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Indicate by check mark
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State the aggregate market
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Indicate the number of
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Portions of the registrant's definitive Proxy Statement for
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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 and sub-assemblies.
It develops, manufactures and delivers precision custom optics and thin film optical coating services through its Custom and Metal
Optics operations. Glass, metal, and crystal substrates are processed using complex processes and techniques to manufacture components,
deposit optical thin films, and assemble sub-components used in advanced photonic systems. The majority of custom optical components
and optical coating services supplied are used in defense and aerospace electro-optical systems, inspection, laser, medical and
process control systems..
The Laser Devices/Instrumentation
category includes the growth and fabrication of crystalline materials with electro-optic (EO) and non-linear optical properties
for use in both standard and custom products. This category also includes crystal based devices and associated instrumentation.
The majority of crystals, crystal components and laser devices are used in laser systems, defense and security EO systems, medical
lasers and research and development applications by engineers within corporations, Scientific / R&D.
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,
|
|
|
|
2018
|
|
|
2017
|
|
Category (In thousands)
|
|
|
Net Sales
|
|
|
|
%
|
|
|
|
Net Sales
|
|
|
|
%
|
|
Optical Components
|
|
$
|
9,939
|
|
|
|
86.5
|
|
|
$
|
8,363
|
|
|
|
84.8
|
|
Laser Devices /Instrumentation
|
|
|
1,550
|
|
|
|
13.5
|
|
|
|
1,496
|
|
|
|
15.2
|
|
Total
|
|
$
|
11,489
|
|
|
|
100
|
|
|
$
|
9,859
|
|
|
|
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 aerospace, industrial medical
marketplace and military. Planar, prismatic and spherical components are fabricated from glass and synthetic crystals, including
fused silica, germanium, magnesium fluoride, quartz, silicon, zinc selenide, and zinc sulfide. Components consist of cavity optics
for lasers, lenses, mirrors, polarizing optics, prisms, wave plates, , x-ray mirrors, and x-ray monochromators.
Most optical components
and sub-assemblies require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect
and transmit specific wavelengths. The Custom Optics optical coating specialties include anti-reflective high laser damage resistance,
highly reflective, infra-red, polarizing, and coating to complex multi-wavelength requirements on a wide range of substrate materials.
Coating deposition process technologies employed included electron beam, ion and plasma assisted deposition systems and thermal.
The Metal Optics product
line is a fully integrated precision metal optics and optical assembly operation which employs high precision diamond machining,
polishing, and plating of aluminum, AlBeMet™, beryllium and stainless steel. The Metal Optics product line offers opto-mechanical
design and assembly services as part of its manufactured deliverables and can support prototyping through production of arc-second
accuracy polygons, diamond machined precision aspheric, large and small metal mirrors, low RMS surface finish polished mirrors,
planar mirrors, reflective porro prisms, and thermally stable optical mirrors. Plating specialties include void-free gold and electroless
nickel.
|
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 beta barium borate (BBO), lithium niobate, potassium dideuterium
phosphate, potassium dihydrogen phosphate, stilbene and zinc germanium diphosphide,. Applications for these materials include defense,
homeland security, industrial processing lasers and surgical lasers.
The Crystals and Devices
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 2018 and 2017 the Company’s
product sales were made to customers in the following market areas:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Market (In thousands)
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Defense/Aerospace
|
|
$
|
2,585
|
|
|
|
22.5
|
|
|
$
|
3,138
|
|
|
|
31.8
|
|
Process control & metrology
|
|
|
5,891
|
|
|
|
51.3
|
|
|
|
4,244
|
|
|
|
43.0
|
|
Laser systems
|
|
|
1,550
|
|
|
|
13.5
|
|
|
|
1,030
|
|
|
|
10.5
|
|
Scientific / R&D
|
|
|
1,463
|
|
|
|
12.7
|
|
|
|
1,447
|
|
|
|
14.7
|
|
Total
|
|
$
|
11,489
|
|
|
|
100
|
|
|
$
|
9, 859
|
|
|
|
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 22.5% and 31.8% of sales in 2018 and 2017, respectively. Sales decreased by approximately $553,000
or 17.6% from 2017. The decrease in 2018 is primarily due to a reduction of shipments to a few 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 $1,647,000 or 38.8% in 2018 compared to 2017 and represented 51.3% of sales
compared to 43.0% in the prior year. The increase in 2018 sales is a result of an increase in demand from the semiconductor capital
equipment market. An increase in bookings in late 2017 and early 2018 to two OEM customers resulted in an increase in shipments
in 2018.
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 13.5% of sales in 2018 compared to 10.5% in 2017. This represented an increase of $520,000 or 50.4% from the prior year. A
majority of the increase was a result of two new customers one domestic and one international as compared to the previous year.
Scientific / R&D
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 Scientific / R&D market consist primarily of the Company’s legacy systems, Pockels’
cells and related repairs. Sales in 2018 increased by $16,000, or 1.1% and as a percentage of total sales to 12.7% compared to
14.7% in 2017. This was primarily attributable to increased business in 2018 from one National Lab and one research contract.
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 2018, the Company’s
sales to its top three customers accounted for 44.6% of sales. This included sales to a major OEM that manufactures process
control and metrology equipment for the semiconductor industry. These customers represented 22.3% of total sales during the
year.
Two other customers included
a US based defense contractor of electro-optical systems for US and foreign governments and a foreign owned OEM manufacturer of
process control and metrology equipment whose sales represented 12.9% and 9.4% of sales, respectively.
The same three customers
represented 14.4%, 14.8%, and 5.6% of sales in 2017, respectively.
Sales to the Company’s
top five customers represented approximately 56.1% and 45.1% of sales, in 2018 and 2017, 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 40%, and 32.5% of product sales in 2018
and 2017, 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, 2018 was $6,480,000. The Company’s order backlog as of December 31, 2017 was $6,512,000.
We anticipate shipping a substantial majority
of the present backlog during fiscal year 2019. 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 25, 2019, the Company had 58 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 history of losses
|
While we had net
income for the fiscal year December 31, 2018 of $0.7 million, we had net loss of $0.6 million, and $0.6 million, for 2017,
and 2016 respectively. Our history of losses had; an adverse effect on our working capital, total assets and
shareholders’ equity. We are unable to predict, with certainty, whether we will continue to be profitable after 2018
and our inability to achieve and sustain profitability may negatively affect our business, financial condition, results of
operations and cash flows.
|
b)
|
The Company may need to raise additional capital to repay indebtedness and to fund our operations
|
We may need to raise additional
financing to repay our outstanding indebtedness of approximately $2.8 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, 2018, five customer accounts represented approximately 56% 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.
|
l
)
|
Data Breach and breakdown of information and communication
technologies
|
In the course of our business,
we collect and store sensitive data, including intellectual property. We could be subject to service outages or breaches of security
systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches
of our network or data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers
or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although
we have not experienced an incident, if we are unable to prevent such security or privacy breaches, our operations would be disrupted
or we could suffer, financial loss, property damage, reputational damage, or regulatory penalties because of lost or misappropriated
information.
|
Item 1B.
|
Unresolved Staff Comments
|
None
Administrative, engineering
and manufacturing operations are housed in a 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 have a new lease
agreement for the Northvale facility prior to May, 31, 2019.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, 2018
|
1.
|
Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates
|
|
a.
|
Nature of Business and Operations
|
Inrad Optics, Inc. and
Subsidiaries (the “Company”), was incorporated in the state of New Jersey and is a manufacturer of crystals, crystal
devices, electro-optic and optical components, and sophisticated laser devices and instruments. The Company has administrative
offices and manufacturing operations in Northvale, New Jersey.
The Company’s principal
customers include commercial instrumentation companies and OEM laser systems manufacturers, research laboratories, government agencies,
and defense contractors. The Company’s products are sold domestically using its own sales staff, and in major overseas markets,
principally Europe, Israel, Japan, and Asia, using independent sales agents.
As of December 31, 2018,
the Company had working capital of $4,057,914 and cash and cash equivalents of $1,185,553. 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, 2020.
|
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
of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
On December 22, 2017,
the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue
Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after
December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time
transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance
with the Tax Act and guidance, and the company has maintained the full valuation allowance on its deferred tax asset.
The Company recognizes
the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more
likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with
the relevant tax authority.
The Company classifies
interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
The Company had 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 2015 and state or local income tax examinations by tax authorities for the years before 2015.
|
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 adopted the
provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales
continue to generally be recognized either when products are shipped (i.e. point in time) or under certain long-term government
contracts, as the Company transfers control of the product or service to its customers (i.e. over time), Internal research and
development costs see note 2.
|
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 $25,000 and $11,000 for the years ended December 31, 2018 and 2017, 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, 2018, the Company had three customers who had sales representing 22.3%, 12.9% and 9.4% of total revenues, respectively.
In 2017, the Company had the same three customers had sales representing 14.4%, 14.8%, and 5.6% 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 is based on the
principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about
the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments
and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for
fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the
provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales
continue to generally be recognized either when products are shipped (i.e. point in time) or under certain long-term government
contracts, as the Company transfers control of the product or service to its customers (i.e. over time), which approximates the
previously used percentage-of-completion method of accounting. As such, the adoption of ASU 2014-09 had no material impact to the
Company’s financial position or results of operations; however, the Company has now presented the disclosures required by
this new standard, refer to Note 2.
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 will adopt ASU 2016-02 and we
do not expect a material impact on the 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 did
not 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.
The Company’s revenues are comprised
of product sales as well as products and services provided under long-term government contracts with its customers. All revenue
is recognized when the Company satisfies its performance obligation(s) under the contract (either implicit or explicit) by transferring
the promised product or service to its customer either when (or as) its customer obtains control of the product or service. A performance
obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price
is allocated to each distinct performance obligation. The majority of the Company’s contracts have a single performance obligation,
as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore,
not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price
to each performance obligation using the Company’s best estimate of standalone selling price for each distinct product or
service in the contract, which is generally based on an observable price.
Revenue is measured as the amount of consideration
the Company expects to receive in exchange for transferring products or providing services. As such, revenue is recorded net of
returns, allowances, customer discounts, and incentives. Sales, value added, and other taxes collected from customers and remitted
to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included
in cost of goods sold.
The Company’s performance obligations
under long-term government contracts are generally satisfied over time. Revenue from products or services transferred to customers
over time accounted for approximately 5.0% and 2.1% of revenue for 2018 and 2017, respectively. Revenue under these long-term government
contracts are generally recognized over time using an input measure based upon the proportion of actual costs incurred to estimated
total project costs, which is a method used to best depict the Company’s performance to date under the terms of the contract.
Accounting for these long-term government contracts
involves the use of various techniques to estimate total revenue and costs. The Company estimates profit on these long-term government
contracts as the difference between total estimated revenue and expected costs to complete a contract and recognizes that profit
over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that
may span several years. These assumptions include, among other things, labor productivity, costs and availability of materials,
and timing of funding by the U.S. government. The nature of these long-term agreements may give rise to several types of variable
consideration, such as claims, awards and incentive fees. Historically, these amounts of variable consideration are not considered
significant. Additionally, contract estimates may include additional revenue for submitted contract modifications if there exists
an enforceable right to the modification, the amount can be reasonably estimated and its realization is probable. These estimates
are based on historical collection experience, anticipated performance, and the Company’s best judgement at the time. These
amounts are generally included in the contract’s transaction price and are allocated over the remaining performance obligations.
Changes in judgments on these above estimates could impact the timing and amount of revenue recognized with a resulting impact
on the timing and amount of associated income. Under these long-term government contracts, the Company may receive payments from
customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional.
In the event a contract loss becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statements
of Operations.
The majority of the Company’s revenue
is from products and services transferred to customers at a point in time and were approximately 95.0% and 97.9% of revenue for
2018 and 2017, respectively. The Company recognizes revenue at the point in time in which the customer obtains control of the product
or service, which is generally when product title passes to the customer upon shipment. In limited cases, title does not transfer
and revenue is not recognized until the customer has received the products at its physical location.
As part of the adoption of Accounting Standards
Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, the Company reviewed its sales
by market area and reassigned certain customers within the existing markets. In addition, the Universities and National Lab market
was renamed to Scientific/R&D. Sales by market area, as previously presented for 2017, were reclassified accordingly.
The following table summarizes the Company’s
sales by market area:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Aerospace & Defense
|
|
$
|
2,584,785
|
|
|
$
|
3,137,708
|
|
Process Control & Metrology
|
|
|
5,890,753
|
|
|
|
4,243,562
|
|
Laser Systems
|
|
|
1,550,180
|
|
|
|
1,030,534
|
|
Scientific / R&D
|
|
|
1,463,009
|
|
|
|
1,447,397
|
|
Total
|
|
$
|
11,488,727
|
|
|
$
|
9,859,201
|
|
Net sales by timing to transfers of goods and services is as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Transfer at point in time
|
|
$
|
10,914,423
|
|
|
$
|
9,656,598
|
|
Transfer over time
|
|
|
574,304
|
|
|
|
202,603
|
|
Total net sales
|
|
$
|
11,488,727
|
|
|
$
|
9,859,201
|
|
Inventories are comprised
of the following and are shown net of inventory reserves of approximately $2,486,000 for 2018 and $2,447,000 for 2017:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
1,143
|
|
|
$
|
1,174
|
|
Work in process, including manufactured parts and components
|
|
|
1,389
|
|
|
|
1,462
|
|
Finished goods
|
|
|
484
|
|
|
|
560
|
|
|
|
$
|
3,016
|
|
|
$
|
3,196
|
|
Plant and equipment are comprised
of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Office and computer equipment
|
|
$
|
1,352
|
|
|
$
|
1,333
|
|
Machinery and equipment
|
|
|
11,062
|
|
|
|
11,118
|
|
Leasehold improvements
|
|
|
2,283
|
|
|
|
2,276
|
|
|
|
|
14,697
|
|
|
|
14,727
|
|
Less accumulated depreciation and amortization
|
|
|
(14,070
|
)
|
|
|
(14,014
|
)
|
|
|
$
|
627
|
|
|
$
|
713
|
|
Depreciation expense
recorded by the Company totaled approximately $240,000 and $284,000 for 2018 and 2017, respectively. Plant and equipment with a
net book value of $0 was sold in 2017 for proceeds of $24,000, Fully depreciated assets of $184,079 were written off in 2018.
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, 2018, 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, 2018.
Amortization expense was
approximately $38,000 and $81,000 for the years ended December 31, 2018 and 2017, respectively. Lower amortization for 2018 was
due to an Intangible Asset fully amortized by February 2018. Aggregate amortization for the five succeeding years from January
1, 2019 through December 31, 2023 is expected to be approximately $17,000.
The following schedule
details the Company’s intangible asset balance by major asset class.
|
|
At December 31, 2018
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
|
Customer-related
|
|
$
|
550
|
|
|
|
(542
|
)
|
|
$
|
8
|
|
Completed technology
|
|
|
363
|
|
|
|
(363
|
)
|
|
|
—
|
|
Trademarks
|
|
|
187
|
|
|
|
(187
|
)
|
|
|
—
|
|
Licensed Patents
|
|
|
30
|
|
|
|
(6
|
)
|
|
|
24
|
|
Total
|
|
$
|
1,130
|
|
|
|
(1,098
|
)
|
|
$
|
32
|
|
|
|
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
|
|
|
6.
|
Related Party Transactions
|
On April 12, 2018 the
maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000
Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2021 from April 1,2019. 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, 2022 to April 1,2024.
The Company paid $187,500
and $112,500 for interest on the notes in 2018 and 2017, respectively. Accrued interest of $75,000 and $112,000 is included in
Accounts payable and accrued liabilities as of December 31, 2018 and 2017, respectively.
Other Long-Term Notes
consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
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.
|
|
$
|
258
|
|
|
$
|
270
|
|
|
|
|
258
|
|
|
|
270
|
|
Less current portion
|
|
|
(13
|
)
|
|
|
(12
|
)
|
Other Long-Term Notes, excluding current portion
|
|
$
|
245
|
|
|
$
|
258
|
|
Other Long-Term Notes mature
as follows:
Year ending December 31:
|
|
(In thousands)
|
|
2019
|
|
|
13
|
|
2020
|
|
|
13
|
|
2021
|
|
|
14
|
|
2022
|
|
|
15
|
|
2023
|
|
|
15
|
|
Thereafter
|
|
|
188
|
|
|
|
$
|
258
|
|
|
8.
|
Accounts Payable and Accrued Liabilities
|
Accounts payable and accrued
expenses are comprised of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Trade accounts payable and accrued purchases
|
|
$
|
399
|
|
|
$
|
740
|
|
Accrued payroll
|
|
|
114
|
|
|
|
121
|
|
Accrued 401K company matching contribution
|
|
|
125
|
|
|
|
143
|
|
Accrued expenses – other
|
|
|
197
|
|
|
|
213
|
|
|
|
$
|
835
|
|
|
$
|
1,217
|
|
The Company did not record
a current provision for income tax due to the availability of net operation loss carryforwards to offset taxable income for both
federal and state tax purposes.
A reconciliation of the
income tax provision computed at the statutory Federal income tax rate to our effective income tax rate follows (in percent):
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal statutory rate
|
|
|
(21
|
)%
|
|
|
(34
|
)%
|
State statutory rate
|
|
|
(9
|
)
|
|
|
(7
|
)
|
Reduction in Federal rate due to tax reform
|
|
|
0
|
|
|
|
259
|
|
Reduction in State rate due to tax rate change
|
|
|
24
|
|
|
|
0
|
|
Change in Valuation Allowance
|
|
|
8
|
|
|
|
(214
|
)
|
Permanent Differences
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
At December 31, 2018 and
2017, the Company had estimated Federal net operating loss carry forwards of approximately $8,699,000 and $9,435,000, respectively
and State net operating loss carry forwards of approximately $5,221,000 and $5,977,000, 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 at December 31, 2017 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Account receivable reserves
|
|
$
|
4
|
|
|
$
|
4
|
|
Inventory reserves
|
|
|
746
|
|
|
|
685
|
|
Inventory capitalization
|
|
|
102
|
|
|
|
101
|
|
Depreciation
|
|
|
312
|
|
|
|
291
|
|
Loss carry forwards
|
|
|
2,229
|
|
|
|
2,371
|
|
Gross deferred tax assets
|
|
|
3,393
|
|
|
|
3,452
|
|
Valuation allowance
|
|
|
(3,393
|
)
|
|
|
(3,452
|
)
|
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, 2018 and 2017, the valuation allowance was decreased by $59,000 and increased by $302,000, respectively. 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 adjusted 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 2015.
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 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, 2018 and 2017 include stock-based compensation expense for stock option grants totaling $80,000
and $60,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold
($22,000 for 2018 and $17,000 for 2017), and selling, general and administrative expenses ($58,000 for 2018 and $43,000 for 2017).
As of December 31, 2018
and 2017, there were $180,000 and $89,000 of unrecognized compensation costs, net of estimated forfeitures, related to non-vested
stock options, which are expected to be recognized over a weighted average period of approximately 1.89 years and 1.4 years, respectively.
The weighted average estimated
fair value of stock options granted in the two years ended December 31, 2018 and 2017 was $0.98 and $0.56, 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,
2018 and 2017:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Volatility
|
|
|
140.0
|
%
|
|
|
133-134
|
%
|
Risk-free interest rate
|
|
|
2.6
|
%
|
|
|
2.2 – 2.3
|
%
|
Expected life
|
|
|
10 years
|
|
|
|
10 years
|
|
A summary of the Company’s
outstanding stock options as of and for the years ended December 31, 2018 and 2017 is presented below:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(In Years)
|
|
|
Aggregate
Intrinsic
Value(a)
|
|
Outstanding as of January 1, 2017
|
|
|
760,214
|
|
|
$
|
.60
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
180,000
|
|
|
|
.58
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,333
|
)
|
|
|
.25
|
|
|
|
|
|
|
|
|
|
Forfeited /Expired
|
|
|
(28,873
|
)
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
(b)
|
|
|
903,008
|
|
|
$
|
.58
|
|
|
|
5.20
|
|
|
|
648,410
|
|
Granted
|
|
|
175,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,500
|
)
|
|
|
.31
|
|
|
|
|
|
|
|
|
|
Forfeited /Expired
|
|
|
(15,300
|
)
|
|
|
.98
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
(b)
|
|
|
1,058,208
|
|
|
$
|
.64
|
|
|
|
5.58
|
|
|
|
337,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2018
|
|
|
708,717
|
|
|
$
|
.59
|
|
|
|
3.45
|
|
|
|
264,192
|
|
(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, 2018 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, 2018.
(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, 2018.
The following table represents
non-vested stock options granted, vested, and forfeited for the year ended December 31, 2018.
Non-vested Options
|
|
Options
|
|
|
Weighted-Average Grant-
Date Fair Value
- $
|
|
Non-vested - January 1, 2018
|
|
|
330,495
|
|
|
|
.44
|
|
Granted
|
|
|
175,000
|
|
|
|
.98
|
|
Vested
|
|
|
(156,004
|
)
|
|
|
.38
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested – December 31, 2018
|
|
|
349,491
|
|
|
|
.74
|
|
The total weighted average
grant date fair value of options vested during the years ended December 31, 2018 and 2017, was $62,000 and $34,000, respectively.
The following table summarizes
information about stock options outstanding at December 31, 2018:
|
|
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
|
|
|
407,167
|
|
|
|
6.26
|
|
|
$
|
.29
|
|
|
|
352,676
|
|
|
$
|
.28
|
|
$0.50 - $1.00
|
|
|
636,100
|
|
|
|
2.66
|
|
|
$
|
.86
|
|
|
|
341,100
|
|
|
$
|
.88
|
|
$1.50 - $1.75
|
|
|
14,941
|
|
|
|
0.10
|
|
|
$
|
1.75
|
|
|
|
14,941
|
|
|
$
|
1.75
|
|
|
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, 2018, 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 income per share because their effect is anti-dilutive. In addition, 1,058,208 common stock equivalents
related to outstanding options have been excluded from the diluted computation because their effect is anti-dilutive.
For the year ended December
31, 2017, all common equivalent shares outstanding have been excluded from the diluted computation because their effect is anti-dilutive.
This included 903,008 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 exercised the option to renew the
lease for a one-year term through May 31, 2019. The company intends to have a new lease agreement prior to May, 31, 2019.
The Company’s total
rent expense for the year ended December 31, 2018 and 2017 was $290,000 and $283,000, respectively.
The Company also paid
real estate taxes and insurance premiums under the terms of the lease that totaled approximately $94,000 in 2018 and $91,000 in
2017.
Future minimum annual
rentals at December 31, 2018 which cover the remaining lease term expiring on May 31, 2019. total $122,310.
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 2018, the Company’s
401(k) matching contribution for employees was $124,783. This will be funded by way of a contribution of 134,176 shares of the
Company’s common stock, which will be issued to the Plan in April, 2019. In 2017, the Company’s 401(k) matching contribution
for employees was $123,706. This was funded by way of cash contribution of $31,000 and a contribution of 111,288 shares of the
Company’s common stock, which were issued to the Plan in June, 2018. The Company records the distribution of the common shares
in the Consolidated Statement of Shareholders’ Equity as of the date of distribution to the 401(k) plan administrator.
|
13.
|
Product Sales, Foreign Sales and Sales to Major Customers
|
The Company’s export
sales, which are primarily to customers in countries within Europe, Israel, Asia and Japan, amounted to approximately 40% and 32.5%
of product sales in 2018 and 2017, respectively.
The Company had sales
to three major customers which accounted for approximately 44.6% of sales in 2018. 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 12.9% of 2018 sales.
The two other customers included one foreign-based and one domestic-based manufacturer of process control and metrology equipment
whose sales represented 22.3% and 9.4% of sales, respectively. For 2017 the top three customers represented 14.4%, 14.8% and 5.6%
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.
During the past two years,
sales to the Company’s top five customers represented approximately 56.1%, and 45.2% 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, 2018, are as follows:
|
2010 Equity compensation plan
|
|
|
4,000,000
|
|
2000 Equity compensation plan
|
|
|
80,341
|
|
Subordinated convertible notes
|
|
|
2,500,000
|
|
Warrants issuable on conversion of Subordinated convertible notes
|
|
|
1,875,000
|
|
|
|
|
8,455,341
|
|
The Company had no outstanding
warrants as of December 31, 2018 and 2017.
|
15.
|
Fair Value of Financial Instruments
|
The methods and assumptions
used to estimate the fair value of the following classes of financial instruments were:
Current Assets and Current
Liabilities: The carrying amount of cash, current receivables and payables and certain other short-term financial instruments approximate
their fair value as of December 31, 2018 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 $2,752,000 compared to its carrying amount
of $2,758,000 as of December 31, 2018.