Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405
of the Securities Act. Yes
¨
. No
x
.
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
¨
. No
x
.
Note – Checking the box above will
not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
under those Sections.
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting
company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b2 of the Exchange
Act. (Check one):
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
State the aggregate
market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter. $1,659,539 (For purposes of determining this amount, only directors, executive
officers and shareholders with voting power of 10% or more of our stock have been deemed affiliates.)
Indicate the number
of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Portions of the registrant's
definitive Proxy Statement for the 2014 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 10-K.
PART 1
Caution Regarding Forward Looking Statements
This Annual Report
contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to insure that
any forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the safe
harbor provided by the Private Securities Litigation Reform Act of 1995. The events described in the forward-looking statements
contained in this Annual Report may not occur. Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of the Company’s plans or strategies, or projections involving anticipated revenues,
earnings, or other aspects of the Company’s operating results. The words “may”, “will”, “expect”,
“believe”, “anticipate”, “project”, “plan”, “intend”, “estimate”,
and “continue”, and their opposites and similar expressions are intended to identify forward-looking statements. The
Company cautions you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties,
risks, and other influences, many of which are beyond the Company’s control, that may influence the accuracy of the statements
and the projections upon which the statements are based. Factors that may cause or contribute to such differences include, but
are not limited to, those discussed in more detail in Item 1 (Business) and Item 1A (Risk Factors) of Part I and Item 7
(Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of this Annual Report
on Form 10-K. Any one or more of these uncertainties, risks, and other influences could materially affect the Company’s
results of operations and whether forward-looking statements made by the Company ultimately prove to be accurate. Readers are
further cautioned that the Company’s financial results can vary from quarter to quarter, and the financial results for any
period may not necessarily be indicative of future results. The foregoing is not intended to be an exhaustive list of all factors
that could cause actual results to differ materially from those expressed in forward-looking statements made by the Company. The
Company’s actual results, performance and achievements could differ materially from those expressed or implied in these
forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward looking statements,
whether from new information, future events, or otherwise, except as otherwise required by law.
Inrad Optics, Inc.
(the “Company”, “Inrad”), was incorporated in New Jersey in 1973. The Company develops, manufactures and
markets products and services for use in photonics industry sectors via three distinct but complimentary product areas - “Crystals
and Devices”, “Custom Optics” and “Metal Optics.”
The Company is a vertically
integrated manufacturer specializing in crystal-based optical components and devices, custom optical components from both glass
and metal, and precision optical and opto-mechanical assemblies. Manufacturing capabilities include solution and high temperature
crystal growth, extensive optical fabrication capabilities, including precision diamond turning and the ability to handle large
substrates, optical coatings and provide in-process metrology.
Inrad Optics’
customers include leading corporations in the defense, aerospace, laser systems, process control and metrology sectors of the
photonics industry, as well as the U.S. Government, National Laboratories and universities worldwide.
Administrative, engineering
and manufacturing operations are in a 42,000 square foot building located in Northvale, New Jersey, about 15 miles northwest of
New York City, and in a 25,000 square foot building located in Sarasota, FL. The headquarters of the Company are located in the
Northvale facility. In November 2013, the Company announced plans to relocate all of the operations from the Sarasota facility
to the New Jersey facility. The Company anticipates being out of that facility by March 31, 2014 when the operations in Sarasota
will be fully transferred.
The products produced
by Inrad Optics, Inc. fall into two main categories: Optical Components and Laser Devices and Instrumentation.
The Optical Components
segment of the business is heavily focused on custom optics manufacturing. The Company specializes in high-end precision components.
It develops, manufactures and delivers precision custom optics and thin film optical coating services through its Custom Optics
and Metal Optics operations. Glass, metal, and crystal substrates are processed using modern manufacturing equipment, complex
processes and techniques to manufacture components, deposit optical thin films, and assemble sub-components used in advanced photonic
systems. The majority of custom optical components and optical coating services supplied are used in inspection, process control
systems, defense and aerospace electro-optical systems, laser system applications, industrial scanners, and medical system applications.
The Laser Devices and Instrumentation category includes the growth and fabrication of crystalline materials with electro-optic (EO) and non-linear optical
properties for use in both standard and custom products. This category also includes crystal based devices and associated instrumentation.
The majority of crystals, crystal components and laser devices are used in laser systems, defense EO systems, medical lasers and
R&D applications by engineers within corporations, universities and national laboratories.
The following table
summarizes the Company’s net sales by product categories during the past three years. Laser Devices and Instrumentation
includes all non-linear and electro-optical crystal components.
|
|
Years Ended December
31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Category (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Optical Components
|
|
$
|
8,628
|
|
|
|
76.8
|
|
|
$
|
8,758
|
|
|
|
76.7
|
|
|
$
|
11,812
|
|
|
|
89.6
|
|
Laser Devices and Instrumentation
|
|
|
2,608
|
|
|
|
23.2
|
|
|
|
2,646
|
|
|
|
23.3
|
|
|
|
1,365
|
|
|
|
10.4
|
|
Total
|
|
$
|
11,236
|
|
|
|
100.0
|
|
|
$
|
11,404
|
|
|
|
100.0
|
|
|
$
|
13,177
|
|
|
|
100.0
|
|
Products Manufactured by the Company
Optical Components
|
a)
|
Custom Optics
and Optical Coating Services
|
Manufacturing of
high-performance custom optics is a major product area for Inrad Optics and is addressed in the marketplace by each of the product
groups - Crystals and Devices, Custom Optics and Metal Optics.
The Custom Optics
product line
focuses on products manufactured to specific customer requirements. It specializes
in the manufacture of optical components, optical coatings (ultra-violet wavelengths through infra-red wavelengths) and subassemblies
for the military, aerospace, industrial and medical marketplace. Planar, prismatic and spherical components are fabricated from
glass and synthetic crystals, including fused silica, quartz, germanium, zinc selenide, zinc sulfide, magnesium fluoride and silicon.
Components consist of mirrors, lenses, prisms, wave plates, polarizing optics, monochromators, x-ray mirrors, and cavity optics
for lasers.
Most optical components
and sub-assemblies require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect,
or transmit specific wavelengths. The Custom Optics optical coating specialties include high laser damage resistance, polarizing,
highly reflective, anti-reflective, infra-red, and coating to complex multi-wavelength requirements on a wide range of substrate
materials. Coating deposition process technologies employed included electron beam, thermal, ion and plasma assisted deposition
systems.
The Metal Optics
product line is a fully integrated precision metal optics and optical assembly operation which employs high precision CNC and
diamond machining, polishing, plating of aluminum, AlBeMet™, beryllium and stainless steel. The Metal Optics product line
offers opto-mechanical design and assembly services as part of its manufactured deliverables and can support prototyping through
production of large and small metal mirrors, thermally stable optical mirrors, low RMS surface finish polished mirrors, diamond
machined precision aspheric and planar mirrors, reflective porro prisms, and arc-second accuracy polygons and motor assemblies.
Plating specialties include void-free gold and electroless nickel.
|
b)
|
UV Filter Optical
Components
|
This product line
consists of crystals and crystal devices including UV filter materials of both patented and proprietary materials with unique
transmission and absorption characteristics. These materials are used in critical applications in defense systems such as missile
warning sensors. Such materials include nickel sulfate and other proprietary materials.
Laser Devices and Instrumentation
This product line
consists of crystal-based products that are used in, or alongside, laser systems. Developing growth processes for high quality
synthetic crystals is a core competency of the Crystals and Devices manufacturing team. These crystals are embedded in our value
added devices and instrumentation products manufactured in our Northvale facility and include crystals for wavelength conversion,
modulation and polarization, Pockels cells, and wavelength conversion instruments. In addition to the filter materials consumed
by the UV Filter Optical components described above, current materials produced include Beta Barium Borate (BBO), Lithium Niobate,
Zinc Germanium DiPhosphide, Potassium Dihydrogen Phosphate and Potassium Dideuterium Phosphate. Applications for these materials
include defense, homeland security, surgical lasers, and industrial processing lasers. The Crystals and Devices team is also engaged
in ongoing R & D efforts to develop new materials for evolving applications and offers contract growth of crystalline materials
to customer specifications. Some of the major products produced for the photonics marketplace include:
The Company grows
and fabricates electro-optic and nonlinear crystal devices for altering the intensity, polarization or wavelength of a laser beam.
Other crystal components, produced as part of the Crystals and Devices product line, are used in laser research and in commercial
laser systems.
|
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,
research institutes and laser system design engineers.
Sales by Market
The photonics industry serves a very 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, grow across traditional market boundaries. While a significant part of the Company’s
business remains firmly in the defense and aerospace markets, other markets served include the OEM medical and industrial
laser market, and the OEM metrology and process control market, university research institutes and national labs worldwide. Scanning,
detection and imaging technologies for homeland security and health care markets are beginning to provide opportunities for the
Company and these new sectors are expected to
account for future growth and demand for our products
and capabilities.
In 2013, 2012 and
2011 the Company’s product sales were made to customers in the following market areas:
|
|
Years Ended December
31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Market (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Defense/Aerospace
|
|
$
|
4,520
|
|
|
|
40.2
|
|
|
$
|
5,089
|
|
|
|
44.6
|
|
|
$
|
6,734
|
|
|
|
51.1
|
|
Process control & metrology
|
|
|
2,664
|
|
|
|
23.7
|
|
|
|
3,484
|
|
|
|
30.5
|
|
|
|
4,752
|
|
|
|
36.1
|
|
Laser systems
|
|
|
2,988
|
|
|
|
26.6
|
|
|
|
2,421
|
|
|
|
21.2
|
|
|
|
1,255
|
|
|
|
9.5
|
|
Universities & national laboratories
|
|
|
1,064
|
|
|
|
9.5
|
|
|
|
410
|
|
|
|
3.7
|
|
|
|
436
|
|
|
|
3.3
|
|
Total
|
|
$
|
11,236
|
|
|
|
100.0
|
|
|
$
|
11,404
|
|
|
|
100.0
|
|
|
$
|
13,177
|
|
|
|
100.0
|
|
Defense and Aerospace
This market consists
of sales to OEM defense electro-optical systems and subsystems manufacturers, manufacturers of non-military satellite-based electro-optical
systems and subsystems, and direct sales to governments where the products have the same end-use.
End-use applications
for the Company’s products in the defense and aerospace 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.
Defense/Aerospace
sector sales represented approximately 40.2%, 44.6% and 51.1% of sales in 2013, 2012 and 2011. Despite the decrease in sales over the past three years, the Company believes that the defense and aerospace 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 customers who are manufacturers of capital equipment used in manufacturing process implementation and control, optics-based
metrology, quality assurance and inventory and product control equipment. Examples of applications for such equipment include semiconductor
fabrication and testing and inventory management and distribution control.
Sales in the Process
Control and Metrology market decreased in 2013 and 2012, as a percentage of total sales and actual sales, compared to 2011. The
total amount of sales in 2013 was comparable to sales in 2010. The decrease correlates with the decline in business activity experienced
by the semiconductor market, as a whole. The Company believes that the optical and x-ray inspection segment of the semiconductor
industry offers continued opportunities which match its capabilities in precision optics, crystal products, and monochromators.
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, as well as, representing related markets that are not
currently large enough to list individually. While sales to our OEM customers remained fairly constant, sales to customers in other
smaller markets increased in 2013.
Universities and National Laboratories
These sales consist
of product sales directly to researchers at various educational and research institutions and through distributors into that market.
Sales to customers within the University and National Laboratories market sector consist primarily of the Company’s legacy
systems, Pockels cells and related repairs. Sales in 2013 increased by approximately 160% over 2012, primarily the result of increased demand from one large customer. Sales for 2012 compared to
2011 were relatively unchanged and the total dollar amount from sales to this market remained relatively stable over the past two
years and is dependent on research projects and the availability of funding for such projects.
Major Customers
Historically, the
Company’s sales have been concentrated within a small number of customers, although the top customers have varied from year
to year. In 2013, the Company had sales to three major customers which accounted for 9.4%, 8.2% and 7.3% of sales, respectively.
One customer is a domestic manufacturer of medical laser systems. The two other major customers in 2013 are electro-optical systems
divisions of major U.S. defense industry corporations who manufacture systems for the U.S. and foreign governments. In 2012, the
top three customers represented 11.2%, 10.7% and 8.6% of sales, respectively. In 2011, the top three customers represented 20.9%,
15.4% and 10.8% of sales, respectively.
Sales to the Company’s
top five customers represented approximately 37.7%, 43.1% and 58.1% of sales, in 2013, 2012 and 2011, respectively. These customers
are all OEM manufacturers either within the defense, process control and metrology or laser systems sector. The concentration
of sales within a small number of customers presents the risk that the loss of any of these customers could have a significant
negative impact on the Company.
Export Sales
The Company’s
export sales are primarily to customers in Europe, Israel, Asia and Japan and amounted to approximately 14.5%, 14.3%, and 22.8%
of product sales in 2013, 2012 and 2011, respectively.
Long-Term Contracts
Certain of the Company’s
agreements with customers provide for periodic deliveries at fixed prices over a long period of time. In such cases, the Company
negotiates to obtain firm price commitments, as well as, cash advances from its suppliers 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 teams.
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 countries in major non-U.S. markets, including Canada, the United Kingdom, the European Union, Israel, and
Japan.
Sales and marketing
efforts to promote our product lines and our participation in trade shows, internet-based marketing, media and non-media advertising
and promotion, and management of international sales representatives and distributor relationships are coordinated at the corporate
level under the auspices of the Vice President, Sales and Marketing.
In 2011, the Company
undertook a significant marketing effort in the form of a corporate name change and a new branding strategy around the “Inrad
Optics” name which was supported by the development of a new website and other brand identity marketing efforts.
Backlog
The Company’s order backlog at December
31, 2013 was $4,357,000. The Company’s order backlog as of December 31, 2012 and 2011 was $5,898,000 and $5,021,000, respectively.
We anticipate shipping a majority of the
present backlog during fiscal year 2014. However, our backlog at any given date is not necessarily indicative of actual sales for
any future period.
Competition
Within each product
category in which the Company’s business units are active, there is competition.
Changes in the photonics
industry have had an effect on suppliers of custom optics. As end users have introduced products requiring large volumes of optical
components, suppliers have responded either by staying small and carving out niche product areas, or by ramping up manufacturing
capacity and modernizing their manufacturing methods to meet higher volume production rates. Additionally the availability of
an increasingly large variety of inventoried inexpensive catalog optics has led some OEM manufacturers to “design in”
these low-cost solutions rather than utilizing custom designed and manufactured products.
Competition for the
Company’s crystal devices and instrumentation is more limited and the Company’s laser devices are considered to be
high quality and generally offer a combination of features not available elsewhere. As a result of the Company’s in-house
crystal growth capability, this area of the business is highly vertically integrated, providing a competitive advantage over other
suppliers.
For crystal products,
the market is highly competitive. Many of the Company’s competitors who supply non-linear optical crystals are located overseas,
and can offer significantly reduced pricing for some crystal materials. On many occasions, the quality of the crystal component
drives the ultimate performance of the component or instrument into which it is installed. Quality and technical support are considered
to be valuable attributes for a crystal supplier by some, but not all, OEM customers.
Our metal optics
product line has several key competitors who are larger and better equipped to compete on high volume work. There are also several
large and small competitors who compete with our products on large form factor optics. The Company has made recent inroads within
this competitive landscape, and is building brand awareness in the marketplace.
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.
Employees
As of the close of business on March 28, 2014, the Company had 71 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 patents, 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. 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 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 and
Florida.
Availability of Reports
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 are available free of charge on our web site
at
www.inradoptics.com
as soon as reasonably practicable after such reports are electronically filed with, or furnished
to, the Securities and Exchange Commission (“SEC”) (
www.sec.gov
). We will also provide electronic or paper
copies of such reports free of charge, upon request made to our Corporate Secretary.
The Company cautions
investors that its performance (and, therefore, any forward looking statement) is subject to risks and uncertainties. Various
important factors, including but not limited to the following, may cause the Company’s future results to differ materially
from those projected in any forward looking statement.
|
a)
|
The Company has incurred a net loss for four of the past five years
|
The Company has historically
incurred substantial net losses. We had a net loss of $1.6 million, and $1.4 million for the fiscal years ended December 31, 2013
and 2012, respectively. We expect our losses to continue in the near term. These losses have had an
adverse effect on our working capital, total assets and stockholders’ equity. We are uable to predict when we will become
profitable and the inability to achieve and sustain profitability would 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 $3.2 million, as well as, to fund our
current level of operations. Additional financing, which is not in place at this time, may be from the sale of equity or
convertible or other debt securities in a public or private offering, or from an additional credit facility. We may be unable
to raise sufficient additional capital on favorable terms, if at all, to supply the working capital needs of our existing
operations or to expand our business.
|
c)
|
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 such as the Budget Control Act
of 2011 which significantly reduced appropriations below forecasted levels for most federal agencies, including the Department
of Defense. In addition, the 2015 Presidential Budget includes reductions in spending for the defense department.
It is
difficult to assess how this will 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.
|
d)
|
The Company’s revenues
are concentrated in its largest customer accounts
|
For the year ended
December 31, 2013, five customer accounts represented approximately 38% of total revenues although none of these customers accounted
for more than 10% of revenues in 2013. Since 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, the relative size and identity of our largest customers
change somewhat 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, and financial
condition.
|
e)
|
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.
|
f)
|
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 and adversely affect the market price of the Company’s common stock.
In addition, any information concerning the Company, including projections of future operating results, appearing in investment
advisory publications or on-line bulletin boards or otherwise emanating from a source other than the Company could in the future
contribute to volatility in the market price of the Company’s common stock.
|
g)
|
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 the services of the Company’s key personnel could have a material adverse
effect on its business, results of operations, or financial condition.
|
h)
|
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 are subject to cyclical fluctuations, and this could have a material
adverse effect on our business, results of operations, or financial condition.
|
i)
|
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. Examples include optical grade quartz, specialty
optical glasses, scarce natural and manmade crystals, beryllium and its alloys, and high purity chemical compounds. 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 to 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.
|
j)
|
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.
|
k)
|
The Company may not be
able to fully protect its intellectual property
|
The Company currently
holds one material patent 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 secret and employee non-competition 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.
|
Item 1B.
|
Unresolved
Staff Comments
|
None
Administrative, engineering
and manufacturing operations are housed in a 42,000 square foot building located in Northvale, New Jersey and in a 25,000 square
foot building located in Sarasota, Florida. The headquarters of the Company are in its Northvale facility. The lease for the Northvale
facility expired on October 31, 2013 and the Company is currently in negotiations for a new lease for this facility on more favorable
terms. The Company continues to occupy the facility under the terms of the expired lease paying a reduced amount of monthly rent
that includes all real estate taxes, maintenance and operating costs.
The Company’s
wholly-owned subsidiary, MRC Precision Metal Optics Inc., (DBA Inrad Optics) has its manufacturing operations in a leased facility
located in the Sarasota, Florida pursuant to a net lease that expired on August 31, 2013. The Company announced plans in 2013 to
relocate this operation into the Northvale, New Jersey facility and continues to occupy the facility under the terms of the expired
lease, on a month to month basis, at the same amount of rent which includes real estate taxes, maintenance and operating costs.
The Company expects to vacate the facility by March 31, 2014 when the operations in Sarasota have been fully consolidated within
the Northvale facility.
We believe that our
existing facilities are adequate to meet current and future projected production needs.
|
Item 3.
|
Legal
Proceedings
|
We are not party to
any legal proceedings as of the date hereof.
|
Item 4.
|
Mine
Safety Disclosures
|
Not Applicable
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
THREE YEARS
ENDED DECEMBER 31, 2013
|
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”), formerly known as Photonic Products Group, Inc., 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 manufacturing operations in Northvale, New Jersey and Sarasota, Florida. The Company announced
plans to relocate the Sarasota operation to Northvale, New Jersey and expects to vacate the facility by March 31, 2014 when the
operations have been fully consolidated within the Northvale facility.
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.
|
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.
The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from these estimates.
|
d.
|
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. Investments with original maturity dates exceeding three months are separately disclosed on the Consolidated
Balance Sheets and as cash flows from investing activities on the Consolidated Statements of Cash Flows.
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.
Inventories are stated
at the lower of cost (first-in, first-out method) or market. 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.
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.
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 or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes
the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more
likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement
with the relevant tax authority.
The Company classifies
interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
The Company had no
unrecognized tax benefits or liabilities, and no adjustment to its financial position, results of operations, or cash flows relating
to uncertain tax positions taken on all open tax years. The Company is no longer subject to federal, state or local income tax
examinations by tax authorities for the years before 2010.
|
i.
|
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.
|
j.
|
Goodwill
and intangible assets with indefinite lives
|
Goodwill represents
the excess of purchase price and related costs over the fair value assigned to the net tangible and identifiable assets of business
acquisitions. Goodwill and intangible assets with indefinite lives are not amortized. The Company tests for impairment of goodwill
and intangible assets with indefinite lives on an annual basis in December of each year, or more frequently whenever events occur
or circumstances exist that indicates that impairment may exist.
|
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.
The Company records
revenue from the sale of products and services used in the photonics industry when all four of the following criteria are met:
|
·
|
persuasive
evidence of an arrangement exists;
|
|
·
|
delivery
has occurred or services have been rendered;
|
|
·
|
the
sales price is fixed or determinable; and
|
|
·
|
collectability
is reasonably assured.
|
Losses on contracts
in progress are recorded when identified.
|
m.
|
Internal
research and development costs
|
Internal research
and development costs are charged to expense as incurred.
Precious metals consist
of various fixtures used in the high temperature crystal growth manufacturing process. They are valued at the lower of cost or
net realizable value.
Advertising costs
included in selling, general and administrative expenses were $8,900, $8,500 and $16,000 for the years ended December 31, 2013,
2012 and 2011, respectively. Advertising costs are charged to expense when the related services are incurred or related events
take place.
|
p.
|
Concentrations
and credit risk
|
The Company may invest
its excess cash in certificates of deposits with major financial institutions. Generally, the investments range over a variety
of maturity dates usually, within three to nine months, and therefore, are subject to little risk. The Company has not experienced
losses related to these investments.
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, 2013, the Company’s top five customer accounts in the aggregate represented approximately 37.7% of total revenues,
and the top three customers accounted for 24.9% of revenues. These three customers each represented approximately 9.4%, 8.2% and
7.3% of sales, respectively. Since the Company is a supplier of custom manufactured components to OEM customers, the relative
size and identity of the largest customer accounts changes somewhat from year to year. In the short term, the loss of any one
of these large customer accounts could have a material adverse effect on business, results of operations, and financial condition.
|
q.
|
Fair value measurements
|
The Company follows
U.S. GAAP accounting guidance which establishes a framework for measuring fair value and expanded related disclosures. The framework
requires fair value to be determined based on the exchange price that would be received for an asset, or paid to transfer a liability
(an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants.
The valuation techniques
required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect the Company’s market assumptions. The accounting guidance requires the following fair
value hierarchy:
|
·
|
Level
1 - Quoted prices (unadjusted) for identical assets and liabilities in active markets
that the Company has the ability to access at the measurement date.
|
|
·
|
Level
2 - Quoted prices for similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that are not active; and inputs
other than quoted prices that are observable for the asset or liability, including interest
rates, yield curves and credit risks, or inputs that are derived principally from or
corroborated by observable market data through correlation.
|
|
·
|
Level
3 - Values determined by models, significant inputs to which are unobservable and are
primarily based on internally derived assumptions regarding the timing and amount of
expected cash flows.
|
Long-lived
assets, including goodwill and other intangible 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. Managements’ determination of fair value, although highly subjective, is
based on the best information available, including internal projections of future earnings and cash flows discounted at an appropriate
interest rate, quoted market prices when available, market prices for similar assets, broker quotes and independent appraisals,
as appropriate.
|
r.
|
New Accounting
Guidance
|
In July 2013,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11,
“Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists.” ASU 2013-11 clarifies the financial statement presentation of unrecognized tax benefits when a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for interim and
annual reporting periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits
that exist at the effective date. Management does not expect the adoption of ASU 2013-11 to have a material impact on the Company’s
financial position, results of operations or cash flows.
No other recently
issued accounting guidance was determined to be significant to the Company.
Inventories are comprised
of the following and are shown net of inventory reserves of approximately $1,666,000 for 2013 and $1,505,000 for 2012:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
1,012
|
|
|
$
|
1,267
|
|
Work in process, including manufactured parts and components
|
|
|
1,155
|
|
|
|
1,291
|
|
Finished goods
|
|
|
963
|
|
|
|
1,039
|
|
|
|
$
|
3,130
|
|
|
$
|
3,597
|
|
Plant and equipment
are comprised of the following:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Office and computer equipment
|
|
$
|
1,292
|
|
|
$
|
1,508
|
|
Machinery and equipment
|
|
|
12,045
|
|
|
|
11,700
|
|
Leasehold improvements
|
|
|
2,302
|
|
|
|
2,239
|
|
|
|
|
15,639
|
|
|
|
15,447
|
|
Less accumulated depreciation and amortization
|
|
|
(13,932
|
)
|
|
|
(14,183
|
)
|
|
|
$
|
1,707
|
|
|
$
|
1,264
|
|
Depreciation expense
recorded by the Company totaled approximately $508,000, $571,000 and $757,000 for 2013, 2012 and 2011, respectively. Plant and
equipment with a net book value of $5,040 and $7,003 was disposed of in 2012 and 2011, respectively.
At December 31, 2012,
the Company had an outstanding commitment to purchase new equipment for $825,000. In 2012, the Company made a down-payment of
$500,000 on the equipment. This amount was included with Other Assets as of December 31, 2012. In March of 2013, an additional
installment payment of $242,500 was made upon delivery of the equipment to the Company’s Northvale location. The balance
of the purchase price of $82,500 was paid in the second quarter of 2013 when the equipment was placed in service. The full amount
of the asset is included in Machinery and Equipment at December 31, 2013.
The Company evaluates
its property and equipment and intangible assets with finite lives for impairment when events or circumstances indicate and impairment
may exist. Based on this evaluation, the Company concluded that, at December 31, 2013, its long-lived assets were not impaired.
The carrying value of goodwill was approximately
$312,000 at December 31, 2013 and 2012.
The Company
tests for impairment of goodwill in December of each year. The testing for goodwill impairment initially involves an
assessment of qualitative factors. This assessment serves as the basis for determining whether it is more likely than not,
which is defined as greater than 50%, that the fair value of the reporting unit is less than its carrying amount, including
goodwill. In assessing the qualitative factors, the Company considers factors such as economic conditions, industry and
market considerations, cost factors, overall financial performance and other relevant events that may affect the
reporting unit. If after assessing the totality of events and circumstances involving the reporting unit it is determined
that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then it is
not necessary to perform the more detailed two-step process. If the assessment determines that it is more likely than not
that the fair value of the reporting unit is less that its carrying amount an additional two-step process is followed for
testing impairment of the goodwill. The first step compares the fair value of each reporting unit to its carrying value. If
the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired as of the
measurement date. Otherwise, if the carrying value exceeds the fair value, a second step must be followed to determine the
level of impairment. In establishing the fair value of the reporting unit, the Company uses both a market based approach
and an income based approach as part of its valuation methodology. Since quoted market prices in an active market are not
separately available for the Company’s reporting units, the market based method estimates the fair value of the
reporting unit utilizing an industry multiple of projected earnings before interest taxes, depreciation and amortization
(“EBITDA”). Due to the small capitalization value of the Company, the low trading volume of its stock and the
niche market served by its products, the application of available industry comparables in establishing fair value requires a
high degree of management judgment, and the actual fair value that could be realized could differ from those used to evaluate
the impairment of goodwill. The income approach determines fair value based on the estimated discounted cash flows that each
reporting unit is expected to generate in the future. For each method, the sensitivity of key assumptions are tested by using
a range of estimates and the results of each method are corroborated as part of management’s determination of fair
value.
The second step of
the testing process, if necessary, involves calculating the fair value of the individual assets and liabilities of the reporting
unit and measuring the implied fair value of the goodwill against its carrying value to determine whether an adjustment to the
carrying value of goodwill is required. This process also has inherent risks and uncertainties and requires significant management
judgment.
Based on the results
of the tests performed, management concluded that there is no impairment of goodwill at December 31, 2013.
Intangible assets
include acquired intangible assets with finite lives, consisting principally of non-contractual customer relationships, completed
technology and trademarks. Intangible assets with finite lives are amortized on a straight-line basis over the assets’ estimated
useful life up to 14 years. The Company evaluates whether events or circumstances have occurred indicating the carrying amount
of intangible assets may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment,
the Company uses an estimate of the associated undiscounted future cash flows compared to the related carrying amount of assets
to determine if an impairment loss should be recognized. An impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value.
Amortization expense
was approximately $79,000 for each of the years ended December 31, 2013 and 2012. Aggregate amortization for the next five years
is expected to be approximately $359,000, accumulating at the rate of $79,000 per year. The weighted average remaining life of
the Company’s intangible assets is approximately 4.5 years.
The following schedule
details the Company’s intangible asset balance by major asset class.
|
|
At December 31, 2013
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
|
Customer-related
|
|
$
|
550
|
|
|
$
|
(373
|
)
|
|
$
|
177
|
|
Completed technology
|
|
|
363
|
|
|
|
(245
|
)
|
|
|
118
|
|
Trademarks
|
|
|
187
|
|
|
|
(123
|
)
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,100
|
|
|
$
|
(741
|
)
|
|
$
|
359
|
|
|
|
At December 31, 2012
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
|
Customer-related
|
|
$
|
550
|
|
|
$
|
(333
|
)
|
|
$
|
217
|
|
Completed technology
|
|
|
363
|
|
|
|
(219
|
)
|
|
|
144
|
|
Trademarks
|
|
|
187
|
|
|
|
(111
|
)
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,100
|
|
|
$
|
(663
|
)
|
|
$
|
437
|
|
|
6.
|
Related
Party Transactions
|
In July 2012, 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 extended to April 1, 2015 from April 1, 2013. The remaining
terms and conditions of the notes were unchanged. The notes were previously issued on April 1, 2009 and had a maturity date of
April 1, 2011 which was extended to April 1, 2013. The notes bear simple interest at 6% per annum. Interest accrues yearly, is
payable on maturity and unpaid interest along with principal may be converted into securities of the Company as follows:
The notes are convertible in the aggregate into 1,500,000 Units and 1,000,000 Units, respectively, with each unit consisting of
one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of
$1.35 per share and have an expiration date of April 1, 2016. Clarex is a significant shareholder of the Company.
The Company paid
$150,000 for the current interest on the notes in 2013, 2012 and 2011, respectively. During 2011, the Company also paid the accrued
interest of $645,000 and $480,000 on the $1,500,000 note and the $1,000,000 note, respectively, that was outstanding as of December
31, 2010. The Company expects to continue to make quarterly interest payments of $37,500 through the maturity dates of the notes.
On July 26, 2012,
the Company entered into a term loan agreement in the amount of $750,000 with Valley National Bank, Wayne, NJ. The loan is payable
in equal month installments over five years beginning in August 2012 and bears an interest rate of 4.35% annually. The loan is
secured with a Note and a security interest in new equipment, which the Company placed in service in 2013. In 2012, the Company
made a down-payment of $500,000 on the equipment which is included in Other Assets in the accompanying consolidated balance sheet.
The balance of the purchase price of $325,000 was paid in 2013 when the equipment was placed in service. The full amount of the
asset is included in Machinery and Equipment at December 31, 2013.
The Company also
has a note payable to the U.S. Small Business Administration which bears interest at the rate of 4.0% and is due in 2032.
Other Long Term Notes
consist of the following:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Term Note Payable, payable in equal monthly installments of $13,953 and bearing an
interest rate of 4.35% and expiring in July 2017
|
|
$
|
554
|
|
|
$
|
694
|
|
U.S. Small Business Administration term note payable in monthly installments
of $1,922 and bearing an interest rate of 4.0% and expiring in April 2032.
|
|
$
|
315
|
|
|
$
|
325
|
|
|
|
|
869
|
|
|
|
1,019
|
|
Less current portion
|
|
|
(156
|
)
|
|
|
(150
|
)
|
Other Long Term Notes, excluding current portion
|
|
$
|
713
|
|
|
$
|
869
|
|
Other Long Term Notes
mature as follows:
Year ending December 31:
|
|
(In thousands)
|
|
2014
|
|
$
|
156
|
|
2015
|
|
|
164
|
|
2016
|
|
|
171
|
|
2017
|
|
|
108
|
|
2018
|
|
|
12
|
|
Thereafter
|
|
|
258
|
|
|
|
$
|
869
|
|
|
8.
|
Accounts Payable and Accrued Liabilities
|
Accounts payable
and accrued expenses are comprised of the following:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Trade accounts payable and accrued purchases
|
|
$
|
339
|
|
|
$
|
457
|
|
Accrued payroll
|
|
|
127
|
|
|
|
131
|
|
Accrued 401K company matching contribution
|
|
|
141
|
|
|
|
162
|
|
Accrued Restructuring costs
|
|
|
297
|
|
|
|
—
|
|
Accrued expenses – other
|
|
|
64
|
|
|
|
64
|
|
|
|
$
|
968
|
|
|
$
|
814
|
|
The Company’s
income tax provision consists of the following:
|
|
Years Ended December 31,
|
|
|
|
(In thousands)
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal provision for AMT
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
State provision
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax provision
|
|
|
—
|
|
|
|
408
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
408
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
408
|
|
|
$
|
11
|
|
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,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
State statutory rate
|
|
|
(7.8
|
)
|
|
|
(8.0
|
)
|
|
|
8.0
|
|
Change in Valuation Allowance
|
|
|
34.2
|
|
|
|
59.5
|
|
|
|
(41.5
|
)
|
Permanent Differences
|
|
|
(0.5
|
)
|
|
|
8.6
|
|
|
|
6.7
|
|
Prior year adjustments
|
|
|
12.5
|
|
|
|
13.4
|
|
|
|
—
|
|
Other
|
|
|
(4.4
|
)
|
|
|
0.8
|
|
|
|
(0.9
|
)
|
Effective income tax rate
|
|
|
—
|
%
|
|
|
40.3
|
%
|
|
|
6.3
|
%
|
At December 31, 2013,
the Company had estimated Federal and State net operating loss carry forwards of approximately $7,124,000 and $2,463,000, respectively.
These tax loss carry forwards expire at various dates through 2032.
Internal Revenue
Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carry forwards when an
ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in
ownership occurs. Accordingly, the actual utilization of the net operating loss and carryforwards for tax purposes may be limited
annually to a percentage (based on the risk free interest rate) of the fair market value of the Company at the time of any such
ownership change. The Company has not prepared an analysis of ownership changes but does not believe that a greater than 50% change
of ownership has occurred and such limitations would not apply to the Company.
Deferred tax assets
(liabilities) are comprised of the following:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Account receivable reserves
|
|
$
|
7
|
|
|
$
|
7
|
|
Inventory reserves
|
|
|
700
|
|
|
|
633
|
|
Inventory capitalization
|
|
|
131
|
|
|
|
137
|
|
Depreciation
|
|
|
192
|
|
|
|
45
|
|
Loss carry forwards
|
|
|
2,590
|
|
|
|
2,233
|
|
Gross deferred tax assets
|
|
|
3,620
|
|
|
|
3,055
|
|
Valuation allowance
|
|
|
(3,620
|
)
|
|
|
(3,055
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
In evaluating the
Company’s ability to recover deferred tax assets in future periods, management considers the available positive and negative
factors, including the Company’s recent operating results, the existence of cumulative losses and near term forecasts of
future taxable income that is consistent with the plans and estimates management is using to manage the underlying business. A
significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Company over the three-year
period ended December 31, 2012. Such objective evidence limits the ability to consider other subjective evidence such as our projections
for future growth.
On the basis of this
evaluation, as of December 31, 2013 and 2012, the Company concluded it was more likely than not that it would not be able to realize
any portion of the benefit on the deferred tax assets and the valuation allowance was increased by $565,000 and $603,000, respectively,
to provide a full valuation against the deferred tax assets.
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 2010.
The guidance for
accounting for uncertainties in income taxes requires that we recognize the financial statement effects of a tax position when
it is more likely than not, based on the technical merits, that the position will be sustained upon examination. There were no
unrecognized tax benefits that impacted our effective tax rate and accordingly, there was no material effect to our financial
position, results of operations or cash flows.
Our policy is to
recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there
have been no interest or penalties charged to us in relation to the underpayment of income taxes.
We do not anticipate
that our unrecognized tax benefits will significantly increase in the next 12 months.
|
10.
|
Equity
Compensation Program and Stock-based Compensation
|
|
a.
|
2010 Equity Compensation
Program
|
The Company’s
2010 Equity Compensation Program was approved by the shareholders of the Company at the Annual Meeting which was held on June
2, 2010. The Company’s 2010 Equity Compensation 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 Program is comprised of four
parts including: (i) the Incentive Stock Option Plan which provides for grants of “incentive stock options”, (ii)
the Supplemental Stock Option Plan which provides for grants of stock options that shall not be “incentive stock options”,
(iii) the Stock Appreciation Rights Plan which allows the granting of stock appreciation rights and, (iv) the Restricted Stock
Award Plan which provides for the granting of restrictive shares of Common Stock and restricted stock units. The plan is administered
by the Compensation Committee of the Board of Directors. Under this plan, an aggregate of up to 4,000,000 shares of common stock
may be granted.
|
b.
|
2000 Equity Compensation
Program
|
The Company’s
2000 Equity Compensation Program expired on June 2, 2010. All outstanding grants of options, stock appreciation rights and performance
shares issued under the 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 plan is March 28, 2020.
The Company's results
for the years ended December 31, 2013, 2012 and 2011 include stock-based compensation expense for stock option grants totaling
$133,000, $196,000 and $165,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within
cost of goods sold ($71,000 for 2013, $100,000 for 2012 and $68,000 for 2011), and selling, general and administrative expenses
($62,000 for 2013, $96,000 for 2012 and $97,000 for 2011).
As of December 31,
2013, 2012 and 2011, there were $92,000, $199,000 and $382,000 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 .7 years,
2 years and 2.3 years, respectively.
The weighted average
estimated fair value of stock options granted in the three years ended December 31, 2013, 2012 and 2011 was $0.27, $0.43 and $0.86,
respectively. The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award.
The Company assumes a dividend yield of zero, as the Company has not paid dividends in the past and does not expect to in the
foreseeable future. The expected volatility is based upon the historical volatility of our common stock which the Company believes
results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current
expectations of future volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant
with maturity dates approximately equal to the expected life at the grant date. The expected life is based upon the period of
expected benefit based on the Company’s evaluation of historical and expected future employee exercise behavior.
The following range
of weighted-average assumptions were used for to determine the fair value of stock option grants during the years ended December
31, 2013, 2012 and 2011:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Volatility
|
|
|
98 – 114
|
%
|
|
|
91
|
%
|
|
|
94 – 100
|
%
|
Risk-free interest rate
|
|
|
1.9 – 2.7
|
%
|
|
|
1.6
|
%
|
|
|
2.0 - 3.4
|
%
|
Expected life
|
|
|
10 years
|
|
|
|
10 years
|
|
|
|
10 years
|
|
A summary of the Company’s
outstanding stock options as of and for the years ended December 31, 2013, 2012 and 2011 is presented below:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(In Years)
|
|
|
Aggregate
Intrinsic
Value(a)
|
|
Outstanding as of January 1, 2011
|
|
|
798,476
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
409,600
|
|
|
|
.97
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,000
|
)
|
|
|
.95
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(108,400
|
)
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2011
|
|
|
1,079,676
|
|
|
|
1.02
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
30,000
|
|
|
|
.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10,700
|
)
|
|
|
.50
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(137,153
|
)
|
|
|
1.06
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2012
|
|
|
961,823
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
95,000
|
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited /Expired
|
|
|
(77,802
|
)
|
|
|
.67
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2013
(b)
|
|
|
979,021
|
|
|
$
|
.96
|
|
|
|
5.7
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2013
|
|
|
772,113
|
|
|
$
|
.61
|
|
|
|
5.3
|
|
|
|
—
|
|
(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, 2013 exceeds the exercise prices of the respective options. All of the options used in the calculation
of the aggregate intrinsic value for outstanding options are exercisable as of December 31, 2013.
(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, 2013.
The following table
represents non-vested stock options granted, vested, and forfeited for the year ended December 31, 2013.
Non-vested Options
|
|
Options
|
|
|
Weighted-Average Grant-Date
Fair Value - $
|
|
Non-vested - January 1, 2013
|
|
|
298,678
|
|
|
|
.82
|
|
Granted
|
|
|
95,000
|
|
|
|
.27
|
|
Vested
|
|
|
(158,279
|
)
|
|
|
.84
|
|
Forfeited
|
|
|
(28,502
|
)
|
|
|
.86
|
|
Non-vested – December 31, 2013
|
|
|
206,897
|
|
|
|
.55
|
|
The total weighted
average grant date fair value of options vested during the years ended December 31, 2013, 2012 and 2011, was $132,000, $230,000
and $175,000, respectively.
The following table
summarizes information about stock options outstanding at December 31, 2013:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
$0.23 - $0.35
|
|
|
95,000
|
|
|
|
2.8
|
|
|
$
|
.30
|
|
|
|
5,000
|
|
|
$
|
.35
|
|
$0.50 - $1.03
|
|
|
738,398
|
|
|
|
5.6
|
|
|
$
|
.92
|
|
|
|
621,490
|
|
|
$
|
.92
|
|
$1.20 - $1.75
|
|
|
145,623
|
|
|
|
6.5
|
|
|
$
|
1.61
|
|
|
|
145,623
|
|
|
$
|
1.61
|
|
|
e.
|
Restricted Stock
Unit Awards
|
The Company did not
grant any restricted stock unit awards in 2013 and 2012, respectively.
During 2011, the
Company granted 15,000 restricted stock units under the 2010 Performance Share Program with an estimated fair value of $14,550
based on the closing market price of the Company’s stock on the grant date. These grants vest over a three year period contingent
on continued employment over the vesting period.
The Company recognized
related stock compensation expense of $5,000 in Selling, General and Administrative expenses in 2013 and 2012, respectively, and
$7,000 in Selling, General and Administrative expenses in 2011, related to these and previously issued grants.
A summary of the Company’s non-vested
restricted stock unit awards shares is as follows:
|
|
# of Units
|
|
|
Weighted Average
Grant Date
Fair Value
$
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2011
|
|
|
6,998
|
|
|
|
3.59
|
|
Granted
|
|
|
15,000
|
|
|
|
.97
|
|
Vested
|
|
|
(6,998
|
)
|
|
|
3.59
|
|
Forfeited/Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of December 31, 2011
|
|
|
15,000
|
|
|
|
.97
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(5,000
|
)
|
|
|
.97
|
|
Forfeited/Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of December 31, 2012
|
|
|
10,000
|
|
|
|
.97
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(5,000
|
)
|
|
|
.97
|
|
Forfeited/Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of December 31, 2013
|
|
|
5,000
|
|
|
|
.97
|
|
The total fair value
of restricted stock units which vested during 2013, 2012 and 2011 was approximately $5,000, $5,000 and $7,000, respectively, as
of the vesting date.
|
11.
|
Net
Income (Loss) 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, 2013, all common stock equivalents were excluded from the computation of diluted net loss per share because their
effect is anti-dilutive. This included 984,021 common stock equivalents related to outstanding options and grants. In addition,
there were 2,500,000 common shares and 1,875,000 warrants issuable upon conversion of outstanding related party convertible notes
which were anti-dilutive.
For
the year ended December 31, 2012, all common equivalent shares outstanding have been excluded from the diluted computation because
their effect is anti-dilutive.
This included 971,823 common stock
equivalents related to outstanding options and grants, in addition to 2,500,000 common shares and 1,875,000 warrants issuable
upon conversion of outstanding related party convertible notes which were anti-dilutive.
For the year ended
December 31, 2011, a total of 94,778 common share equivalents were assumed to be outstanding at the end of the year. A total of
2,500,000 anti-dilutive common shares issuable upon conversion of outstanding convertible notes and 1,875,000 warrants issuable
upon conversion of outstanding related party convertible notes have been excluded from the diluted computation because their effect
is anti-dilutive.
A reconciliation
of the shares used in the calculation of basic and diluted earnings per common share is as follows:
|
|
Years ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Numerators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders - basic
|
|
$
|
(1,649,961
|
)
|
|
$
|
(1,420,833
|
)
|
|
$
|
164,746
|
)
|
Interest on Convertible Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) applicable to
common shareholders - diluted
|
|
$
|
(1,649,961
|
)
|
|
$
|
(1,420,833
|
)
|
|
$
|
164,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
11,975,195
|
|
|
|
11,825,583
|
|
|
|
11,658,891
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
83,843
|
|
Restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
10,935
|
|
Weighted average shares outstanding – diluted
|
|
|
11,975,195
|
|
|
|
11,825,583
|
|
|
|
11,753,669
|
|
The Company occupies
approximately 42,000 square feet of space located at 181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease. The lease
for the Northvale facility expired on October 31, 2013 and the Company is currently in negotiations for a new lease for this facility
on more favorable terms. The Company continues to occupy the facility under the terms of the expired
lease but on a month to month basis paying a reduced amount of rent that includes all real estate taxes, maintenance and operating
costs.
The Company’s
wholly-owned subsidiary, MRC Precision Metal Optics Inc., (DBA Inrad Optics) has its manufacturing operations in a leased facility
located in the Sarasota, Florida pursuant to a net lease that expired on August 31, 2013. The Company announced plans in 2013
to relocate this operation into the Northvale, New Jersey facility and continues to occupy the facility under the terms of the
expired lease, on a month to month basis, at the same amount of rent which includes real estate taxes, maintenance and operating
costs. The Company expects to vacate the facility by March 31, 2014 when the operations in Sarasota have been fully consolidated
within the Northvale facility.
The total rent for
these leases was approximately $491,000, $485,000 and $519,000 in 2013, 2012 and 2011, respectively. The Company also paid real
estate taxes and insurance premiums that totaled approximately $168,000 in 2013, $160,000 in 2012 and $162,000 in 20111, respectively.
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 2013, the Company’s
401(k) matching contribution for employees was $142,505. This was funded by way of a cash contribution of $71,252 in March 2014
and a contribution of 298,490 shares of the Company’s common stock, which were issued to the Plan in April 2014. In 2012,
the Company’s 401(k) matching contribution for employees was $161,845. This was funded by way of a cash contribution of $80,922
and a contribution of 163,879 shares of the Company’s common stock. The cash contribution was issued to the Plan in March
2013 and the Company’s common shares were issued to the Plan in April 2013. In 2011, the Company matched employee contributions
of $151,775 in the form of 152,460 shares of the Company’s common stock, which were issued to the Plan in March 2012. 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 following table
summarizes the Company’s net sales by product categories during the past three years:
|
|
Years Ended December
31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Category (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Optical Components
|
|
$
|
8,628
|
|
|
|
76.8
|
|
|
$
|
8,758
|
|
|
|
76.7
|
|
|
$
|
11,812
|
|
|
|
89.6
|
|
Laser Systems Devices and Instrumentation
|
|
|
2,608
|
|
|
|
23.2
|
|
|
|
2,646
|
|
|
|
23.3
|
|
|
|
1,365
|
|
|
|
10.4
|
|
Total
|
|
$
|
11,236
|
|
|
|
100.0
|
|
|
$
|
11,404
|
|
|
|
100.0
|
|
|
$
|
13,177
|
|
|
|
100.0
|
|
The Company’s
export sales, which are primarily to customers in countries within Europe, Asia and Japan, amounted to approximately 14.5%, 14.3%
and 22.8% of product sales in 2013, 2012 and 2011, respectively
The Company had sales
to three major customers which accounted for 9.4%, 8.2% and 7.3% of sales in 2013. One customer is a domestic manufacturer of
medical laser systems. Both of the other major customers are electro-optical systems divisions of major U.S. defense industry
corporations who manufacture systems for U.S. and foreign governments. In 2012, the same three customers represented 8.6%, 10.7%
and 4.9% of sales, respectively. In 2011, the same three customers represented 15.4%, 4.0% and 1.6% of sales, respectively.
During the past three
years, sales to the Company’s top five customers represented approximately 37.7%, 43.1% and 58.1% of sales, respectively.
Given the concentration of sales within a small number of customers, the loss of any of these customers would have a significant
negative impact on the Company and its business units.
|
a.
|
Common
shares reserved at December 31, 2013, are as follows:
|
2010 Equity compensation plan
|
|
|
4,000,000
|
|
2000 Equity compensation plan
|
|
|
474,923
|
|
Subordinated convertible notes
|
|
|
2,500,000
|
|
Warrants issuable on conversion of Subordinated convertible notes
|
|
|
1,875,000
|
|
|
|
|
8,849,923
|
|
The Company had no
outstanding warrants as of December 31, 2013 and 2012.
|
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, certificates of deposits, current receivables and payables and certain other
short-term financial instruments approximate their fair value as of December 31, 2013 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 carrying amount of debt at December 31, 2013 in the amount of $3,369,000 approximates
fair value.
In November 2013,
the Company announced plans to move the operations of its Sarasota, FL metal optics facility to its Northvale, NJ optical production
center and corporate headquarters. The consolidation is part of a larger strategic effort to improve the Company's value proposition
to its customers as well as improve its financial results. The physical integration of all development and production in one location
is intended to enhance operating efficiencies and reduce overhead costs. The move will centralize the Company's optical problem
solving skills, allowing for beneficial cross-pollination of expertise, including leveraging the Florida metal optics facility's
single point diamond turning capability over a broader range of optical materials.
The decision also
reflects the continued uncertainty in US defense funding. Much of the Company's metal optics business serves US government installations
and defense prime contractors. The Company has seen a falloff in bookings from these two customer groups in 2013.
The Company expects
to incur one-time cash charges of approximately $750,000 to $900,000, primarily associated with employee termination and relocation,
moving of equipment, preparation of the Northvale facility and other general costs associated with consolidation. Overall annual
reductions in operational costs are expected to be in the range of $800,000 to $1,000,000 per year starting in the second quarter
of 2014. The Company expects operations in Sarasota will be fully transferred by approximately March 31, 2014 and all restructuring
payments are expected to be made by the end of 2014.
The following table
summarizes restructuring information by type of cost:
(In Thousands)
|
|
Termination
and
Relocation
|
|
|
Northvale
Facility
Expenditures
|
|
|
Moving and
Other
Costs
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs expected to be incurred
|
|
$
|
227
|
|
|
$
|
342
|
|
|
$
|
181
|
|
|
$
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued balance December 31, 2012
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Provisions
|
|
|
227
|
|
|
|
—
|
|
|
|
86
|
|
|
|
313
|
|
Cash expenditures
|
|
|
—
|
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Accrued balance December 31, 2013
|
|
$
|
227
|
|
|
$
|
—
|
|
|
$
|
70
|
|
|
$
|
297
|
|
Accrued restructuring
costs of $297,000 are included in Accounts Payable and Accrued Liabilities in the Company’s Consolidated Balance Sheets at
December 31, 2013.
In the first quarter
of 2013, the Company instituted a plan to reduce its combined headcount by approximately 11%, in order to reduce costs and align
its workforce with current business requirements while ensuring the Company would continue to meet its customers’ needs.
The reductions affected both the Company’s Northvale, NJ and the Sarasota, FL operations. Annualized savings from the reductions
are expected to be approximately $700,000. Severance and other separation costs of $141,000 were expensed in the first and second
quarters of 2013 and offset payroll savings of approximately $220,000. Accrued severance payments of $141,000 were made in 2013.
|
18.
|
Quarterly
Data
(Unaudited)
|
Summary quarterly
results were as follows:
Year 2013
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,077,126
|
|
|
$
|
2,694,598
|
|
|
$
|
2,756,488
|
|
|
$
|
2,707,442
|
|
Gross profit
|
|
|
699,098
|
|
|
|
307,732
|
|
|
|
549,959
|
|
|
|
118,572
|
|
Net loss
|
|
|
(169,354
|
)
|
|
|
(647,764
|
)
|
|
|
(238,793
|
)
|
|
|
(549,050
|
)
|
Net loss per share - Basic
|
|
|
(0.01
|
)
|
|
|
(0.06
|
)
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
Net loss per share – Diluted
|
|
|
(0.01
|
)
|
|
|
(0.06
|
)
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
Year 2012
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,840,681
|
|
|
$
|
2,880,448
|
|
|
$
|
2,903,740
|
|
|
$
|
2,778,958
|
|
Gross profit
|
|
|
739,956
|
|
|
|
567,834
|
|
|
|
616,247
|
|
|
|
566,612
|
|
Net income (loss)
|
|
|
(148,959
|
)
|
|
|
(333,083
|
)
|
|
|
(279,589
|
)
|
|
|
(659,202
|
)
|
Net income (loss) per share - Basic
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
(0.02
|
)
|
|
|
(0.06
|
)
|
Net income (loss) per share - Diluted
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
(0.02
|
)
|
|
|
(0.06
|
)
|
Year 2011
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,241,434
|
|
|
$
|
3,221,234
|
|
|
$
|
3,328,761
|
|
|
$
|
3,385,765
|
|
Gross profit
|
|
|
872,537
|
|
|
|
784,060
|
|
|
|
907,905
|
|
|
|
997,817
|
|
Net income (loss)
|
|
|
34,729
|
|
|
|
(95,750
|
)
|
|
|
83,731
|
|
|
|
142,036
|
|
Net income (loss) per share - Basic
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
|
|
0.01
|
|
Net income (loss) per share - Diluted
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
|
|
0.01
|
|