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 has submitted electronically and posted on its corporate Web site, if any, 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).
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. $7,964,343. (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 2018 Annual Meeting of Shareholders, to be filed with the Commission not later than 120 days
after the close of the registrant’s fiscal year, have been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.
PART 1
Caution Regarding Forward Looking Statements
This Annual Report
contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to 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”, or “we”), 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 complementary 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, as well as in-process metrology.
Inrad Optics’
customers include leading corporations in the defense, aerospace, laser systems, process control and metrology sectors of the photonics
industry, as well as the U.S. Government, National Laboratories and universities worldwide.
Administrative, engineering
and manufacturing operations are in a 42,000 square foot building located in Northvale, New Jersey.
The products produced
by Inrad Optics, Inc. fall into two main categories: Optical Components and Laser Devices/Instrumentation.
The Optical Components
category is heavily focused on custom optics manufacturing. The Company specializes in high-end precision components. It develops,
manufactures and delivers precision custom optics and thin film optical coating services through its Custom and Metal Optics operations.
Glass, metal, and crystal substrates are processed using 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/Instrumentation
category includes the growth and fabrication of crystalline materials with electro-optic (EO) and non-linear optical properties
for use in both standard and custom products. This category also includes crystal based devices and associated instrumentation.
The majority of crystals, crystal components and laser devices are used in laser systems, defense and security EO systems, medical
lasers and research and development applications by engineers within corporations, universities and national laboratories.
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,
|
|
|
|
2017
|
|
|
2016
|
|
Category (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical Components
|
|
$
|
8,363
|
|
|
|
84.8
|
|
|
$
|
8,055
|
|
|
|
82.5
|
|
Laser Devices /Instrumentation
|
|
|
1,496
|
|
|
|
15.2
|
|
|
|
1,712
|
|
|
|
17.5
|
|
Total
|
|
$
|
9,859
|
|
|
|
100
|
|
|
$
|
9,767
|
|
|
|
100
|
|
Products Manufactured by the Company
Optical Components
|
a)
|
Custom Optics and Optical Coating Services
|
Manufacturing of high-performance
custom optics is a major product area for Inrad Optics and is addressed in the marketplace by the Company’s Custom and Metal
Optics product lines.
The Custom Optics
product line focuses on products manufactured to specific customer requirements. It specializes in the manufacture of optical components,
optical coatings (ultra-violet wavelengths through infra-red wavelengths) and subassemblies for the 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, x-ray 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
and 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 diamond machining,
polishing, and plating of aluminum, AlBeMet™, beryllium and stainless steel. The Metal Optics product line offers opto-mechanical
design and assembly services as part of its manufactured deliverables and can support prototyping through production of 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/Instrumentation
This product line
consists of crystal-based products that are used in, or alongside, laser systems. Developing growth processes for high quality
synthetic crystals is a core competency of the Crystals and Devices manufacturing team. These crystals are embedded in our value
added devices and instrumentation products manufactured in our Northvale facility and include crystals for wavelength conversion,
modulation and polarization, Pockels’ cells, and wavelength conversion instruments. In addition to the filter materials used
in the UV Filter Optical components described above, current materials produced include beta barium borate (BBO), lithium niobate,
zinc germanium diphosphide, potassium dihydrogen phosphate, potassium dideuterium phosphate and stilbene. 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. 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 in commercial laser systems and in detection of fast neutrons.
|
b)
|
Pockels’ Cells and Drivers
|
A line of Pockels’
cells and associated electronics is manufactured for sale in multiple market sectors. Pockels’ cells are devices that include
one or more crystal components and are used in applications that require fast switching of the polarization direction of a beam
of light. These uses include Q-switching of laser cavities to generate pulsed laser light, coupling light into and out from regenerative
amplifiers, and light intensity modulation. These devices are sold to medical and industrial laser original equipment manufacturers,
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, 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 original equipment manufacturers (OEM) in the medical and industrial laser market, and OEM customers in the 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 continue to account for potential future growth and demand for our products and capabilities.
In 2017 and 2016 the
Company’s product sales were made to customers in the following market areas:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Market (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Defense/Aerospace
|
|
$
|
3,235
|
|
|
|
32.8
|
|
|
$
|
3,639
|
|
|
|
37.2
|
|
Process control & metrology
|
|
|
4,254
|
|
|
|
43.1
|
|
|
|
3,436
|
|
|
|
35.2
|
|
Laser systems
|
|
|
1,139
|
|
|
|
11.6
|
|
|
|
1,573
|
|
|
|
16.1
|
|
Universities & national laboratories
|
|
|
1,231
|
|
|
|
12.5
|
|
|
|
1,119
|
|
|
|
11.5
|
|
Total
|
|
$
|
9,859
|
|
|
|
100
|
|
|
$
|
9,767
|
|
|
|
100
|
|
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 sales represented approximately 32.8% and
37.2% of sales in 2017 and 2016, respectively. Sales decreased by approximately $404,000 or 11.1% from 2016. The decrease in 2017
is primarily due to reduced bookings and shipments from a number of defense customers partially offset by an increase in shipments
to two other major defense customers compared to the previous year.
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 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 fabrication
and testing and inventory management and distribution systems control.
Sales in the Process
Control and Metrology (PC&M) market increased by $818,000 or 23.8% in 2017 compared to 2016 and represented 43.1% of sales
compared to 35.2% in the prior year. The increase in 2017 sales is mainly attributable to increased bookings and shipments to one
large international OEM customer serving the semi-conductor industry offset partially by lower sales to two other major customers
in the same PC&M market.
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.
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 a number of smaller customers in other markets
that the Company does not list separately.
Sales in this market
were 11.6% of sales in 2017 compared to 16.1% in 2016. This represented a decrease of $434,000 or 27.6% from the prior year. Increased
shipments to one laser manufacturer were offset by lower shipments under direct government contracts.
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 consist primarily of the Company’s legacy systems, Pockels’ cells and
related repairs. Sales in 2017 increased by $112,000, or 10% and as a percentage of total sales to 12.5% compared to 11.5% in 2016.
This was primarily attributable to increased business in 2017 from one National Lab that received government funding for a program
which utilized our products and an increase in sales to one university account due to a large order received during the year.
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 2017, the Company’s
sales to its top three customers accounted for 34.6% of sales. This included sales to a major U.S. defense industry corporation
that manufactures electro-optical systems for U.S. and foreign governments. These sales represented 14.8% of total sales during
the year.
Two other customers
included one foreign-based manufacturer and one domestic manufacturer of process control and metrology equipment whose sales represented
14.3% and 5.6% of sales, respectively.
The same three customers
represented 10.5%, 1.6% and 3.5 %, of sales in 2016, respectively.
Sales to the Company’s top five customers represented
approximately 45.1% and 37.8% of sales, in 2017 and 2016, respectively. All these customers are OEM manufacturers either within
the defense, process control and metrology or laser systems sector.
Export Sales
The Company’s
export sales are primarily to customers in Europe, Israel, and Asia and amounted to approximately 32.5%, and 23.1% of product sales
in 2017 and 2016, respectively.
Long-Term Contracts
Certain of the Company’s agreements with customers provide
for periodic deliveries at fixed prices over a long period of time. In such cases, the Company negotiates to obtain firm price
commitments, as well as cash advances from its customers for the purchase of the materials necessary to fulfill the order.
Marketing and Business Development
The Company markets
its products domestically, through the coordinated efforts of the sales, marketing and customer service 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 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 promotion and management of international sales representatives and distributors.
Backlog
The Company’s order backlog at December
31, 2017 was $6,512,000. The Company’s order backlog as of December 31, 2016 was $6,255,000.
We anticipate shipping a substantial majority
of the present backlog during fiscal year 2018. However, our backlog at any given date may consist of orders with delivery schedules
that extend beyond 12 months into the future.
Competition
Within each product
category in which the Company’s business units are active, there is competition.
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, 2018, the Company had 62 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.
Availability of Reports
Our principal executive
offices are located at 181 Legrand Avenue, Northvale, N.J. 07647 which also houses our manufacturing operations. Our telephone
number is 201-767-1910 and our corporate website address is
www.inradoptics.com
. We include our website address in this
annual report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website. The
information on our website is not incorporated by reference in this annual report on Form 10-K.
Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports, as well as other documents we file with the
Securities and Exchange Commission, are available free of charge on our web site at
www.inradoptics.com
as soon as reasonably
practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”)
(
www.sec.gov
). We will also provide electronic or paper copies of such reports free of charge, upon request made to our
Corporate Secretary.
The Company cautions
investors that its performance (and, therefore, any forward looking statement) is subject to risks and uncertainties. The risks
described below are not the only ones we face, but those we currently consider to be material. 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
and results of operation.
|
a)
|
The Company has incurred a net loss for the past two years
|
The Company has historically
incurred substantial net losses. We had a net loss of $0.6 million and $0.6 million for the fiscal years ended December 31, 2017
and 2016, respectively. These losses have had, and will continue to have, an adverse effect on our working capital, total assets
and shareholders’ equity. We are unable to predict, with certainty, when we will become profitable and our inability to
achieve and sustain profitability will 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 $2.8 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 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.
|
d)
|
The Company’s revenues are concentrated in its largest customer accounts
|
For the year ended
December 31, 2017, five customer accounts represented approximately 45.4% of total revenues and two of these 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 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 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. 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.
|
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 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.
|
Item 1B.
|
Unresolved Staff Comments
|
None
Administrative, engineering
and manufacturing operations are housed in a 41,935 square foot building located in Northvale, New Jersey. The lease for the Northvale
facility was renewed for a term of two years from June 1, 2015 to May 31, 2017 along with an option to renew the lease for two
additional one year terms running through May 31, 2019, at substantially the same terms. The Company has exercised its option to
renew the Northvale lease for an additional one year term running through May 31, 2018. The Company intends to exercise the option
to renew the lease for an additional one-year term through May 31, 2019, prior to the end of the current lease term.
We believe that our
existing facility is adequate to meet current and future projected production needs.
|
Item 3.
|
Legal Proceedings
|
We are not party to
any legal proceedings as of the date hereof.
|
Item 4.
|
Mine Safety Disclosures
|
Not Applicable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 2017
|
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 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.
As of December 31,
2017, the Company had working capital of $3,060,715 and cash and cash equivalents of $799,953. 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, 2019.
|
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.
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.
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 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.
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.
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 available as of the date of this filing, and the company has maintained the full valuation allowance.
The Company recognizes the financial statement
benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain
the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is
the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company classifies
interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
The Company had no
unrecognized tax benefits or liabilities, and no adjustment to its financial position, results of operations, or cash flows relating
to uncertain tax positions taken on all open tax years. The Company is no longer subject to federal income tax examinations by
tax authorities for the years before 2014 and state or local income tax examinations by tax authorities for the years before 2014.
|
j.
|
Impairment of long-lived assets
|
Long-lived assets,
such as plant and equipment and purchased intangibles with finite lives, which are subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Long-lived assets
held for sale would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell and would no longer be depreciated.
|
k.
|
Stock-based compensation
|
Stock based compensation
expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options
granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the
closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for
estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.
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 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.
Advertising costs
included in selling, general and administrative expenses were $11,000 and $7,000 for the years ended December 31, 2017 and 2016,
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, 2017, the Company had two customers who had sales representing 14.9% and 14.4% of total revenues, respectively. In
2016, the Company had one customer who had sales representing 10.5% 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.
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.
|
Recent Accounting Pronouncements
|
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 (with subsequent targeted amendments) 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 product sales will continue to generally be recognized when products are
shipped (i.e. point in time) and revenue from the Company’s products and service sales provided under long-term government
contracts will continue to generally be recognized 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 is not expected to have a material impact to the Company’s financial position or results of operations. The Company
will present the disclosures required by this new standard beginning in our 2018 interim financial statements and will continue
to evaluate the changes that will be required within its internal controls as a result of the adoption.
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. Early adoption is permitted. 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 No. 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 2020, with
earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial
statements.
In March 2016,
the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for employee share-based payments, including income tax
consequences, application of award forfeitures to expense, classification on the statement of cash flows, and classification of
awards as either equity or liabilities. This guidance is effective for annual reporting periods beginning after December 15,
2016, and interim periods within those annual periods. The adoption of the guidance in ASU No. 2016-09 on January 1, 2017
did not have a material effect on the Company’s financial statements and related footnote disclosures.
In February 2016,
the FASB created Topic 842 and issued ASU 2016-02, Leases. The guidance in this update supersedes Topic 840, Leases. This ASU requires
lessees to recognize a right-of-use assets and a lease liability, initially measured at the present value of the lease payments
on the balance sheet. For public companies, the amendments will be effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the
impact of the adoption of ASU 2016-02 on its financial statements and disclosure.
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”, which
changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities
measured under the fair value option that are attributable to instrument-specific credit risk. The adoption of ASU 2016-01 is not
expected to have a material impact to the Company’s financial position or results of operations. ASU 2016-01 is effective
for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years.
Inventories are comprised
of the following and are shown net of inventory reserves of approximately $2,447,000 for 2017 and $2,249,000 for 2016:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
1,174
|
|
|
$
|
1,041
|
|
Work in process, including manufactured parts and components
|
|
|
1,462
|
|
|
|
1,115
|
|
Finished goods
|
|
|
560
|
|
|
|
584
|
|
|
|
$
|
3,196
|
|
|
$
|
2,740
|
|
Plant and equipment are comprised
of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Office and computer equipment
|
|
$
|
1,333
|
|
|
$
|
1,318
|
|
Machinery and equipment
|
|
|
11,118
|
|
|
|
11,013
|
|
Leasehold improvements
|
|
|
2,276
|
|
|
|
2,276
|
|
|
|
|
14,727
|
|
|
|
14,607
|
|
Less accumulated depreciation and amortization
|
|
|
(14,014
|
)
|
|
|
(13,730
|
)
|
|
|
$
|
713
|
|
|
$
|
877
|
|
Depreciation expense
recorded by the Company totaled approximately $284,000 and $366,000 for 2017 and 2016, respectively. Plant and equipment with a
net book value of $0 was sold in 2017 for proceeds of $24,000. No plant or equipment was disposed of in 2016.
The Company evaluates
its property and equipment for impairment when events or circumstances indicate and impairment may exist. Based on this evaluation,
the Company concluded that, at December 31, 2017, its long-lived assets were not impaired.
Intangible assets include acquired intangible
assets with finite lives, consisting principally of non-contractual customer relationships, completed technology, trademark and
licensed patents. Intangible assets with finite lives are amortized on a straight-line basis over the assets’ estimated useful
life up to 14 years.
Based on management’s judgement, there
were no events or circumstances that would lead us to conclude that a possible impairment of intangible assets exists as of December
31, 2017.
Amortization expense
was approximately $81,000 and $80,000 for the years ended December 31, 2017 and 2016, respectively. Aggregate amortization for
the five succeeding years from January 1, 2018 through December 31, 2022 is expected to be approximately $54,000, accumulating
at the rate of $46,000 for the year ended December 31, 2018 and $2,000 for each of the four years, thereafter.
The weighted average
remaining life of the Company’s intangible assets is approximately 2.3 years.
The following schedule
details the Company’s intangible asset balance by major asset class.
|
|
At December 31, 2017
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
|
Customer-related
|
|
$
|
550
|
|
|
|
(535
|
)
|
|
$
|
15
|
|
Completed technology
|
|
|
363
|
|
|
|
(348
|
)
|
|
|
15
|
|
Trademarks
|
|
|
187
|
|
|
|
(173
|
)
|
|
|
14
|
|
Licensed Patents
|
|
|
30
|
|
|
|
(4
|
)
|
|
|
26
|
|
Total
|
|
$
|
1,130
|
|
|
|
(1,060
|
)
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
|
Customer-related
|
|
$
|
550
|
|
|
$
|
(495
|
)
|
|
$
|
55
|
|
Completed technology
|
|
|
363
|
|
|
|
(322
|
)
|
|
|
41
|
|
Trademarks
|
|
|
187
|
|
|
|
(160
|
)
|
|
|
27
|
|
Licensed Patents
|
|
|
30
|
|
|
|
(2
|
)
|
|
|
28
|
|
Total
|
|
$
|
1,130
|
|
|
$
|
(979
|
)
|
|
$
|
151
|
|
|
5.
|
Related Party Transactions
|
On June 9, 2016 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, 2019 from April 1, 2017. The
notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be
converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000
units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to
acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement, the expiration dates of the warrants
were extended from April 1, 2020 to April 1, 2022.
The Company paid $112,500
and $112,500 for interest on the notes in 2017 and 2016, respectively. Accrued interest of $112,500 and $75,000 is included in
Accounts payable and accrued liabilities as of December 31, 2017 and 2016, respectively.
Other Long-Term Notes
consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(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
|
|
$
|
—
|
|
|
$
|
96
|
|
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 May 2032.
|
|
$
|
270
|
|
|
$
|
282
|
|
|
|
|
270
|
|
|
|
378
|
|
Less current portion
|
|
|
(12
|
)
|
|
|
(108
|
)
|
Other Long-Term Notes, excluding current portion
|
|
$
|
258
|
|
|
$
|
270
|
|
Other Long-Term Notes
mature as follows:
Year ending December 31:
|
|
(In thousands)
|
|
2018
|
|
$
|
12
|
|
2019
|
|
|
12
|
|
2020
|
|
|
13
|
|
2021
|
|
|
13
|
|
Thereafter
|
|
|
220
|
|
|
|
$
|
270
|
|
|
7.
|
Accounts Payable and Accrued Liabilities
|
Accounts payable and
accrued expenses are comprised of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Trade accounts payable and accrued purchases
|
|
$
|
740
|
|
|
$
|
630
|
|
Accrued payroll
|
|
|
121
|
|
|
|
124
|
|
Accrued 401K company matching contribution
|
|
|
143
|
|
|
|
129
|
|
Accrued expenses – other
|
|
|
213
|
|
|
|
192
|
|
|
|
$
|
1,217
|
|
|
$
|
1,075
|
|
The Company’s
income tax provision consists of the following:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
Federal statutory rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
State statutory rate
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Reduction in Federal rate due to tax reform
|
|
|
259
|
|
|
|
—
|
|
Change in Valuation Allowance
|
|
|
(214
|
)
|
|
|
43
|
|
Permanent Differences
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
At December 31, 2017
and 2016, the Company had estimated Federal net operating loss carry forwards of approximately $9,435,000 and $9,194,000, respectively
and State net operating loss carry forwards of approximately $5,977,000 and $4,969,000, respectively. These tax loss carry forwards
expire at various dates through 2037.
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.
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. The Company remeasured its net deferred tax assets using the new Federal Tax
Rate and posted a one-time reduction of $1,765,000 in deferred tax assets and $1,765,000 to the valuation allowance to reflect
the lower realization rate to be applied commencing in 2018.
Deferred tax assets
(liabilities) are comprised of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Account receivable reserves
|
|
$
|
4
|
|
|
$
|
6
|
|
Inventory reserves
|
|
|
685
|
|
|
|
944
|
|
Inventory capitalization
|
|
|
101
|
|
|
|
129
|
|
Depreciation
|
|
|
291
|
|
|
|
401
|
|
Loss carry forwards
|
|
|
2,371
|
|
|
|
3,435
|
|
Gross deferred tax assets
|
|
|
3,452
|
|
|
|
4,915
|
|
Valuation allowance
|
|
|
(3,452
|
)
|
|
|
(4,915
|
)
|
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, 2017. 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, 2017 and
2016, 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 $302,000 and $151,000, 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 2014.
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.
|
9.
|
Equity Compensation Program and Stock-based Compensation
|
|
a.
|
2010 Equity Compensation Program
|
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, 2017 and 2016 include stock-based compensation expense for stock option grants totaling $60,000
and $30,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold
($17,000 for 2017 and $7,000 for 2016), and selling, general and administrative expenses ($43,000 for 2017 and $23,000 for 2016).
As of December 31,
2017 and 2016, there were $89,000 and $49,000 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 1.4 years and 1.5 years, respectively.
The weighted average
estimated fair value of stock options granted in the two years ended December 31, 2017 and 2016 was $0.56 and $0.34, 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, 2017 and 2016:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Volatility
|
|
|
133 - 134
|
%
|
|
|
128
|
%
|
Risk-free interest rate
|
|
|
2.2 - 2.3
|
%
|
|
|
2.1
|
%
|
Expected life
|
|
|
10 years
|
|
|
|
10 years
|
|
A summary of the Company’s
outstanding stock options as of and for the years ended December 31, 2017 and 2016 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(In Years)
|
|
|
Value(a)
|
|
Outstanding as of January 1, 2016
|
|
|
699,604
|
|
|
$
|
.71
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
163,500
|
|
|
|
.35
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited /Expired
|
|
|
(102,890
|
)
|
|
$
|
.92
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
(b)
|
|
|
760,214
|
|
|
$
|
.60
|
|
|
|
4.8
|
|
|
|
109,168
|
|
Granted
|
|
|
180,000
|
|
|
|
.58
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,333
|
)
|
|
|
.25
|
|
|
|
|
|
|
|
|
|
Forfeited /Expired
|
|
|
(28,873
|
)
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
b)
|
|
|
903,008
|
|
|
$
|
.58
|
|
|
|
5.2
|
|
|
|
648,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2017
|
|
|
572,513
|
|
|
$
|
.65
|
|
|
|
3.7
|
|
|
|
288,789
|
|
(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, 2017 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, 2017.
(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, 2017.
The following table
represents non-vested stock options granted, vested, and forfeited for the year ended December 31, 2017.
Non-vested Options
|
|
Options
|
|
|
Weighted-Average Grant-
Date Fair Value - $
|
|
Non-vested - January 1, 2017
|
|
|
272,167
|
|
|
|
.28
|
|
Granted
|
|
|
180,000
|
|
|
|
.56
|
|
Vested
|
|
|
(121,672
|
)
|
|
|
.27
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested – December 31, 2017
|
|
|
330,495
|
|
|
|
.44
|
|
The total weighted
average grant date fair value of options vested during the years ended December 31, 2017 and 2016, was $34,000 and $21,000, respectively.
The following table
summarizes information about stock options outstanding at December 31, 2017:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
$0.18 - $0.35
|
|
|
411,667
|
|
|
|
7.1
|
|
|
$
|
.29
|
|
|
|
261,172
|
|
|
$
|
.28
|
|
$0.50 - $1.00
|
|
|
476,400
|
|
|
|
4.8
|
|
|
$
|
.80
|
|
|
|
296,400
|
|
|
$
|
.93
|
|
$1.50 - $1.75
|
|
|
14,941
|
|
|
|
1.1
|
|
|
$
|
1.75
|
|
|
|
14,941
|
|
|
$
|
1.75
|
|
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, 2017, a total of 2,500,000 anti-dilutive 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 have been excluded
from the diluted computation of net loss per share because their effect is anti-dilutive. In addition, 903,008 common stock equivalents
related to outstanding options have been excluded from the diluted computation because their effect is anti-dilutive.
For the year ended December 31, 2016, all common equivalent
shares outstanding have been excluded from the diluted computation because their effect is anti-dilutive. This included 760,214
common stock equivalents related to outstanding options, in addition to 2,500,000 common shares and 1,875,000 common shares underlying
warrants issuable upon conversion of outstanding related party convertible notes.
The Company occupies
approximately 42,000 square feet of space located at 181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease. Under the
terms of the lease, the Company is obligated for all real estate taxes, maintenance and operating costs of the facility. The lease
for the Northvale facility was renewed for a term of two years from June 1, 2015 to May 31, 2017 along with options to renew the
lease for two additional one year terms running through May 31, 2019, at substantially the same terms. In 2017, the Company exercised
its option to renew the Northvale lease for an additional one year term running through May 31, 2018. The Company intends to exercise
the option to renew the lease for a one-year term through May 31, 2019, prior to the end of the current lease term.
The Company’s
total rent expense for the year ended December 31, 2017 and 2016 was $283,000 and $284,000, respectively.
The Company also paid
real estate taxes and insurance premiums under the terms of the lease that totaled approximately $91,000 in 2017 and $89,000 in
2016.
Future minimum annual
rentals which cover the remaining lease terms, excluding uncommitted option renewal periods at December 31, 2017, total $117,942.
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 2017, the Company’s
401(k) matching contribution for employees was $123,706. This will be funded by way of a contribution of 148,381 shares of the
Company’s common stock, which will be issued to the Plan in April, 2018. In 2016, the Company’s 401(k) matching contribution
for employees was $124,289. This was funded by way of a contribution of 356,323 shares of the Company’s common stock, which
were issued to the Plan in April 2017. 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.
|
12.
|
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 32.5%
and 23.1% of product sales in 2017 and 2016, respectively.
The Company had sales
to three major customers which accounted for approximately 34.6% of sales in 2017. One customer, a division of a major U.S. defense
industry corporation that manufactures electro-optical systems for U.S. and foreign governments accounted for 14.8% of 2017 sales.
The two other customers included one foreign-based and one domestic-based manufacturer of process control and metrology equipment
whose sales represented 14.3% and 5.6% of sales, respectively. The same three customers represented 10.5%, 1.6% and 3.5%, of sales
in 2016, respectively.
During the past two years, sales to the Company’s top five customers represented
approximately 45.1%, and 37.8% 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, 2017, are as
follows:
|
2010 Equity compensation plan
|
|
|
4,000,000
|
|
2000 Equity compensation plan
|
|
|
95,641
|
|
Subordinated convertible notes
|
|
|
2,500,000
|
|
Warrants issuable on conversion of Subordinated convertible notes
|
|
|
1,875,000
|
|
|
|
|
8,470,641
|
|
The Company had no
outstanding warrants as of December 31, 2017 and 2016.
|
14.
|
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, 2017 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 $2,645,000 compared to its carrying
amount of $2,770,000 as of December 31, 2017.