | 46 | 82 | |||||||||||||||
| Total contractual cash obligations | $ | 3,208 | $ | 173 | $ | 2,907 | $ | 46 | $ | 82 | ||||||||||
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements2021 and 2020, the outstanding principal on the Subordinated Convertible Promissory Notes was $2.5 million. Interest accrues at 6% annually. For the years ended December 31, 20192021 and 2018.2020, the Company recorded interest expense on these notes of $0.2 million in each year.
Notes Payable Other
At December 31, 2021 and 2020, the Company had $0.2 million outstanding in Notes Payable Other in each year. Interest accrues annually at 4%. For the years ended December 31, 2021 and 2020, the Company recorded interest expense on Notes Payable Other of $7,000 in each year.
PPP Loan Proceeds
At December 31, 2021 and 2020, PPP loan proceeds were $0 and $973,000, respectively. The PPP loan and all accrued interest was forgiven in January 2021.
Impact of COVID-19 to Operations
The impacts of the global emergence of COVID-19 on our business and financial results are currently unknown. We are conducting business to ensure the safety of our employees and associates actively and earnestly, following all best practice CDC guidelines for prevention in the workplace. We have applied social distancing in our operations and implemented a connected, remote workforce where practicable. While ourOur operations arehave been considered essential business under the Executive Orders of New Jersey’s Governor, and we cannot predict what further actions may be required by federal, state, or local authorities.authorities in the future. Nor can we predict what additional actions theseor new mandates may have on our customers and suppliers. We will continue to actively monitor the situation and may be required to take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, partners, suppliers and shareholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our financial results.
13 The Company's bookings were stronger in 2021, compared to 2020 and our sales have increased over last year. However, our sales and marketing efforts continue to be impacted due to travel and other operational restrictions. The total impact of the global emergence of COVID-19 on our business and financial results are not completely known, and we cannot predict what impact it may have on our continuing operations and the effect to our financial results.
N/AItem 7A.Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
Item 8.Financial Statements and Supplementary Data
The financial statements and supplementary financial information required to be filed under this Item are presented commencing on page 21 of the Annual Report on Form 10-K, and are incorporated herein by reference.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.Controls and Procedures
| a) | Evaluation of Disclosure Controls and Procedures |
a)Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act
18
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures as of December 31, 20192021, are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company'sCompany’s management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding disclosure.
b)Management’s Annual Report on Internal Control over Financial Reporting
| b) | Management’s Annual Report on Internal Control over Financial Reporting |
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our internal control over financial reporting includes those policies and procedures that:
| pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2019.2021. In making this assessment, management used the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment and the criteria set forth by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019.2021.
c)Changes in Internal Control over Financial Reporting
| c) | Changes in Internal Control over Financial Reporting |
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Item 9BOther Information
None
19
PART III
PART III
Item 10.Directors, Executive Officers and Corporate Governance
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20202021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.2021.
Item 11. Executive Compensation
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20202021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.2021.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20202021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.2021.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20202021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.2021.
Item 14. Principal Accountant Fees and Services
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20202021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.2021.
PART IV
PART IVItem 15. Exhibits and Financial Statement Schedules
(a) (1)Financial Statements.
Reference is made to the Index to Financial Statements and Financial Statement Schedule commencing on Page 19.23.
(a) (2)Financial Statement Schedule.
Reference is made to the Index to Financial Statements and Financial Statement Schedule on Page 19.23. All other schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Financial Statements or Notes thereto.
15
20
(a) (3)Exhibits.
Exhibit No. | Description of Exhibit | ||
| | | |
3.1 | | | |
3.2 | | | |
3.3 | | | |
3.4 | | | |
4.1 | | | |
4.2 | | Note dated | |
| |||
4.3 | | | |
4.4 | | | |
10.2 | | | |
10.3 | | | |
14.1 | | | |
21.1 | | | |
23.1* | | Consent of PKF O’Connor Davies, LLP Independent Registered Public Accounting Firm | |
31.1* | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1** | | | |
32.2** | | | |
101.INS* | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104* | | The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, has been formatted Inline XBRL | |
| | | |
| | * Filed herewith ** Furnished herewith | |
Item 16.Form 10-K Summary.
None.
16 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | ||
| INRAD OPTICS, INC. | ||
| | ||
| | | |
| By: | /s/ Amy Eskilson | |
| | Amy Eskilson | |
| | Chief Executive Officer | |
| | ||
| Dated: March 30, | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Jan M. Winston | Chairman of the Board | March | ||
Jan M. Winston | ||||
/s/ William J. Foote | Director | March | ||
William J. Foote | ||||
/s/ Luke P. LaValle, Jr. | Director | March | ||
Luke P. LaValle, Jr. | ||||
/s/ Dennis G. Romano | Director | March | ||
Dennis G. | ||||
/s/ N.E. Rick Strandlund | Director | March | ||
N.E. Rick Strandlund | ||||
/s/ Amy Eskilson | President, Chief Executive Officer | March | ||
Amy Eskilson | and Director (Principal Executive Officer) | |||
/s/ Theresa A. Balog | Chief Financial Officer, Secretary, and Treasurer | March | ||
Theresa A. Balog | (Principal Financial and Accounting Officer) |
17
22
INRAD OPTICS, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 20192021 AND 20182020
CONTENTS
18
23
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Inrad Optics, Inc. and Subsidiaries
Northvale, New Jersey
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Inrad Optics, Inc. and Subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2019,2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 11 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
/s/ PKF O’Connor Davies, LLPThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Inventory
As discussed in Note 1 to the consolidated financial statements, the Company values inventories at the lower of cost, determined using the first-in, first-out method, or net realizable value. The Company reviews the components of its inventory on a quarterly basis for products identified as surplus, slow-moving, or discontinued and adjusts inventory to its net realizable value as necessary. The Company’s inventory reserves are primarily based on historical, as well as projected, usage of its various inventory products. The inventory reserve at December 31, 2021 totaled $2.5 million. Net inventories at December 31, 2021 totaled $2.5 million.
Auditing management’s calculations to value inventory involved a high degree of auditor judgment due to the sensitivity of valuation methodologies and the extent of audit effort required to address the matter.
24
Our principal audit procedures related to the Company’s inventory valuation included the following:
| ● | Evaluated the appropriateness and consistency of management’s methods and assumptions used in developing their assessment of net realizable value and their estimated reserve for slow-moving or excess inventory. We performed an analysis of the inventories’ net realizable value and performed analytical testing by performing a year over year comparison of the inventory reserve by product. |
| ● | We performed price testing on a sample of raw material inventory by comparing the carrying value of on-hand inventories to the latest purchases that occurred. |
| ● | In order to assess the appropriateness of the valuation of work-in-progress and finished goods inventories, we performed testing on a sample of capitalized labor costs. |
| ● | We evaluated management’s assumptions used to determine inventory absorption costs and performed a sensitivity analysis to evaluate the changes in inventory valuation that would result from changes in the assumptions. |
| ● | Performed an observation of the Company’s physical inventory count, including independent test counts thereon. |
We have served as the Company’s auditor since 2017.
/s/ PKF O’Connor Davies, LLP (127)
New York, New York
March 30, 20202022
19 * * * * *
25
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 950,705 | $ | 1,185,553 | ||||
| Accounts receivable (net of allowance for doubtful accounts of $15,000) | 1,233,081 | 1,296,487 | ||||||
| Inventories, net | 2,834,107 | 3,015,883 | ||||||
| Other current assets | 141,339 | 180,893 | ||||||
| Total current assets | 5,159,232 | 5,678,816 | ||||||
| Plant and equipment: | ||||||||
| Plant and equipment, at cost | 14,990,773 | 14,696,966 | ||||||
| Less: Accumulated depreciation and amortization | (14,309,992 | ) | (14,069,880 | ) | ||||
| Total plant and equipment | 680,781 | 627,086 | ||||||
| Precious metals | 561,910 | 562,347 | ||||||
| Lease right-of-use, net | 688,746 | - | ||||||
| Other assets | 44,577 | 64,176 | ||||||
| Total Assets | $ | 7,135,246 | $ | 6,932,425 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of other long term notes | $ | 16,044 | $ | 12,960 | ||||
| Accounts payable and accrued liabilities | 978,184 | 835,015 | ||||||
| Contract liabilities | 768,243 | 772,927 | ||||||
| Current portion of lease obligation | 273,369 | - | ||||||
| Total current liabilities | 2,035,840 | 1,620,902 | ||||||
| Related party convertible notes payable | 2,500,000 | 2,500,000 | ||||||
| Other long term notes, net of current portion | 166,763 | 244,781 | ||||||
| Lease obligation, net of current portion | 415,377 | - | ||||||
| Total liabilities | 5,117,980 | 4,365,683 | ||||||
| Shareholders' equity: | ||||||||
| Common stock: $.01 par value; 60,000,000 authorized shares;13,735,177 shares | ||||||||
| issued at December 31, 2019, and 13,636,988 shares issued at December 31, 2018 | 137,353 | 136,371 | ||||||
| Capital in excess of par value | 19,281,255 | 19,055,615 | ||||||
| Accumulated deficit | (17,386,392 | ) | (16,610,294 | ) | ||||
| 2,032,216 | 2,581,692 | |||||||
| Less - Common stock in treasury, at cost (4,600 shares) | (14,950 | ) | (14,950 | ) | ||||
| Total shareholders' equity | 2,017,266 | 2,566,742 | ||||||
| Total Liabilities and shareholders' equity | $ | 7,135,246 | $ | 6,932,425 | ||||
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Assets |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 1,801,188 | | $ | 1,129,703 |
Accounts receivable (net of allowance for doubtful accounts of $90,000 in 2021, and $91,000 in 2020) | |
| 1,287,653 | |
| 824,452 |
Inventories, net | |
| 2,524,871 | |
| 3,206,057 |
Other current assets | |
| 260,116 | |
| 214,748 |
Total current assets | |
| 5,873,828 | |
| 5,374,960 |
| | | | | | |
Plant and equipment: | |
| | |
| |
Plant and equipment, at cost | |
| 15,393,241 | |
| 15,191,610 |
Less: Accumulated depreciation and amortization | |
| (14,709,744) | |
| (14,564,186) |
Total plant and equipment | |
| 683,497 | |
| 627,424 |
Precious metals | |
| 561,909 | |
| 561,909 |
Lease right-of-use, net | | | 125,724 | | | 415,377 |
Other assets | |
| 26,993 | |
| 48,421 |
Total Assets | | $ | 7,271,951 | | $ | 7,028,091 |
| | | | | | |
Liabilities and Shareholders’ Equity | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Current portion of other long term notes | | $ | 16,403 | | $ | 16,288 |
Accounts payable and accrued liabilities | |
| 554,604 | |
| 717,537 |
Contract liabilities | | | 576,474 | | | 856,802 |
Current portion of lease obligation | |
| 141,536 | |
| 304,844 |
Total current liabilities | |
| 1,289,017 | |
| 1,895,471 |
| | | | | | |
Related party convertible notes payable | |
| 2,500,000 | |
| 2,500,000 |
| | | | | | |
Other long term notes, net of current portion | | | 157,578 | | | 1,133,682 |
Lease obligation, net of current portion | |
| 2,692 | |
| 144,228 |
Total liabilities | |
| 3,949,287 | |
| 5,673,381 |
| | | | | | |
| | | | | | |
Shareholders’ equity: | |
|
| |
|
|
Common stock: $.01 par value; 60,000,000 authorized shares; 13,967,257 shares issued at December 31, 2021, and 13,824,928 shares issued at December 31, 2020 | |
| 139,674 | |
| 138,251 |
Capital in excess of par value | |
| 19,733,996 | |
| 19,516,363 |
Accumulated deficit | |
| (16,536,056) | |
| (18,284,953) |
| |
| 3,337,614 | |
| 1,369,661 |
Less - Common stock in treasury, at cost (4,600 shares) | |
| (14,950) | |
| (14,950) |
Total shareholders’ equity | |
| 3,322,664 | |
| 1,354,711 |
Total Liabilities and shareholders’ equity | | $ | 7,271,951 | | $ | 7,028,091 |
See Notes to Consolidated Financial Statements
20
26
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Total revenue | $ | 10,007,655 | $ | 11,488,727 | ||||
| Cost and expenses: | ||||||||
| Cost of goods sold | 8,015,148 | 8,387,527 | ||||||
| Selling, general and administrative expenses | 2,614,229 | 2,233,760 | ||||||
| 10,629,377 | 10,621,287 | |||||||
| (Loss) income from operations | (621,722 | ) | 867,440 | |||||
| Other expense: | ||||||||
| Interest expense-net | (153,938 | ) | (158,544 | ) | ||||
| Loss on exchange of precious metals | (438 | ) | (2,288 | ) | ||||
| (154,376 | ) | (160,832 | ) | |||||
| (Loss) income before income taxes | (776,098 | ) | 706,608 | |||||
| Income tax (provision) benefit | - | - | ||||||
| Net (loss) income | $ | (776,098 | ) | $ | 706,608 | |||
| Net (loss) income per common share - basic | $ | (0.06 | ) | $ | 0.05 | |||
| Net (loss) income per common share - diluted | $ | (0.06 | ) | $ | 0.05 | |||
| Weighted average shares outstanding - basic | 13,672,235 | 13,561,207 | ||||||
| Weighted average shares outstanding - diluted | 13,672,235 | 13,930,708 | ||||||
| | | | | | |
| | Years Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Total revenue | | $ | 11,352,527 | | $ | 9,007,562 |
| | | | | | |
Cost and expenses: | |
| | |
|
|
Cost of goods sold | |
| 7,874,076 | |
| 7,218,119 |
Selling, general and administrative expenses | |
| 2,544,102 | |
| 2,537,630 |
| |
| 10,418,178 | |
| 9,755,749 |
| | | | | | |
Income (loss) from operations | |
| 934,349 | |
| (748,187) |
Other expense: | |
| | |
|
|
Gain on forgiveness of PPP loan | | | 973,166 | | | — |
Interest expense-net | |
| (158,618) | |
| (150,374) |
| |
| 814,548 | |
| (150,374) |
| | | | | | |
Income (loss) before income taxes | |
| 1,748,897 | |
| (898,561) |
| | | | | | |
Income tax (provision) benefit | |
| 0 | |
| 0 |
| | | | | | |
Net income (loss) | | $ | 1,748,897 | | $ | (898,561) |
| | | | | | |
Net income (loss) per common share - basic | | $ | 0.13 | | $ | (0.07) |
| | | | | | |
Net income (loss) per common share - diluted | | $ | 0.11 | | $ | (0.07) |
| | | | | | |
Weighted average shares outstanding – basic | |
| 13,871,420 | |
| 13,762,795 |
| | | | | | |
Weighted average shares outstanding – diluted | |
| 16,630,239 | |
| 13,762,795 |
See Notes to Consolidated Financial Statements
27
INRAD OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | |
| | | | | | | Capital in | | | | | | | | Total | ||
| | Common Stock | | excess of | | Accumulated | | Treasury | | Shareholders’ | |||||||
|
| Shares |
| Amount |
| par value |
| Deficit |
| Stock |
| Equity | |||||
Balance - January 1, 2020 |
| 13,735,177 | | $ | 137,353 | | $ | 19,281,255 | | $ | (17,386,392) | | $ | (14,950) | | $ | 2,017,266 |
401K contribution |
| 89,751 | |
| 898 | |
| 123,457 | |
| 0 | |
| 0 | |
| 124,355 |
Stock-based compensation expense |
| 0 | |
| 0 | |
| 111,651 | |
| 0 | |
| 0 | |
| 111,651 |
Net income (loss) December 31, 2020 | | 0 | |
| 0 | |
| 0 | |
| (898,561) | |
| 0 | |
| (898,561) |
Balance - December 31, 2020 |
| 13,824,928 | | $ | 138,251 | | $ | 19,516,363 | | $ | (18,284,953) | | $ | (14,950) | | $ | 1,354,711 |
401K contribution |
| 142,329 | |
| 1,423 | |
| 101,925 | |
| 0 | |
| 0 | |
| 103,348 |
Stock-based compensation expense |
| 0 | |
| 0 | |
| 115,708 | |
| 0 | |
| 0 | |
| 115,708 |
Net income (loss) December 31, 2021 |
| 0 | |
| 0 | |
| 0 | |
| 1,748,897 | |
| 0 | |
| 1,748,897 |
Balance - December 31, 2021 |
| 13,967,257 | | $ | 139,674 | | $ | 19,733,996 | | $ | (16,536,056) | | $ | (14,950) | | $ | 3,322,664 |
See Notes to Consolidated Financial Statements
21
28
INRAD OPTICS, INC.INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYCASH FLOWS
| | | | | | |
| | Years Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net income (loss) | | $ | 1,748,897 | | $ | (898,561) |
| | | | | | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | |
|
| |
|
|
Depreciation and amortization | |
| 166,987 | |
| 254,194 |
401(k) common stock contribution - non cash item | |
| 103,348 | |
| 124,355 |
Stock based compensation | |
| 115,708 | |
| 111,651 |
Gain on forgiveness of PPP loan | | | (973,166) | | | — |
Capitalized interest on promissory note | | | 5,538 | | | — |
Changes in operating assets and liabilities: | |
|
| |
|
|
Accounts receivable | |
| (463,200) | |
| 408,629 |
Inventories, net | |
| 681,185 | |
| (371,949) |
Other current assets | |
| (45,368) | |
| (73,409) |
Other assets | |
| (20,206) | |
| (3,844) |
Accounts payable and accrued liabilities | |
| (178,125) | |
| (151,952) |
Customer advances | |
| (280,327) | |
| 88,558 |
Accrued interest in related party note payable | |
| — | |
| (75,000) |
Total adjustments and changes | |
| (887,626) | |
| 311,233 |
Net cash provided by (used in) operating activities | |
| 861,271 | |
| (587,328) |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Capital expenditures | |
| (221,838) | |
| (200,837) |
Net cash (used in) investing activities | |
| (221,838) | |
| (200,837) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from PPP Loan | |
| 0 | |
| 973,166 |
Principal payments on notes payable-other | |
| (8,360) | |
| (6,003) |
Net cash (used in) provided by financing activities | |
| (8,360) | |
| 967,163 |
| | | | | | |
Net increase in cash and cash equivalents | |
| 631,073 | |
| 178,998 |
| | | | | | |
Cash and cash equivalents at beginning of year | |
| 1,129,703 | |
| 950,705 |
Cash and cash equivalents at end of year | | $ | 1,760,776 | | $ | 1,129,703 |
| | | | | | |
Supplemental disclosure of cash flow information: | |
|
| |
|
|
Interest paid | | $ | 161,948 | | $ | 226,513 |
Income taxes paid | | $ | 0 | | $ | 0 |
| Capital in | Total | |||||||||||||||||||||||
| Common Stock | excess of | Accumulated | Treasury | Shareholders' | ||||||||||||||||||||
| Shares | Amount | par value | Deficit | Stock | Equity | |||||||||||||||||||
| Balance - January 1, 2018 | 13,521,200 | $ | 135,213 | $ | 18,882,086 | $ | (17,316,902 | ) | $ | (14,950 | ) | $ | 1,685,447 | |||||||||||
| 401K contribution | 111,288 | 1,113 | 91,668 | - | - | 92,781 | ||||||||||||||||||
| Common stock issued on exercise of options | 4,500 | 45 | 1,343 | - | - | 1,388 | ||||||||||||||||||
| Stock-based compensation expense | - | - | 80,518 | - | - | 80,518 | ||||||||||||||||||
| Net income December 31, 2018 | - | - | - | 706,608 | - | 706,608 | ||||||||||||||||||
| Balance - December 31, 2018 | 13,636,988 | $ | 136,371 | $ | 19,055,615 | $ | (16,610,294 | ) | $ | (14,950 | ) | $ | 2,566,742 | |||||||||||
| 401K contribution | 98,189 | 982 | 92,605 | - | - | 93,587 | ||||||||||||||||||
| Stock-based compensation expense | - | - | 133,035 | - | - | 133,035 | ||||||||||||||||||
| Net income (loss) December 31, 2019 | - | - | - | (776,098 | ) | - | (776,098 | ) | ||||||||||||||||
| Balance - December 31, 2019 | 13,735,177 | $ | 137,353 | $ | 19,281,255 | $ | (17,386,392 | ) | $ | (14,950 | ) | $ | 2,017,266 | |||||||||||
See Notes to Consolidated Financial Statements
22
29
Table of ContentsINRAD OPTICS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (776,098 | ) | $ | 706,608 | |||
| Adjustments to reconcile net income (loss) to net cash (used in) | ||||||||
| provided by operating activities | ||||||||
| Depreciation and amortization | 267,098 | 278,173 | ||||||
| 401(k) common stock contribution - non cash item | 93,587 | 92,780 | ||||||
| Loss on exchange of precious metals | 438 | 2,288 | ||||||
| Stock based compensation | 133,035 | 80,518 | ||||||
| Change in inventory reserve | 2,910 | 39,003 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 63,406 | (262,088 | ) | |||||
| Inventories | 178,866 | 141,115 | ||||||
| Other current assets | 39,554 | (52,993 | ) | |||||
| Other assets | 8,872 | 5,466 | ||||||
| Accounts payable and accrued liabilities | 30,668 | (419,643 | ) | |||||
| Customer advances | (4,684 | ) | (96,750 | ) | ||||
| Accrued interest in related party note payable | 112,500 | 37,500 | ||||||
| Total adjustments and changes | 926,250 | (154,631 | ) | |||||
| Net cash (used in) provided by operating activities | 150,152 | 551,977 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (310,066 | ) | (154,407 | ) | ||||
| Purchase of precious metals | - | (875 | ) | |||||
| Net cash (used in) investing activities | (310,066 | ) | (155,282 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuance of common stock | - | 1,388 | ||||||
| Principal payments on notes payable-other | (74,934 | ) | (12,483 | ) | ||||
| Net cash (used in) financing activities | (74,934 | ) | (11,095 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (234,848 | ) | 385,600 | |||||
| Cash and cash equivalents at beginning of period | 1,185,553 | 799,953 | ||||||
| Cash and cash equivalents at end of period | $ | 950,705 | $ | 1,185,553 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | 158,906 | $ | 197,581 | ||||
| Income taxes paid | $ | - | $ | - | ||||
| Significant non-cash activities: | ||||||||
| Lease right-of-use asset | $ | 819,612 | $ | - | ||||
| Exchange of precious metals | $ | 400 | $ | 2,000 | ||||
See Notes to Consolidated Financial Statements
23
INRAD OPTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 20192021
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, 2019,2021, the Company had working capital of $3.1$4.6 million and cash and cash equivalents of $1.0$1.8 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, 2021.2023.
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.
30
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.
24 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.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Tax Act and guidance, and the company has maintained the full valuation allowance on its deferred tax asset.
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 no0 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 20162018 and state or local income tax examinations by tax authorities for the years before 2016.2018.
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.
31
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.
25 l. Revenue recognition
The Company adopted the provisions of ASU 2014-09, “Revenues from Contracts with Customers (ASC 606)” on January 1, 2018, usingwhich requires recognition of revenue at the modified retrospective approach.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 2.2
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 $45,000$19,000 and $25,000$18,000 for the years ended December 31, 20192021 and 2018,2020, 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, 2019,2021, the Company had three3 customers who had sales representing 18.5%20.3%, 14.7%13.6% and 6.1%9.5% of total revenues. In 2018,For the Company’s three topyear ended December 31, 2020, the Company had 3 customers who had sales representing 22.3%17.1%, 12.9%7.0% and 9.4%6.5% 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.
32
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.
26
| r. Recent |
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e. point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e. over time), which approximates the previously used percentage-of-completion method of accounting. As such, the adoption of ASU 2014-09 had no material impact to the Company’s financial position or results of operations; however, the Company has now presented the disclosures required by this new standard, refer to Note 2.Pronouncements
In January 2017, the FASB issued guidance which clarifies the definition of a business and provides revised criteria and a framework to determine whether an integrated set of assets and activities is a business. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted the new guidance on January 1, 2018, as required, with no impact on the Company’s consolidated financial statements upon adoption.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) which provides guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company adopted the new guidance on January 1, 2018 as required. There are no significant impacts to the Company’s consolidated financial statements from the adoption of the new guidance.
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 2022,2023, with earlier application permitted in 2019.permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In February 2016,December 2019, the FASB issued ASU 2016-02, “Leases” (ASC 842), and subsequently issued updates as part of ASU 2018-11, “Leases, Targeted Improvements.” The new2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilitieswas effective for entities for the rightsfiscal years, and obligations created byinterim periods within those leasesfiscal years, beginning after December 15, 2020, 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 11a. Lease Commitments.a prospective basis. The adoption of ASU 842 and ASU 2018-11this guidance did not have a material impact on the Company’s statements of operations or cash flows.consolidated financial statements.
In June 2018,August 2020, the FASB issued ASU 2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Shared-Based Payment Accounting. The2020-06, 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 expandsis intended to simplify the scopecomplexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of Topic 718 to include share-based payment transactionsliabilities and equity. This guidance is effective for acquiring goods and services from nonemployees.the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company adopted ASU 2018-07 effective January 1, 2019. Thedoes not expect the adoption did notof this guidance will have a material impact on itsthe Company’s consolidated financial statements.
s. Subsequent events
Management has performed an evaluation of subsequent events through the date that the financial statements were issued and related disclosures.
has determined that it does not have any additional material subsequent events to disclose in these financial statements.
| For the years ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Aerospace & Defense | $ | 3,710 | $ | 2,585 | ||||
| Process Control & Metrology | 4,189 | 5,891 | ||||||
| Laser Systems | 1,212 | 1,550 | ||||||
| Scientific / R&D | 897 | 1,463 | ||||||
| Total | $ | 10,008 | $ | 11,489 | ||||
33
2. Revenue
| | | | | | | | | | |
| | Years Ended December 31, | ||||||||
|
| 2021 |
| 2020 | ||||||
Market (In thousands) | | Net Sales | | % | | Net Sales | | % | ||
Aerospace & Defense | | $ | 3,824 | | 33.7 | | $ | 3,916 | | 43.5 |
Process Control & Metrology | |
| 5,656 | | 49.8 | |
| 3,328 | | 36.9 |
Laser Systems | |
| 724 | | 6.4 | |
| 667 | | 7.4 |
Scientific / R&D | |
| 1,149 | | 10.1 | |
| 1,097 | | 12.2 |
Total | | $ | 11,353 | | 100.0 | | $ | 9,008 | | 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.
27
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 3.1%0.4% and 5.0%1.8% of revenue for 20192021 and 2018,2020, respectively. Revenue under these long-term government contracts areis 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 96.9%99.6% and 95.0%98.2% of revenue for 20192021 and 2018,2020, 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.
34
Net sales by timing to transfers of goods and services is as follows:
| | | | | | |
| | For the years ended | ||||
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Transfer at point in time | | $ | 11,313 | | $ | 8,842 |
Transfer over time | |
| 40 | |
| 166 |
Total net sales | | $ | 11,353 | | $ | 9,008 |
| For the years ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Transfer at point in time | $ | 9,696 | $ | 10,915 | ||||
| Transfer over time | 312 | 574 | ||||||
| Total net sales | $ | 10,008 | $ | 11,489 | ||||
3. Inventories, net
Inventories are comprised of the following and are shown net of inventory reserves of approximately $2,489,000 for 2019$2.5 million at December 31, 2021 and $2,486,000 for 2018:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Raw materials | $ | 1,248 | $ | 1,143 | ||||
| Work in process, including manufactured parts and components | 1,090 | 1,389 | ||||||
| Finished goods | 496 | 484 | ||||||
| $ | 2,834 | $ | 3,016 | |||||
2020:
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
|
| (in thousands) | ||||
Raw materials | | $ | 1,160 | | $ | 1,130 |
Work in process, including manufactured parts and components | |
| 1,020 | |
| 1,718 |
Finished goods | |
| 345 | |
| 358 |
| | $ | 2,525 | | $ | 3,206 |
28
4. Plant and Equipment
Plant and equipment are comprised of the following:
| | | | | | | ||||||||
| | December 31, | ||||||||||||
|
| 2021 |
| 2020 | ||||||||||
| December 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| (In thousands) | ||||||||||||||
|
| (In thousands) | ||||||||||||
| Office and computer equipment | $ | 1,345 | $ | 1,352 | | $ | 1,482 | | $ | 1,474 | ||||
| Machinery and equipment | 11,334 | 11,062 | |
| 11,599 | |
| 11,405 | ||||||
| Leasehold improvements | 2,312 | 2,283 | |
| 2,312 | |
| 2,312 | ||||||
| 14,991 | 14,697 | |||||||||||||
| |
| 15,393 | |
| 15,191 | ||||||||
| Less accumulated depreciation and amortization | (14,310 | ) | (14,070 | ) | |
| (14,710) | |
| (14,564) | ||||
| $ | 681 | $ | 627 | |||||||||||
| | $ | 683 | | $ | 627 | ||||||||
Depreciation expense recorded by the Company totaled approximately $256,000$166,000 and $240,000$254,000 for 20192021 and 2018,2020, respectively. Fully depreciated assets of $16,000 and $184,000$20,000 were written off in 2019 and 2018, respectively.2021. NaN fully depreciated assets were written off in 2020.
The Company evaluates its property and equipment for impairment when events or circumstances indicate andan impairment may exist. Based on this evaluation, the Company concluded that, at December 31, 2019,2021 and 2020, its long-lived assets were not impaired.
5. Related Party Transactions
On April 12, 2018,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, 2021,2024, from April 1, 2019.2021. 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 one1 share of common stock and one1 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, 2022,2024 to April 1, 2024.2027.
35
The Company paid $112,500 and $187,500$0.2 million for interest on the subordinated convertible promissory notes in 2019for each of the years 2021 and 2018,2020, respectively. Accrued interest of $112,500 and $75,000$37,500 is included in Accounts payable and accrued liabilities as of December 31, 20192021 and 2018,2020, respectively.
6. Other Long-Term Notes
Other Long-Term Notes consist of the following:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| U.S. Small Business Administration term note payable in | ||||||||
| equal monthly installments of $1,922 and bearing an | ||||||||
| interest rate of 4.0% and expiring in July 2029. | $ | 183 | $ | 258 | ||||
| Less current portion | (16 | ) | (13 | ) | ||||
| Long-term debt, excluding current portion | $ | 167 | $ | 245 | ||||
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (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. | | $ | 174 | | $ | 177 |
Less current portion | |
| (16) | |
| (16) |
Long-term debt, excluding current portion | | $ | 158 | | $ | 161 |
Other Long-Term Notes mature as follows:
| | | |
Year ending December 31: | |||
(In thousands) | |||
2022 |
| $ | 16 |
2023 |
| | 17 |
2024 |
| | 18 |
2025 | | | 18 |
2026 |
| | 19 |
Thereafter |
| | 86 |
| | $ | 174 |
| Year ending December 31: | (In thousands) | |||
| 2020 | $ | 16 | ||
| 2021 | 17 | |||
| 2022 | 17 | |||
| 2023 | 18 | |||
| 2024 | 19 | |||
| Thereafter | 96 | |||
| $ | 183 | |||
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.
29 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.
36
8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued expenses are comprised of the following:
| December 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| | | | | | | ||||||||
| | December 31, | ||||||||||||
|
| 2021 |
| 2020 | ||||||||||
| Trade accounts payable and accrued purchases | $ | 507 | $ | 399 | | $ | 404 | | $ | 454 | ||||
| Accrued payroll | 133 | 114 | |
| 12 | |
| — | ||||||
| Accrued 401K company matching contribution | 114 | 125 | |
| 126 | |
| 138 | ||||||
| Accrued expenses – other | 224 | 197 | |
| 13 | |
| 125 | ||||||
| $ | 978 | $ | 835 | |||||||||||
| | $ | 555 | | $ | 717 | ||||||||
9. Income Taxes
The Company did not record a current provision for either state tax or federal tax due to lossesloss carry forwards 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, | |||||||||||||
| 2019 | 2018 | ||||||||||||
| | | | | | ||||||||
| | Years Ended |
| ||||||||||
| | December 31, |
| ||||||||||
|
| 2021 |
| 2020 |
| ||||||||
| Federal statutory rate | (21 | )% | 21 | % |
| 21 | % | (21) | % | ||||
| State statutory rate | (9 | ) | 9 | ||||||||||
| Reduction in State rate due to tax rate change | - | (24 | ) | ||||||||||
Reduction in state rate due to tax rate change |
| 9 |
| (9) | | ||||||||
| Change in Valuation Allowance | 2 | (8 | ) |
| (14) |
| 3 | | |||||
| Permanent Differences | 14 | 2 |
| (15) |
| 11 | | ||||||
| Other | 14 | - | | (1) | | 16 | | ||||||
| Effective income tax rate | - | % | - | % |
| — | % | — | % | ||||
At December 31, 20192021 and 2018,2020, the Company had estimated Federal net operating loss carry forwards of approximately $9.3$9.5 million and $8.7$10.4 million, respectively, and state net operating loss carry forwards of approximately $5.8$4.5 million and $5.2$5.1 million, respectively. The 2019 and 2018Approximately $7.9 million net operating loss carryforwards have no expiration dates.expire during various years through 2037, and approximately $1.6 million may be carried forward indefinitely, subject to the 80% of taxable income limitation rule.
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 freerisk-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.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Act eliminates alternative minimum taxes and lowers the U.S. federal corporate income tax from 34% to 21% effective January 1, 2018.
30
Deferred tax assets (liabilities) are comprised of the following:
| Years Ended | ||||||||||||||
| December 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| | | | | | | ||||||||
| | Years Ended | ||||||||||||
|
| December 31, | ||||||||||||
| | 2021 |
| 2020 | ||||||||||
| Account receivable reserves | $ | 4 | $ | 4 | | $ | 25 | | $ | 25 | ||||
| Inventory reserves | 697 | 746 | |
| 707 | |
| 692 | ||||||
| Inventory capitalization | 89 | 102 | |
| 71 | |
| 101 | ||||||
| Depreciation | 252 | 312 | |
| 197 | |
| 182 | ||||||
| Loss carry forwards | 2,332 | 2,229 | |
| 2,386 | |
| 2,636 | ||||||
| Gross deferred tax assets | 3,374 | 3,393 | |
| 3,386 | |
| 3,636 | ||||||
| Valuation allowance | (3,374 | ) | (3,393 | ) | |
| (3,386) | |
| (3,636) | ||||
| Net deferred tax asset | $ | — | — | | $ | 0 | | $ | 0 | |||||
37
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 termnear-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 negative evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
2020.
On the basis of this evaluation, as of December 31, 2019 and 2018,2021, the valuation allowance was decreased by $19,000 and $59,000, respectively.$250,000 due to the reduction of net operating loss carryforwards. The valuation allowance increased as of December 31, 2020, by $262,000. The company concluded it was more likely than not that it would not be able to realize anya significant portion of the benefit on the deferred tax assets and adjusted the valuation allowance was adjusted to provide a full valuation against the deferred tax assets.
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 2016.
2018.
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 no0 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 no0 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. |
The Company’s 2010 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 four4 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 plan2020 Program is administered by the Compensation Committee of the Board of Directors. Under this plan,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 20002010 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 June 2, 2010.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 plan2010 Program is March 28, 2020.23, 2030.
31 c. Stock Option Expense
The Company'sCompany’s results for the years ended December 31, 20192021 and 2018,2020, include stock-based compensation expense for stock option grants totaling $133,000$116,000 and $80,000,$112,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($37,00021,000 and $29,000 for 20192021 and $22,000 for 2018)2020, respectively), and selling, general and administrative expenses ($96,00092,000 and $83,000 for 20192021 and $58,000 for 2018)2020, respectively).
38
As of December 31, 20192021, and 2018,2020, there were $199,000$120,000 and $180,000$98,000 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 1.89 years1.57 and 1.41.16 years, respectively.
The weighted average estimated fair value of stock options granted in the two years ended December 31, 20192021 and 2018,2020, was $0.76$0.62 and $0.98,$1.41, 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,0, 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, 20192021 and 2018:2020:
| Years Ended | |||||||||||||
| December 31, | |||||||||||||
| 2019 | 2018 | ||||||||||||
| Expected Dividend yield | —% | —% | |||||||||||
| Expected Volatility | 126.86% | 140.00% | |||||||||||
| | | | | | ||||||||
| | Years Ended |
| ||||||||||
| | December 31, |
| ||||||||||
|
| 2021 |
| 2020 |
| ||||||||
Expected dividend yield |
| 0 | % | 0 | % | ||||||||
Expected volatility |
| 106.35 | % | 122.22 | % | ||||||||
| Risk-free interest rate | 2.90% | 2.60% |
| 0.86 | % | 1.96 | % | ||||||
| Expected term | 10 years | 10 years |
| 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, 20192021 and 2018,2020, is presented below:
| Weighted | Weighted | |||||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||||
| Exercise | Remaining | Aggregate | ||||||||||||||||||||||||
| Number of | Price per | Contractual | Intrinsic | |||||||||||||||||||||||
| | | | | | | | | | | ||||||||||||||||
| | | | Weighted | | Weighted | | | | |||||||||||||||||
| | | | Average | | Average | | | | |||||||||||||||||
| | | | Exercise | | Remaining | | Aggregate | ||||||||||||||||||
| | Number of | | Price per | | Contractual | | Intrinsic | ||||||||||||||||||
| Stock Options | Options | Option | Term (years) | Value(a) |
| Options |
| Option |
| Term (years) |
| Value(a) | ||||||||||||||
| Outstanding January 1, 2018 | 903,008 | $ | 0.58 | 5.2 | $ | 648,410 | ||||||||||||||||||||
Outstanding January 1, 2020 |
| 1,147,267 | | $ | 0.63 |
| 6.29 |
| $ | 718,840 | ||||||||||||||||
| Granted | 175,000 | 1.00 |
| 22,500 | |
| 1.48 |
| |
| | | ||||||||||||||
| Exercised | (4,500 | ) | 0.31 |
| 0 | |
| 0 |
| |
| | | |||||||||||||
| Expired/Forfeited | (15,300 | ) | 0.98 |
| (18,900) | |
| 0.99 |
| |
| | | |||||||||||||
| Outstanding December 31, 2018(b) | 1,058,208 | $ | 0.64 | 5.58 | $ | 337,997 | ||||||||||||||||||||
Outstanding December 31, 2020 (b) |
| 1,150,867 | | $ | 0.64 |
| 6.61 |
| $ | 107,573 | ||||||||||||||||
| Granted | 200,000 | 0.79 |
| 200,000 | |
| 0.62 |
| |
| | | ||||||||||||||
| Exercised | — |
| 0 | |
| 0 |
| |
| | | |||||||||||||||
| Expired/Forfeited | (110,941 | ) | 1.05 |
| (198,200) | |
| 0.86 |
| |
| | | |||||||||||||
| Outstanding December 31, 2019(b) | 1,147,267 | $ | 0.63 | 6.29 | $ | 718,840 | ||||||||||||||||||||
| Exercisable at December 31, 2019 | 775,598 | $ | 0.54 | 4.51 | $ | 445,173 | ||||||||||||||||||||
Outstanding December 31, 2021 (b) |
| 1,152,667 | | $ | 0.60 |
| 7.40 |
| $ | 662,465 | ||||||||||||||||
| | | | | | | | | | | ||||||||||||||||
Exercisable at December 31, 2021 |
| 875,998 | | $ | 0.57 |
| 6.49 |
| $ | 520,164 | ||||||||||||||||
(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, 2019,2021, 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, 2019.
32 2021.
39
The following table represents non-vested stock options granted, vested, and forfeited for the year ended December 31, 2019:2021:
| Weighted-average | ||||||||||||
| Grant-date Fair Value | ||||||||||||
| Options | ($) | |||||||||||
| Non-Vested - January 1, 2019 | 349,491 | 0.74 | ||||||||||
| | | | | ||||||||
| | Weighted-average | ||||||||||
| | Grant-date Fair Value | ||||||||||
|
| Options |
| ($) | ||||||||
Non-Vested - January 1, 2021 | | 210,840 |
| 0.89 | ||||||||
| Granted | 200,000 | 0.76 |
| 200,000 |
| 0.57 | ||||||
| Vested | (171,156 | ) | 0.64 |
| (130,837) |
| 0.90 | |||||
| Forfeited | (6,666 | ) | 0.59 |
| (3,334) |
| 0.68 | |||||
| Non-Vested - December 31, 2019 | 371,669 | 0.80 | ||||||||||
Non-Vested – December 31, 2021 |
| 276,669 |
| 0.66 | ||||||||
The total weighted average grant date fair value of options vested during the years ended December 31, 20192021 and 2018,2020, was $109,000$113,000 and $62,000,$142,000, respectively.
The following table summarizes information about stock options outstanding at December 31, 2019:2021:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||||
| Weighted | ||||||||||||||||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||||||||
| | Options Outstanding | | Options Exercisable | ||||||||||||||||||||||||||||||
| | | | Weighted | | | | | | | | | ||||||||||||||||||||||
| | | | Average | | Weighted | | | | Weighted | ||||||||||||||||||||||||
| | | | Remaining | | Average | | | | Average | ||||||||||||||||||||||||
| Range of | Range of | Number | Contractual | Exercise | Number | Exercise | | Number | | Contractual | | Exercise | | Number | | Exercise | ||||||||||||||||||
| Exercise Price | Exercise Price | Outstanding | Life in Years | Price | Outstanding | Price |
| Outstanding |
| Life in Years |
| Price |
| Outstanding |
| Price | ||||||||||||||||||
| $0.18 - $0.35 | 402,167 | 5.15 | $ | 0.29 | 402,167 | $ | 0.29 | |||||||||||||||||||||||||||
| $0.50 - $1.00 | 730,100 | 6.37 | $ | 0.80 | 373,431 | $ | 0.80 | |||||||||||||||||||||||||||
| $1.50 - $1.80 | 15,000 | 9.50 | $ | 1.80 | — | $ | — | |||||||||||||||||||||||||||
$0.18 - $0.35 | | 382,667 | | 4.11 | | $ | 0.29 | | 382,667 | | $ | 0.29 | ||||||||||||||||||||||
$0.50 - $1.00 |
| 732,500 |
| 7.10 | | $ | 0.81 |
| 475,831 | | $ | 0.90 | ||||||||||||||||||||||
$1.40 - $1.80 |
| 37,500 |
| 8.89 | | $ | 1.61 |
| 17,500 | | $ | 1.66 | ||||||||||||||||||||||
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, 2019,2021, a total of 2,500,000 common shares issuable upon conversion of outstanding convertible notes have been included in the diluted computation. 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes have been excluded from the diluted computation of net income per share because their effect is anti-dilutive. A total of 258,819 common stock equivalents have been included in the computation of diluted earnings per share because their effect is dilutive and 37,500 common stock equivalents related to outstanding stock options have been excluded from the computation of diluted earnings per share because their effect is anti-dilutive.
For the year ended December 31, 2020, all common equivalent shares outstanding have been excluded from the diluted computation because their effect is anti-dilutive. This included 1,147,2671,150,867 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.
For the year ended December 31, 2018, a total of 2,500,000 anti-dilutive common shares issuable upon conversion of outstanding convertible notes
12. Commitments and 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes have been excluded from the diluted computation of net income per share because their effect is anti-dilutive. In addition, 1,058,208 common stock equivalents related to outstanding options have been excluded from the diluted computation because their effect is anti-dilutive.
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.
p. Lease commitments
33
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 $800,000$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 $179,000$0.3 million during the year ended December 31, 2019,2021, and is included in operating cash flows.
40
The following table presents information about the amount and timing of cash flows arising from the Company’sCompany's operating leaseand capital leases as of December 31, 2019:2021:
| | | | | ||||
| Maturity of Lease Liability | (in thousands) |
| (in thousands) |
| ||||
| 2020 | $ | 306 | ||||||
| 2021 | 306 | |||||||
| 2022 | 128 | | $ | 144 | | |||
| Total undiscounted operating lease payments | 740 | |||||||
2023 | | | 2 | | ||||
Total undiscounted operating and capital lease payments | |
| 146 | | ||||
| | | | | ||||
| Less: imputed interest | (51 | ) | |
| (2) | | ||
| Present value of operating lease liability | $ | 689 | ||||||
Present value of lease liabilities | | $ | 144 | | ||||
| | | | | ||||
| Other Information | |
|
| | ||||
| Remaining lease term (in months) | 29 | |
| | | |||
| Discount rate for operating leases | 5.80% | |||||||
Opeating lease | | | 5 | | ||||
Capital lease | | | 14 | | ||||
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, 20192021 and 2018,2020, was $300,000 and $290,000, respectively.$0.3 million in each year.
The Company also paid real estate taxes and insurance premiums under the terms of the lease that totaled approximately $90,000$0.1 million in 2019both 2021 and $94,000 in 2018.2020.
q. Retirement plans
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 2019,2021, the Company’s 401(k) matching contribution for employees was $124,355.$127,000. This will be funded by way of a contribution of 89,751149,156 shares of the Company’s common stock, which will be issued to the Plan in April, 2020.2022. In 2018,2020, the Company’s 401(k) matching contribution for employees was $124,783.$145,000. This was funded by way of cash contribution of $31,000 and a contribution of 98,189142,329 shares of the Company’s common stock, which were issued to the Plan in June, 2019.2020 and a cash contribution of $42,000. 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 31.9%36.6% and 40%29.4% of product sales in 20192021 and 2018,2020, respectively.
The Company had sales to three3 major customers which accountedaccounting for approximately 39.2%43.4% of sales in 2019.2021. One customer, a division of a major U.S. defense industry corporation that manufactures electro-opticalcapital equipment company supplies process and control and yield management systems for U.S. and foreign governmentsthe semiconductor industry, accounted for 18.5%20.3% of 2019 sales.sales in 2021. The two other customers included twoa U.S.-based customer in the aerospace defense industry and a foreign-based manufacturersmanufacturer of process control and metrology equipment whose sales represented 14.7%13.6% and 6.1%9.5% of sales, respectively. For 2018,2020, the top three3 customers represented 22.3%17.1%, 12.9%7.0% and 9.4% respectively.6.5% of sales.
During the past two years, sales to the Company’s top five5 customers represented approximately 47.2%53.9% and 56.1% of sales,43.0%, 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.
34
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14. Shareholders’ Equity
a. Common shares reserved for future issuances at December 31, 2021, 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 |
b. Warrants
The Company had no0 outstanding warrants as of December 31, 20192021 and 2018.2020.
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, 2019,2021, 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 $2.3 million compared to its carrying amount of $2.7 million as of December 31, 2019.
On March 11, 2020, the World Health Organization declared the global novel coronavirus disease (“COVID-19”) a pandemic. While the Company has taken steps to protect our employees in the event of infection in our offices and production facility and continues to enhance its business continuity plans, the Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on its financial condition and operations.2021.
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