UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
| (Mark One) | |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended: December 31, 2020 | |
| OR | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to | |
| Commission file number: 0-11668 | |
Inrad Optics, Inc.
(Exact name of registrant as specified in its charter)
| New Jersey | 22-2003247 | |
| State or other jurisdiction of incorporation or organization | (I. R. S. Employer Identification No.) | |
| 181 Legrand Avenue, Northvale, NJ | 07647 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code 201-767-1910
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Securities registered pursuant to section 12(g) of the Act:
Common stock, par value $.01 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined 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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes | x | No | ¨ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
| Yes | x | No | ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x |
Smaller reporting company x |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | o | No | x |
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $5,762,963. (For purposes of determining this amount, only directors, executive officers and shareholders with voting power of 10% or more of our stock have been deemed affiliates.)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Shares outstanding as of March 30, 2021 – 13,820,328 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Shareholders, to be filed with the Commission not later than 120 days after the close of the registrant’s fiscal year, have been incorporated by reference, in whole or in part, into Part III Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.
Inrad Optics, Inc.
INDEX
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Caution Regarding Forward Looking Statements
This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to ensure that any forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. The events described in the forward-looking statements contained in this Annual Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of the Company’s plans or strategies, or projections involving anticipated revenues, earnings, or other aspects of the Company’s operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements. The Company cautions you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond the Company’s control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1 (Business) and Item 1A (Risk Factors) of Part I and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of this Annual Report on Form 10-K. Any one or more of these uncertainties, risks, and other influences could materially affect the Company’s results of operations and whether forward-looking statements made by the Company ultimately prove to be accurate. Readers are further cautioned that the Company’s financial results can vary from quarter to quarter, and the financial results for any period may not necessarily be indicative of future results. The foregoing is not intended to be an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by the Company. The Company’s actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether from new information, future events, or otherwise, except as otherwise required by law.
| Item 1. | Business |
Inrad Optics, Inc. (the “Company,” “Inrad,” or “we”), was incorporated in New Jersey in 1973. The Company develops, manufactures and markets products and services for use in photonics enabled industry sectors.
The Company is a vertically integrated manufacturer specializing in crystal-based optical components and devices, custom optical components from both glass and metal, and precision optical and opto-mechanical assemblies. Manufacturing capabilities include solution and high temperature crystal growth, extensive optical fabrication capabilities including precision diamond turning and the ability to handle large substrates, proprietary optical contacting processes, thin film coatings, and high resolution in-process metrology.
Inrad Optics’ customers include leading corporations in the defense, aerospace, laser systems, process control and metrology sectors of the photonics industry, as well as the U.S. Government, National Laboratories and universities worldwide.
Administrative, engineering and manufacturing operations are in a 42,000 square foot building located in Northvale, New Jersey.
The products produced by Inrad Optics, Inc. fall into two main categories: Optical Components and Laser Devices/Instrumentation.
The Optical Components category is heavily focused on custom optics manufacturing. The Company specializes in high-end precision components and sub-assemblies. It develops, manufactures and delivers precision custom optics and thin film optical coating services through its Custom and Metal Optics operations. Glass, metal, and crystal substrates are processed using complex processes and techniques to manufacture components, deposit optical thin films, and assemble sub-components used in advanced photonic systems. The majority of custom optical components and optical coating services supplied are used in defense and aerospace electro-optical systems, inspection, laser, medical and process control systems.
The Laser Devices/Instrumentation category includes the growth and fabrication of crystalline materials with electro-optic (EO) and non-linear optical properties for use in both standard and custom products. This category also includes crystal-based devices and associated instrumentation. The majority of crystals, crystal components and laser devices are used in laser systems, defense and security EO systems, medical lasers and research and development applications by engineers within corporations.
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The following table summarizes the Company’s net sales by product categories during the past two years. Laser Devices/Instrumentation includes all non-linear and electro-optical crystal components.
| Years Ended December 31, | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Category (In thousands) | Net Sales | % | Net Sales | % | ||||||||||||
| Optical Components | $ | 8,341 | 92.6 | $ | 8,796 | 87.9 | ||||||||||
| Laser Devices/Instrumentation | 667 | 7.4 | 1,212 | 12.1 | ||||||||||||
| Total | $ | 9,008 | 100.0 | $ | 10,008 | 100.0 | ||||||||||
Products Manufactured by the Company
Optical Components
a) Custom Optics and Optical Coating Services
Manufacturing of high-performance custom optics is a major product area for Inrad Optics and is addressed in the marketplace by the Company’s Custom and Metal Optics product lines.
The Custom Optics product line focuses on products manufactured to specific customer requirements. It specializes in the manufacture of optical components, optical coatings (ultra-violet wavelengths through infra-red wavelengths) and subassemblies for the aerospace, industrial medical marketplace and military. Planar, prismatic and spherical components are fabricated from glass and synthetic crystals, including fused silica, germanium, magnesium fluoride, quartz, silicon, zinc selenide, and zinc sulfide. Components consist of cavity optics for lasers, large form factor transmission flats, optical windows for airborne applications, multi-element optical assemblies, lenses, mirrors, polarizing optics, prisms, wave plates, and x-ray monochromators.
Most optical components and sub-assemblies require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect and transmit specific wavelengths. The Custom Optics optical coating specialties include anti-reflective high laser damage resistance, highly reflective, infra-red, polarizing, and coating to complex multi-wavelength requirements on a wide range of substrate materials. Coating deposition process technologies employed included electron beam, ion and plasma assisted deposition systems and thermal.
The Metal Optics product line is a fully integrated precision metal optics and optical assembly operation which employs high precision diamond machining, polishing, and plating of aluminum, AlBeMet™, beryllium, and stainless steel. The Metal Optics product line offers opto-mechanical design and assembly services as part of its manufactured deliverables and can support prototyping through production of arc-second accuracy polygons, diamond machined precision aspheres, large and small metal mirrors, low RMS surface finish polished mirrors, planar mirrors, reflective Porro prisms, and thermally stable optical mirrors. Plating specialties include void-free gold and electroless nickel.
b) UV Filter Optical Components
This product line consists of crystals and crystal devices including UV filter materials of both patented and proprietary formulations with unique transmission and absorption characteristics. These materials are used in critical applications in defense systems such as missile warning sensors.
Laser Devices/Instrumentation
This product line consists of crystal-based products that are used in, or alongside, laser systems. Developing growth processes for high quality synthetic crystals is a core competency of the Crystals and Devices manufacturing team. These crystals are embedded in our value-added devices and instrumentation products manufactured in our Northvale facility and include crystals for wavelength conversion, modulation and polarization, Pockels cells, and wavelength conversion instruments. In addition to the filter materials used in the UV Filter Optical components described above, current materials produced include beta barium borate (BBO), lithium niobate, potassium dideuterium phosphate, potassium dihydrogen phosphate, Stilbene, and zinc germanium diphosphide. Applications for these materials include defense, homeland security, industrial processing lasers and surgical lasers.
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The Crystals and Devices manufacturing team is also engaged in ongoing research and development efforts to develop new materials for evolving applications. Some of the major products produced for the photonics marketplace include:
a) Crystal Components
The Company grows and fabricates electro-optic and nonlinear crystal devices for altering the intensity, polarization or wavelength of a laser beam. Other crystal components, produced as part of the Crystals and Devices product line, are used in laser research, in commercial laser systems and in detection of fast neutrons.
b) Pockels Cells and Drivers
A line of Pockels cells and associated electronics is manufactured for sale in multiple market sectors. Pockels cells are devices that include one or more crystal components and are used in applications that require fast switching of the polarization direction of a beam of light. These uses include Q-switching of laser cavities to generate pulsed laser light, coupling light into and out from regenerative amplifiers, and light intensity modulation. These devices are sold to medical and industrial laser original equipment manufacturers (“OEM”), research institutes and laser system design engineers.
Sales by Market
The photonics industry serves a broad, fragmented, and expanding set of markets. As technologies are discovered, developed, and commercialized, the applications for photonic systems and devices, and the components embedded within those devices, expand across traditional market boundaries. While a significant part of the Company’s business remains firmly in the process control and metrology and defense and aerospace markets, other markets served include OEM manufacturers in the medical and industrial laser market, university research institutes and national labs worldwide. Scanning, detection and imaging technologies for homeland security and surface inspection also provide opportunities for the Company and these sectors are expected to continue to account for potential future growth and demand for our products and capabilities.
In 2020 and 2019, the Company’s product sales were made to customers in the following market areas:
| Years Ended December 31, | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Market (In thousands) | Net Sales | % | Net Sales | % | ||||||||||||
| Aerospace & Defense | $ | 3,916 | 43.5 | $ | 3,710 | 37.0 | ||||||||||
| Process Control & Metrology | 3,328 | 36.9 | 4,189 | 41.9 | ||||||||||||
| Laser Systems | 667 | 7.4 | 1,212 | 12.1 | ||||||||||||
| Scientific / R&D | 1,097 | 12.2 | 897 | 9.0 | ||||||||||||
| Total | $ | 9,008 | 100.0 | $ | 10,008 | 100.0 | ||||||||||
Aerospace & Defense
This market consists of sales to OEM defense electro-optical systems and subsystems manufacturers, U.S. based prime defense contractors, and direct sales to governments where the products have the same end-use.
End-use applications for the Company’s products in the aerospace and defense sector include military laser systems, military electro-optical systems, satellite-based systems, and missile warning sensors and systems that protect aircraft. The dollar volume of shipments of product within this sector depends in large measure on the U.S. Defense Department budget and its priorities, that of foreign governments, the timing of their release of contracts to their prime equipment and systems contractors, and the timing of competitive awards from this customer community to the Company.
Sales in the aerospace and defense market represented approximately 43.5% and 37.0% of sales in 2020 and 2019, respectively. Sales increased by approximately $0.2 million, or 5.6% from 2019. The increase in sales is primarily due to the increase in military and defense spending in 2020.
The Company believes that the aerospace and defense sector will continue to represent a significant market for the Company’s products and offers an ongoing opportunity for growth given the Company’s capabilities in specialty crystal, glass and metal precision optics.
Process Control and Metrology
This market consists of capital equipment manufacturers whose products are used in the areas of manufacturing process and control, optics-based metrology, quality assurance, and inventory and product control. Examples of applications for such equipment include semiconductor wafer inspection, nanoscale surface defect analysis, and optical sensing systems
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Sales in the Process Control and Metrology (PC&M) market decreased by approximately $0.9 million, or 20.6% in 2020, compared to 2019, and represented 36.9% and 41.9% of sales in 2020 and 2019 respectively. Decreased sales to two OEM customers resulted in the decrease in 2020.
The Company believes that the optical and x-ray inspection segment of the semiconductor industry offers continued growth opportunities which match its capabilities in precision optics, crystal products, and monochromators However, COVID-19-related temporary customer shutdowns impacted the sales in this market during 2020. Stronger bookings in the second half of 2020 indicate a rebound for our products in the PC&M market.
Laser Systems
This market consists principally of customers who are OEM manufacturers of industrial, medical, and R&D lasers, which the Company serves as an OEM supplier of standard and custom optical components and laser accessories. The Company also serves a number of smaller customers in other niche markets and international distributors.
Sales in this market were 7.4% of total sales in 2020 compared to 12.1% of total sales in 2019. The decrease of approximately $0.5 million, or 45%, from the prior year was due the sharp reduction in demand for products serving the laser markets and excess inventory in the distribution channel.
Scientific / R&D
These sales consist of product sales directly to researchers at various educational and research institutions and through distributors into that same market internationally. Sales to customers within the Scientific / R&D market consist primarily of x-ray monochromators, non-linear crystals for laser research, and Pockels cells. Sales in 2020 increased approximately $0.2 million, or 22.3%, and as a percentage of total sales increased from 9.0% in 2019 to 12.2% in 2020 due to demand for our monochromators as a result of expanded applications in the R&D market.
Major Customers
The Company’s sales have historically been concentrated within a small number of customers, although the top customers have varied from year to year.
In 2020, the Company’s sales to its top three customers accounted for 30.6% of sales. These customers included a two U.S. based defense contractors of electro-optical systems for U.S. and foreign governments and one OEM manufacturer of process control and metrology equipment. These customers represented 17.1%, 7.0%, and 6.5% of total sales during the year.
Sales to the Company’s top five customers represented approximately 43.0% and 47.2% of sales, in 2020 and 2019, respectively. All these customers are OEM manufacturers either within the defense, process control and metrology or laser systems sector.
Export Sales
The Company’s export sales are primarily to customers in Europe, Israel, and Asia and amounted to approximately 29.4% and 31.9% of product sales in 2020 and 2019, respectively.
Long-Term Contracts
Certain of the Company’s agreements with customers provide for periodic deliveries at fixed prices over a long period of time. In such cases, the Company negotiates to obtain firm price commitments, as well as cash advances from its customers for the purchase of the materials necessary to fulfill the order.
Marketing and Business Development
The Company markets its products domestically, through the coordinated efforts of the sales, marketing and customer service team.
The Company has moved towards a strategy of utilizing these combined sales and marketing resources for cross-selling all products across all business lines. This strategy is well suited to the diverse and fragmented markets that utilize photonic technologies.
Independent sales agents are used in major non-U.S. markets, including the United Kingdom, the European Union, Israel, and Japan.
Sales and marketing efforts are coordinated by the Vice President, Sales and Marketing, to promote our product lines through various means including, participation in trade shows, internet-based marketing, media and non-media advertising and promotions, customer visits, and management of international sales representatives and distributors. Our sales efforts were significantly impacted by COVID-19-related government mandates and limitations on travel.
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Backlog
The Company’s order backlog at December 31, 2020, was $5.9 million. The Company’s order backlog as of December 31, 2019, was $5.1 million.
We anticipate shipping a substantial majority of the present backlog during fiscal year 2021. However, our backlog at any given date may consist of orders with delivery schedules that extend beyond 12 months into the future.
Competition
Within each product category in which the Company’s business units are active, there is competition.
Our optical components manufacturing capabilities offer unique solutions designed for highly specialized applications. We are an industry leader in supplying bent crystal analyzers used in x-ray photoelectron spectroscopy, synchrotron beamline focusing, and plasma diagnostics in controlled nuclear fusion research facilities. We are a leading supplier of large precision flats produced in volume for semiconductor defect inspection tools and metrology systems. We have a broad range of materials expertise to produce products across the spectrum from the ultraviolet to the far infrared. Specialized custom optical and opto-mechanical components that we produce are used in military imaging platforms and early warning missile sensing systems. By utilizing a team of scientists, engineers, and manufacturing experts we believe we have a competitive advantage over traditional optical component manufacturers.
The Laser Devices/Instrumentation products have the advantage of vertical integration within our facility that includes crystal growth, fabrication, and design and assembly of instrumentation. Our crystals and devices are used in critical laser applications such as laser surgery, quantum technology, and scientific research. We are a sole supplier of Stilbene scintillation crystals to the nuclear science and radiation detection community and produce associated instrumentation. We believe our vertical integration provides best in class control of quality, delivery, and traceability in our products and allows us to respond quickly to market trends and newly innovative demands from our customers.
Although price is a principal factor in many product categories, competition is also based on product design, performance, customer confidence, quality, delivery, and customer service. Based on its performance to date, the Company believes that it can continue to compete successfully, although no assurances can be given in this regard.
Competitors for our custom optical components used in military and process control applications include several large publicly traded, broad capability, photonics companies. There is also competition from a range of smaller niche businesses catering to a limited set of product offerings. In metal optics, we have competition for mirrors used in aerospace telescopes and EO/IR modules from large and well-capitalized public companies. Our laser devices compete with several small and midsize companies both in the U.S., as well as Asia and Europe. There is also limited competition from commodity supply chain optics value added resellers.
Human Capital
We believe that each employee contributes to our culture of integrity, innovation, and teamwork.
We offer a variety of benefits such as health insurance, paid and unpaid leave, retirement, life and disability/accident coverage as applicable.
Our commitment to diversity and inclusion is an important driver of company performance.
Our workplace health and safety programs include robust policies, procedures, training programs, and self-audits. Our manufacturing facility is in Northvale, NJ, where we maintain high standards of workplace safety and employee protection. We have also been demonstrating a focus on health and safety in our response to the COVID-19 pandemic, including work-from-home flexibility and requiring those who may be sick to stay home. Measures adopted onsite include multiple COVID-19 safety protocols, such as social distancing, use of personal protective equipment, enhanced cleaning practices, regular internal communication regarding impacts of the COVID-19 pandemic, daily health certifications, and restrictions on domestic and international travel.
For our manufacturing activities, the speed at which we can recruit, train and deploy quality new and replacement personnel is an important part of our ability to ramp up and maintain our production capacity. We rely upon both employees and resources from staffing firms to meet our needs for direct labor. We face strong competition from companies in a variety of technology fields to secure the engineering and fabrication talent that we require.
As of the close of business on March 29, 2021, the Company had 51 full-time employees.
Patents and Licenses
The Company mainly relies on its manufacturing and technological expertise, know-how, and trade secrets in addition to its exclusive license patent, to maintain its competitive position in the industry. The Company takes precautionary and protective measures to safeguard its technical design and manufacturing processes. The Company executes nondisclosure agreements with its employees and, where appropriate, with its customers, suppliers, and other associates.
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Regulation
Foreign sales of certain of the Company’s products to certain countries may require export licenses from the United States Department of Commerce and/or Department of State. Such licenses are obtained when required. All requested export licenses of Inrad Optics products have been granted or deemed not-required.
International Traffic in Arms Regulations (“ITAR”) governs much of the Company’s domestic defense sector business, and the Company is capable of handling its customers’ technical information under these regulations. Inrad Optics, Inc. is registered with the United States Department of State Directorate of Defense Trade Controls, and utilizes a supplier base of similarly registered companies.
There are no other federal regulations or any unusual state regulations that directly affect the sale of the Company’s products other than those environmental compliance regulations that generally affect companies engaged in manufacturing operations in New Jersey.
Availability of Reports
Our principal executive offices are located at 181 Legrand Avenue, Northvale, N.J. 07647, which also houses our manufacturing operations. Our telephone number is 201-767-1910, and our corporate website address is www.inradoptics.com. We include our website address in this annual report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website. The information on our website is not incorporated by reference in this annual report on Form 10-K.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports, as well as other documents we file with the Securities and Exchange Commission, are available free of charge on our web site at www.inradoptics.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to the Securities and Exchange Commission (“SEC”) (www.sec.gov). We will also provide electronic or paper copies of such reports free of charge upon request made to our Corporate Secretary.
| Item 1A. | Risk Factors |
The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. The risks described below are those we currently consider to be material. However, there may be other risks, which we now consider immaterial, or which are unknown or unpredictable, with respect to our business, the markets in which we operate, our competition, the regulatory environment or otherwise that could have a material adverse effect on our business, financial condition, or results of operations.
| a) | The Company has a history of losses |
We recorded a net loss of $0.8 million for each of the years ended December 31, 2020 and 2019. Our history of losses has had an adverse effect on our working capital, total assets, and shareholders’ equity. We are unable to predict, with certainty, whether we will be profitable after 2020, and our inability to achieve and sustain profitability may negatively affect our business, financial condition, results of operations, and cash flows.
| b) | The Company may need to raise additional capital to repay indebtedness and to fund our operations |
We may need to raise additional financing to repay our outstanding indebtedness of approximately $2.6 million, net of the PPP Loan proceeds of $1.0 million forgiven in January 2021, as well as, to fund our current level of operations. Additional financing, which is not in place at this time, may be from the sale of equity or convertible or other debt securities in a public or private offering, or from an additional credit facility. We may be unable to raise sufficient additional capital on favorable terms, if at all, to supply the working capital needs of our existing operations or to expand our business.
| c) | A pandemic, epidemic or outbreak of an infectious disease in the United States and globally may adversely affect our business. |
A pandemic, epidemic or outbreak of an infectious disease occurring in the United States and/or worldwide, may adversely affect production. The spread of an infectious disease, including the COVID-19 virus, which was declared a pandemic by the World Health Organization on March 11, 2020, may also result in the inability of our suppliers to deliver on a timely basis or at all. In addition federal, state, and local governments may curtail and restrict business activities, as well as the ability for our employees to work. Such events may result in a period of business disruption, and in reduced operations, which could materially affect our business, financial condition and results of operations. Any significant infectious disease outbreak, including the COVID-19 pandemic, could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations, including our ability to obtain additional funding, if needed.
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The spread of COVID-19 has negatively impacted the global economy and has had an impact our operations, including the curtailment of certain of our production activities and disruptions in our supply chain. The extent to which the global coronavirus pandemic continues to impact our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19, and the actions to contain or treat its impact, among others. The Company continues to monitor safety protocols and enhance its business continuity plans for potential exposure in the event of infection in our offices and production facility, or in response to potential mandatory quarantines.
| d) | The Company has exposure to Government Markets |
Sales to customers in the defense industry represent a significant part of our business. These customers in turn generally contract with government agencies. Most governmental programs are subject to funding approval through congressional appropriations which can be modified or terminated without warning upon the determination of a legislative or administrative body. Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. Government which could reduce available funding for most federal agencies, including the Department of Defense. It is difficult to assess how this may impact our defense industry customers and the business we do with them in the future. The loss or failure to obtain certain contracts or a loss of a major government customer could have a material adverse effect on our business, results of operations, or financial condition.
| e) | The Company’s revenues are concentrated in its largest customer accounts |
For the year ended December 31, 2020, five customer accounts represented approximately 43.0% of total revenues. Only one of these customers accounted for more than 10% of revenues. We are a supplier of custom manufactured components to OEM customers, and have a number of large customers in both the commercial and defense markets, but the relative size and identity of our largest customers change year to year. In the short term, the loss of any of these large customer accounts or a decline in demand in the markets which they represent could have a material adverse effect on our business, results of operations, or financial condition.
| f) | The Company depends on, but may not succeed in, developing and acquiring new products and processes |
To meet the Company’s strategic objectives, the Company needs to continue to develop new processes, improve existing processes, and manufacture and market new products. As a result, the Company may continue to make investments in process development and additions to its product portfolio. There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a way that achieves market acceptance or other pertinent targeted results. The Company also cannot be sure that it will have the human or financial resources to pursue or succeed in such activities.
| g) | The Company’s stock price may fluctuate widely |
The Company’s stock is thinly traded. Many factors, including, but not limited to, future announcements concerning the Company, its competitors or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding the Company’s industries in the financial press or investment advisory publications, could cause the market price of the Company’s stock to fluctuate substantially. In addition, the Company’s stock price may fluctuate widely for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military conflicts, or market or related declines, may materially affect the market price of the Company’s common stock. In addition, any information concerning the Company, including projections of future operating results, appearing in investment advisory publications or on-line bulletin boards or otherwise emanating from a source other than the Company could in the future contribute to volatility in the market price of the Company’s common stock.
| h) | The Company’s business success depends on its ability to recruit and retain key personnel |
The Company depends on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and on the Company’s ability to recruit additional personnel. There is competition for the services of these personnel, and there is no assurance that the Company will be able to retain or attract the personnel necessary for its success, despite the Company’s efforts to do so. The loss of services of the Company’s key personnel could have a material adverse effect on its business, results of operations, or financial condition.
| i) | Many of the Company’s customers are in cyclical industries |
The Company’s business is significantly dependent on the demand its customers experience for their products. Many of their end users are in industries that historically have experienced a cyclical demand for their products. The industries include, but are not limited to, the defense electro-optics industry and the manufacturers of process control capital equipment for the semiconductor tools industry. As a result, demand for the Company’s products is subject to cyclical fluctuations, and this could have a material effect on our business, results of operations, or financial condition.
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| j) | The Company’s manufacturing processes require products from limited sources of supply |
The Company utilizes many relatively uncommon materials and compounds to manufacture its products. Many of the materials have long lead times and the Company’s suppliers could fail to deliver sufficient quantities of these necessary materials on a timely basis, or deliver contaminated or inferior quality materials, or markedly increase their prices. Any such actions could have an adverse effect on the Company’s business, despite the Company’s efforts to secure long term commitments from its suppliers. Adverse results might include reducing the Company’s ability to meet commitments to its customers, compromising the Company’s relationship with its customers, adversely affecting the Company’s ability to meet expanding demand for its products, or causing the Company’s financial results to deteriorate.
| k) | The Company faces competition |
The Company encounters substantial competition from other companies positioned to serve the same market sectors. Some competitors may have financial, technical, capacity, marketing or other resources more extensive than ours, or may be able to respond more quickly than the Company to new or emerging technologies and other competitive pressures. Some competitors have manufacturing operations in low-cost labor regions such as the Far East and Eastern Europe and can offer products at lower prices than the Company. The Company may not be successful in winning orders against the Company’s present or future competitors, and competition may have a material adverse effect on our business, results of operations, or financial condition.
| l) | The Company may not be able to fully protect its intellectual property |
The Company currently holds one patent for a material applicable to an important product, but does not in general rely on patents to protect its products or manufacturing processes. The Company generally relies on a combination of trade secrets and employee non-compete and nondisclosure agreements to protect its intellectual property rights. There can be no assurance that the steps the Company takes will be adequate to prevent misappropriation of the Company’s technology. In addition, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company. Asserting the Company’s rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting the Company’s business, results of operations, or financial condition.
| m) | Data breach and breakdown of information and communication technologies |
In the course of our business, we collect and store sensitive data, including intellectual property. We could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an incident, if we are unable to prevent such security or privacy breaches, our operations would be disrupted or we could suffer, financial loss, property damage, reputational damage, or regulatory penalties because of lost or misappropriated information.
| Item 1B. | Unresolved Staff Comments |
None
| Item 2. | Properties |
Administrative, engineering, and manufacturing operations are housed in a 42,000 square foot building located in Northvale, New Jersey. The lease for the Northvale facility was renewed for a term of three years from June 1, 2019 to May 31, 2022, along with an option to renew the lease for three additional one-year terms running through May 31, 2025, at substantially the same terms. We believe that our existing facility is adequate to meet current and future projected production needs.
| Item 3. | Legal Proceedings |
We are not party to any legal proceedings as of the date hereof.
| Item 4. | Mine Safety Disclosures |
Not Applicable
10
| Item 5. | Market for Registrant’s Common Equity and Related Stockholder Matters |
a) Market Information
The Company’s Common Stock, with a par value of $0.01 per share, is traded on the OTC Pink Sheets under the symbol “INRD.”
b) Shareholders
As of March 27, 2021, there were approximately 121 shareholders of record of our Common Stock based on the `Shareholders’ Listing provided by the Company’s transfer agent. As of the same date, the Company estimates there are an additional 240 beneficial shareholders.
c) Dividends
The Company has not historically paid cash dividends. Payment of cash dividends is at the discretion of the Company’s Board of Directors and depends, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company does not anticipate paying cash dividends in the foreseeable future.
d) Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the past year.
| Item 6. | Selected Financial Data |
Not required.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.
Critical Accounting Policies
The Company’s significant accounting policies are described in Note 1 of the Consolidated Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the Company’s financial statements, the Company made estimates and judgments that affect the results of its operations and the value of assets and liabilities the Company reports. The Company’s actual results may differ from these estimates.
Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosure. The Company believes that the following summarizes critical accounting policies that require significant judgments and estimates in the preparation of the Company’s consolidated financial statements:
Revenue Recognition
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.
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost of manufactured goods includes material, labor and overhead.
The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving, or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues.
Stock-based compensation
Stock based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.
Income Taxes
Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
11
The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
Leases
The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019. Under the guidance of ASU 2016-02, Leases (Topic 842), the Company must determine if such an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease at inception of the arrangement. The Company determined that this lease is an operating lease and presented as a right-of-use lease asset, short term lease liability and long-term lease liability on the consolidated balance sheet. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental borrowing rate.
Results of Operations
The following table sets forth, for the past two years, the percentage relationship of statement of operations categories to total revenues.
| Years ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues: | ||||||||
| Product sales | 100.0 | % | 100.0 | % | ||||
| Costs and expenses: | ||||||||
| Cost of goods sold | 80.1 | 80.1 | ||||||
| Gross profit margin | 19.9 | 19.9 | ||||||
| Selling, general and administrative expenses | 28.2 | 26.1 | ||||||
| Operating (loss) income | (8.3 | ) | (6.2 | ) | ||||
| Net (loss) income | (10.0 | ) | (7.6 | ) | ||||
Revenues
Sales were $9.0 million in 2020, a decrease of 10.0% or $1.0 million, compared to $10.0 million in 2019. Lower bookings in 2019 combined with the effects of mandatory shutdowns, customer pushouts, and reduced demand led to the decrease in sales in 2020.
Sales to the defense and aerospace market in 2020 increased 5.6%, or $0.2 million to $3.9 million from $3.7 million in 2019. Sales in the defense and aerospace market represented 43.5% and 37.0% of total sales in 2020 and 2019, respectively. The increase in military and defense spending resulted in stronger demand for our products in 2020.
Sales in the process control and metrology market decreased $0.9 million, or 20.6% to $3.3 million in 2020 from $4.2 million in 2019. Sales in the process control and metrology represented 36.9% and 41.9% of total sales in 2020 and 2019, respectively. Decreased demand for critical components in the semiconductor capital equipment market negatively impacted sales in 2020 and 2019.
The Company serves as an OEM supplier of standard and custom optical components and laser accessories within the non-military laser industry. Sales to this and related markets were $0.7 million and $1.2 million in 2020 and 2019, respectively. Overall, sales of laser devices and related products represented 7.4% and 12.1% of revenues in 2020 and 2019, respectively, a decrease of $0.5 million or 45.0%. The decrease in 2020 was due to the cancelation of orders from one international customer.
Sales to customers within the Scientific / R&D market increased in 2020 to $1.1 million from $0.9 million in 2019. The 22.3% increase is mainly due to increased orders from a national lab and billings from an SBIR contract awarded in the second quarter of 2020. As a percentage of total sales, this market represented 12.2% and 9.0% of sales in 2020 and 2019, respectively.
Bookings
The Company booked new orders totaling approximately $9.8 million in 2020. The Company’s backlog as of December 31, 2020, was $5.9 million, compared to $5.1 million as of December 31, 2019.
12
Cost of Goods Sold and Gross Profit Margin
Cost of goods sold as a percentage of sales was 80.1% for each of the years ended December 31, 2020 and 2019.
The cost of goods sold in 2020 was $7.2 million, compared to $8.0 million in 2019, a decrease of $0.8 million, mainly attributable to the decrease in sales, coupled with a change in sales mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $2.5 million in 2020, compared to $2.6 million in 2019, a decrease of $0.1 million, or 2.9%. The decrease is attributable a significant reduction in sales and marketing related expenses, coupled with reduced recruiting and temporary employee costs, offset by an increase in the reserve for doubtful accounts and an increase in insurance costs. The reduction in sales and marketing related expenses is directly related to the protocols and restrictions on travel implemented by the Company as a result of government mandates.
As a percentage of sales, SG&A was 28.2% of sales in 2020 compared to 26.1% of sales in 2019, primarily due to lower sales in 2020.
Operating Income (Loss)
The Company had an operating loss of $0.7 million in 2020, compared to a net operating loss of $0.6 million in 2019.
Other Income and Expenses
Net interest expense was $0.2 million in each of 2020 and 2019.
Income Taxes
In 2020 and 2019, the Company did not record a current provision for either state tax or federal alternative minimum tax due to carry forward losses incurred in prior years for both income tax and financial reporting purposes.
Net Income (Loss)
As a result of the foregoing, the Company recorded a net loss of $0.9 million in 2020, compared to a net operating loss of $0.8 million in 2019.
Liquidity and Capital Resources
The Company’s primary source of liquidity is cash and cash equivalents and on-going collection of our accounts receivable. The Company’s major uses of cash in the past three years have been for operating expenses, capital expenditures, and for repayment and servicing of outstanding debt and accrued interest.
As of December 31, 2020, and December 31, 2019, cash and cash equivalents were $1.1 million and $1.0 million, respectively.
On July 22, 2020, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2024, from April 1, 2021. The notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement to extend the maturity date of the notes, the expiration dates of the warrants were extended from April 1, 2022 to April 1, 2027.
The Company paid $0.2 million and $0.1 million for interest on the subordinated convertible promissory notes in 2020 and 2019, respectively. Accrued interest of $37,500 and $112,500 is included in Accounts payable and accrued liabilities as of December 31, 2020 and 2019, respectively.
In total, the Company paid $0.2 million of interest in each of 2020 and 2019, on its outstanding debt, including interest paid on the subordinated convertible promissory notes.
In 2020 and 2019, the Company had capital expenditures of $0.2 million and $0.3 million, respectively. Capital spending in 2020 reflects the Company’s investment in information and technology system upgrades to address cybersecurity requirements and manufacturing equipment upgrades. The 2019 capital expenditures reflected our investments in our large diamond turning center, our in-process metrology capabilities, and the installation of a new redundant power system to support our crystal growth and IT infrastructure.
The Company had a net increase in cash of $0.2 million for the twelve months ended December 31, 2020, compared to a net decrease in cash of $0.2 million for the twelve months ended December 31, 2019.
13
On May 6, 2020, the Company received loan proceeds of approximately $973,000, under the Paycheck Protection Program (“PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was enacted March 27, 2020. The PPP Loan, which is in the form of a promissory note dated May 4, 2020, issued by the Company, matures on May 4, 2022, and bears interest at a rate of 1.0% per annum, payable monthly commencing on December 4, 2020. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered 24-week period will qualify for forgiveness. Forgiveness of the PPP Loan is subject to approval by the Small Business Administration.
On January 19, 2021, the Company received notification from the Small Business Association that the Company’s Forgiveness Application of the PPP Loan and accrued interest, totaling $980,000, was approved in full, and the Company had no further obligations related to the PPP Loan.
Cash flows pertaining to our source and use of cash are presented below (in thousands):
| Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| (in thousands) | ||||||||
| Net cash provided by (used in) operating activities | $ | (587 | ) | $ | 150 | |||
| Capital expenditures and purchase of precious metals | (201 | ) | (310 | ) | ||||
| PPP Loan Proceeds | 973 | 0 | ||||||
| Principal payments on debt obligations | (6 | ) | (75 | ) | ||||
Overview of Financial Condition
The Company recorded a net loss of $0.9 million and $0.8 million for the twelve months ended December 31, 2020 and 2019, respectively. The Company’s cash and cash equivalents increased to $1.1 million from $1.0 million at December 31, 2019.
The Company’s management expects that future cash flows from operations and its existing cash reserves will provide adequate liquidity for the Company’s operations and working capital requirements through at least March 31, 2022.
Contractual Obligations
The following table describes our contractual obligations as of December 31, 2020 (in thousands):
| Less than | 4-5 | Greater | ||||||||||||||||||
| Contractual Obligations | Total | 1 Year | 1-3 Years | Years | Than 5 | |||||||||||||||
| Convertible notes payable, including interest | $ | 2,988 | 150 | 2,838 | ||||||||||||||||
| Notes payable-other, including interest | 247 | 39 | 88 | 46 | 73 | |||||||||||||||
| PPP Loan Proceeds * | 980 | 980 | ||||||||||||||||||
| Total contractual cash obligations | $ | 4,215 | $ | 1,169 | $ | 2,926 | $ | 46 | $ | 73 | ||||||||||
* The PPP Loan amd accrued interest were forgiven on January 21st, 2021.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements at December 31, 2020 and 2019.
Impact of COVID-19 to Operations
We are conducting business to ensure the safety of our employees and associates actively and earnestly, following all best practice CDC guidelines for prevention in the workplace. We have applied social distancing in our operations and implemented a connected, remote workforce where practicable. Our operations are considered essential business under the Executive Orders of New Jersey’s Governor, and we cannot predict what further actions may be required by federal, state, or local authorities in the future. Nor can we predict what actions these mandates may have on our customers and suppliers. We continue to actively monitor the situation and may be required to take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, partners, suppliers and shareholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our financial results.
14
While the Company’s bookings were stronger in 2020 and sales in our aerospace and defense and scientific markets improved over last year, total sales overall were negatively impacted by business factors resulting from COVID-19 and governmental restrictions, including disruptions to our customers’ and suppliers’ operations. Our sales and marketing efforts were negatively impacted due to travel and other operational restrictions. The total impact of the global emergence of COVID-19 on our business and financial results are not completely known, and we cannot predict what impact it may have on our continuing operations and the effect to our financial results.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
N/A
| Item 8. | Financial Statements and Supplementary Data |
The financial statements and supplementary financial information required to be filed under this Item are presented commencing on page 21 of the Annual Report on Form 10-K, and are incorporated herein by reference.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
| Item 9A. | Controls and Procedures |
a) Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures as of December 31, 2020, are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding disclosure.
b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our internal control over financial reporting includes those policies and procedures that:
| · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; | |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2020. In making this assessment, management used the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment and the criteria set forth by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020.
c) Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
| Item 9B | Other Information |
None
15
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.
| Item 11. | Executive Compensation |
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.
| Item 14. | Principal Accountant Fees and Services |
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.
| Item 15. | Exhibits and Financial Statement Schedules |
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements commencing on Page 20.
(a) (2) Financial Statement Schedule.
Reference is made to the Index to Financial Statements on Page 20. All other schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Financial Statements or Notes thereto.
16
(a) (3) Exhibits.
| Item 16. | Form 10-K Summary. |
| None. |
17
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INRAD OPTICS, INC. | ||
| By: | /s/ Amy Eskilson | |
| Amy Eskilson | ||
| Chief Executive Officer | ||
| Dated: March 30, 2021 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Jan M. Winston | Chairman of the Board | March 30. 2021 | ||
| Jan M. Winston | ||||
| /s/ William J. Foote | Director | March 30. 2021 | ||
| William J. Foote | ||||
| /s/ Luke P. LaValle, Jr. | Director | March 30. 2021 | ||
| Luke P. LaValle, Jr. | ||||
| /s/ Dennis G. Romano | Director | March 30. 2021 | ||
| Dennis G. Romao | ||||
| /s/ N.E. Rick Strandlund | Director | March 30. 2021 | ||
| N.E. Rick Strandlund | ||||
| /s/ Amy Eskilson | President, Chief Executive Officer | March 30. 2021 | ||
| Amy Eskilson | and Director (Principal Executive Officer) | |||
| /s/ Theresa A. Balog | Chief Financial Officer, Secretary, and Treasurer | March 30. 2021 | ||
| Theresa A. Balog | (Principal Financial and Accounting Officer) |
18
INRAD OPTICS, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
CONTENTS
19
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Inrad Optics, Inc. and Subsidiaries
Northvale, New Jersey
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Inrad Optics, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Inventory
As discussed in Note 1 to the consolidated financial statements, the Company values inventories at the lower of cost, determined using the first-in, first-out method, or net realizable value. The Company reviews the components of its inventory on a quarterly basis for products identified as surplus, slow moving or discontinued and adjusts inventory to its net realizable value as necessary. The Company’s inventory reserves are primarily based on historical, as well as projected, usage of its various inventory products. The inventory reserve at December 31, 2020 totaled $2.5 million. Net inventories at December 31, 2020 totaled $3.2 million.
Auditing management’s calculations to value inventory involved a high degree of auditor judgment due to the sensitivity of valuation methodologies and the extent of audit effort required to address the matter.
20
Our principal audit procedures related to the Company’s inventory valuation included the following:
| · | Evaluated the appropriateness and consistency of management’s methods and assumptions used in developing their assessment of net realizable value and their estimated reserve for slow-moving or excess inventory. We performed an analysis of the inventories’ realizable value and performed analytical testing by performing a year over year comparison of the inventory reserve by product. |
| · | We performed price testing on a sample of raw material inventory by comparing the carrying value of on-hand inventories to the latest purchases that occurred during the year ended December 31, 2020. |
| · | In order to assess the appropriateness of the valuation of work-in-progress and finished goods inventories, we performed testing on a sample of capitalized labor costs. |
| · | We evaluated management’s assumptions used to determine inventory absorption costs and performed a sensitivity analysis to evaluate the changes in inventory valuation that would result from changes in the assumptions. |
| · | Performed an observation of the Company’s physical inventory count, including independent test counts thereon. |
/s/ PKF O'Connor Davies, LLP
We have served as the Company’s auditor since 2017.
New York, New York
March 30, 2021
21
INRAD OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,129,703 | $ | 950,705 | ||||
| Accounts receivable (net of allowance for doubtful accounts of $91,000 in 2020, and $15,000 in 2019) | 824,452 | 1,233,081 | ||||||
| Inventories, net | 3,206,057 | 2,834,107 | ||||||
| Other current assets | 214,748 | 141,339 | ||||||
| Total current assets | 5,374,960 | 5,159,232 | ||||||
| Plant and equipment: | ||||||||
| Plant and equipment, at cost | 15,191,610 | 14,990,773 | ||||||
| Less: Accumulated depreciation and amortization | (14,564,186 | ) | (14,309,992 | ) | ||||
| Total plant and equipment | 627,424 | 680,781 | ||||||
| Precious metals | 561,909 | 561,910 | ||||||
| Lease right-of-use, net | 415,377 | 688,746 | ||||||
| Other assets | 48,421 | 44,577 | ||||||
| Total Assets | $ | 7,028,091 | $ | 7,135,246 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of other long term notes | $ | 16,288 | $ | 16,044 | ||||
| Accounts payable and accrued liabilities | 717,537 | 978,184 | ||||||
| Contract liabilities | 856,802 | 768,243 | ||||||
| Current portion of lease obligation | 304,844 | 273,369 | ||||||
| Total current liabilities | 1,895,471 | 2,035,840 | ||||||
| Related party convertible notes payable | 2,500,000 | 2,500,000 | ||||||
| Other long term notes, net of current portion | 1,133,682 | 166,763 | ||||||
| Lease obligation, net of current portion | 144,228 | 415,377 | ||||||
| Total liabilities | 5,673,381 | 5,117,980 | ||||||
| Shareholders' equity: | ||||||||
| Common stock: $.01 par value; 60,000,000 authorized shares; 13,824,928 shares issued at December 31, 2020, and 13,735,177 shares shares issued at December 31, 2019 | 138,251 | 137,353 | ||||||
| Capital in excess of par value | 19,516,363 | 19,281,255 | ||||||
| Accumulated deficit | (18,284,953 | ) | (17,386,392 | ) | ||||
| 1,369,661 | 2,032,216 | |||||||
| Less - Common stock in treasury, at cost (4,600 shares) | (14,950 | ) | (14,950 | ) | ||||
| Total shareholders' equity | 1,354,711 | 2,017,266 | ||||||
| Total Liabilities and shareholders' equity | $ | 7,028,091 | $ | 7,135,246 | ||||
See Notes to Consolidated Financial Statements
22
INRAD OPTICS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Total revenue | $ | 9,007,562 | $ | 10,007,655 | ||||
| Cost and expenses: | ||||||||
| Cost of goods sold | 7,218,119 | 8,015,148 | ||||||
| Selling, general and administrative expenses | 2,537,630 | 2,614,229 | ||||||
| 9,755,750 | 10,629,377 | |||||||
| (Loss) income from operations | (748,188 | ) | (621,722 | ) | ||||
| Other expense: | ||||||||
| Interest expense-net | (150,374 | ) | (153,938 | ) | ||||
| Loss on exchange of precious metals | - | (438 | ) | |||||
| (150,374 | ) | (154,376 | ) | |||||
| (Loss) income before income taxes | (898,561 | ) | (776,098 | ) | ||||
| Income tax (provision) benefit | - | - | ||||||
| Net (loss) income | $ | (898,561 | ) | $ | (776,098 | ) | ||
| Net (loss) income per common share - basic | $ | (0.07 | ) | $ | (0.06 | ) | ||
| Net (loss) income per common share - diluted | $ | (0.07 | ) | $ | (0.06 | ) | ||
| Weighted average shares outstanding - basic | 13,762,795 | 13,672,235 | ||||||
| Weighted average shares outstanding - diluted | 13,762,795 | 13,672,235 | ||||||
See Notes to Consolidated Financial Statements
23
INRAD OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| Capital in | Total | |||||||||||||||||||||||
| Common Stock | excess of | Accumulated | Treasury | Shareholders' | ||||||||||||||||||||
| Shares | Amount | par value | Deficit | Stock | Equity | |||||||||||||||||||
| Balance - January 1, 2019 | 13,636,988 | $ | 136,371 | $ | 19,055,615 | $ | (16,610,294 | ) | $ | (14,950 | ) | $ | 2,566,742 | |||||||||||
| 401K contribution | 98,189 | 982 | 92,605 | - | - | 93,587 | ||||||||||||||||||
| Stock-based compensation expense | - | - | 133,035 | - | - | 133,035 | ||||||||||||||||||
| Net income December 31, 2019 | - | - | - | (776,098 | ) | - | (776,098 | ) | ||||||||||||||||
| Balance - December 31, 2019 | 13,735,177 | $ | 137,353 | $ | 19,281,255 | $ | (17,386,392 | ) | $ | (14,950 | ) | $ | 2,017,266 | |||||||||||
| 401K contribution | 89,751 | 898 | 123,457 | - | - | 124,355 | ||||||||||||||||||
| Stock-based compensation expense | - | - | 111,651 | - | - | 111,651 | ||||||||||||||||||
| Net income (loss) December 31, 2020 | - | - | - | (898,561 | ) | - | (898,561 | ) | ||||||||||||||||
| Balance - December 31, 2020 | 13,824,928 | $ | 138,251 | $ | 19,516,363 | $ | (18,284,953 | ) | $ | (14,950 | ) | $ | 1,354,711 | |||||||||||
See Notes to Consolidated Financial Statements
24
INRAD OPTICS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) | $ | (898,561 | ) | $ | (776,098 | ) | ||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities | ||||||||
| Depreciation and amortization | 254,194 | 267,098 | ||||||
| 401(k) common stock contribution - non cash item | 124,355 | 93,587 | ||||||
| Loss on exchange of precious metals | - | 438 | ||||||
| Stock based compensation | 111,651 | 133,035 | ||||||
| Change in inventory reserve | (18,477 | ) | 2,910 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 408,629 | 63,406 | ||||||
| Inventories | (353,472 | ) | 178,866 | |||||
| Other current assets | (73,409 | ) | 39,554 | |||||
| Other assets | (3,844 | ) | 8,872 | |||||
| Accounts payable and accrued liabilities | (151,952 | ) | 30,668 | |||||
| Customer advances | 88,558 | (4,684 | ) | |||||
| Accrued interest in related party note payable | (75,000 | ) | 112,500 | |||||
| Total adjustments and changes | 311,233 | 926,250 | ||||||
| Net cash (used in) provided by operating activities | (587,328 | ) | 150,152 | |||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (200,837 | ) | (310,066 | ) | ||||
| Net cash (used in) investing activities | (200,837 | ) | (310,066 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from PPP Loan | 973,166 | - | ||||||
| Principal payments on notes payable-other | (6,003 | ) | (74,934 | ) | ||||
| Net cash provided by (used in) financing activities | 967,163 | (74,934 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 178,998 | (234,848 | ) | |||||
| Cash and cash equivalents at beginning of period | 950,705 | 1,185,553 | ||||||
| Cash and cash equivalents at end of period | $ | 1,129,703 | $ | 950,705 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | 226,513 | $ | 158,906 | ||||
| Income taxes paid | $ | - | $ | - | ||||
| Significant non-cash activities: | ||||||||
| Lease right-of-use asset | $ | - | $ | 819,612 | ||||
| Exchange of precious metals | $ | - | $ | 400 | ||||
See Notes to Consolidated Financial Statements
25
INRAD OPTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 2020
| 1. | Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates |
a. Nature of Business and Operations
Inrad Optics, Inc. and Subsidiaries (the “Company”), was incorporated in the state of New Jersey and is a manufacturer of crystals, crystal devices, electro-optic and optical components, and sophisticated laser devices and instruments. The Company has administrative offices and manufacturing operations in Northvale, New Jersey.
The Company’s principal customers include commercial instrumentation companies and OEM laser systems manufacturers, research laboratories, government agencies, and defense contractors. The Company’s products are sold domestically using its own sales staff, and in major overseas markets, principally Europe, Israel, Japan, and Asia, using independent sales agents.
b. Liquidity
As of December 31, 2020, the Company had working capital of $3.5 million and cash and cash equivalents of $1.1 million. Management believes based on the Company’s operations and its existing working capital resources together with existing cash flows, the Company has sufficient cash flows to fund operations through at least March 31, 2022.
c. Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts and transactions are eliminated.
d. Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates include, but are not limited to, determining our allowance for doubtful accounts, our allowance for inventory obsolescence, the fair value and depreciable lives of long-lived tangible and intangible assets, and deferred taxes and the associated valuation allowance. Actual results could differ from these estimates.
e. Cash and cash equivalents
The Company considers cash-on-hand and highly liquid investments with original maturity dates of three months or less at the date of purchase to be cash and cash equivalents.
f. Accounts receivable
Accounts receivable are carried at net realizable value, net of write-offs and allowances. The Company establishes an allowance for doubtful accounts based on estimates as to the collectability of accounts receivable. Management specifically analyzes past-due accounts receivable balances and, additionally, considers bad debt history, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Uncollectible accounts receivable are written-off when it is determined that the balance will not be collected.
g. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or net-realizable value. Cost of manufactured goods includes material, labor and overhead.
The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues.
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h. Plant and Equipment
Plant and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets which range between five and seven years. Amortization of leasehold improvements is computed using the straight-line method over the lesser of 10 years or the remaining term of the lease including optional renewal periods, as appropriate, when failure to renew the lease imposes an economic penalty on the Company in such an amount that renewal appears to be probable. In determining the amount of the economic penalty, management considers such factors as (i) the costs associated with the physical relocation of the offices, manufacturing facility and equipment, (ii) the economic risks associated with business interruption and potential customer loss during relocation and transition to new premises, (iii) the significant costs of leasehold improvements required at any new location to custom fit our specific manufacturing requirements, and (iv) the economic loss associated with abandonment of existing leasehold improvements or other assets whose value would be impaired by vacating the facility.
Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and a gain or loss is recorded.
i. Income taxes
Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
The Company had no unrecognized tax benefits or liabilities, and no adjustment to its financial position, results of operations, or cash flows relating to uncertain tax positions taken on all open tax years. The Company is no longer subject to federal income tax examinations by tax authorities for the years before 2017 and state or local income tax examinations by tax authorities for the years before 2017.
j. Impairment of long-lived assets
Long-lived assets, such as plant and equipment and purchased intangibles with finite lives, which are subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Long-lived assets held for sale would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and would no longer be depreciated.
k. Stock-based compensation
Stock based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.
l. Revenue recognition
The Company adopted the provisions of ASU 2014-09, “Revenues from Contracts with Customers (ASC 606)” on January 1, 2018, which requires recognition of revenue at the time performance obligations are satisfied. Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e., point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e., over time). See Note 2.
m. Internal research and development costs
Internal research and development costs are charged to expense as incurred.
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n. Precious metals
Precious metals are stated at cost and consist of various fixtures used in the high temperature crystal growth manufacturing process. From time to time the quoted market values of these precious metals may be below cost. Management evaluates these market adjustments on a recurring basis and if it is determined that they are other than temporary the carrying value would be adjusted.
o. Advertising costs
Advertising costs included in selling, general and administrative expenses were $18,000 and $45,000 for the years ended December 31, 2020 and 2019, respectively. Advertising costs are charged to expense when the related services are incurred or related events take place.
p. Concentrations and credit risk
The concentration of credit risk in the Company’s accounts receivable is mitigated by the Company’s credit evaluation process, familiarity with its small base of recurring customers and reasonably short collection terms and the geographical dispersion of revenue. The Company generally does not require collateral but, in some cases, the Company negotiates cash advances prior to the undertaking of the work. These cash advances are recorded as current liabilities on the balance sheet until corresponding revenues are realized.
The Company utilizes many relatively uncommon materials and compounds to manufacture its products and relies on outside vendors for certain manufacturing services. Therefore, any failure by its suppliers to deliver materials of an adequate quality and quantity could have an adverse effect on the Company’s ability to meet the commitments of its customers.
For the year ended December 31, 2020, the Company had three customers who had sales representing 17.1%, 7.0% and 6.5% of total revenues. For the year ended December 31, 2019, the Company had three customers who had sales representing 18.5%, 14.7% and 6.1% of total revenues. Since the Company is a supplier of custom manufactured components to OEM customers, the relative size and identity of the largest customer accounts changes somewhat from year to year. In the short term, the loss of any one of these large customer accounts could have a material adverse effect on business, results of operations, and financial condition.
q. Fair value measurements
The Company follows U.S. GAAP accounting guidance which establishes a framework for measuring fair value and expanded related disclosures. The framework requires fair value to be determined based on the exchange price that would be received for an asset, or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
The valuation techniques required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The accounting guidance requires the following fair value hierarchy:
| · | Level 1 - Quoted prices (unadjusted) for identical assets and liabilities in active markets that the Company has the ability to access at the measurement date. | |||
| · | Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. | |||
| · | Level 3 - Values determined by models, significant inputs to which are unobservable and are primarily based on internally derived assumptions regarding the timing and amount of expected cash flows. |
Long-lived assets may be measured at fair value if such assets are held for sale or if there is a determination that the asset is impaired. Management’s determination of fair value, although highly subjective, is based on the best information available, including internal projections of future earnings and cash flows discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets, broker quotes and independent appraisals, as appropriate.
r. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”) which amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2023, with earlier application permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
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In February 2016, the FASB issued ASU 2016-02, “Leases” (ASC 842), and subsequently issued updates as part of ASU 2018-11, “Leases, Targeted Improvements.” The new guidance requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The Company adopted ASC 842, effective January 1, 2019. The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019, and accordingly recorded an initial right-of-use asset of $0.8 million. See Note 12a. Lease Commitments. The adoption of ASU 842 and ASU 2018-11 did not have a material impact on the Company’s statements of operations or cash flows.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Shared-Based Payment Accounting. The ASU update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 effective January 1, 2019. The adoption did not have a material impact on its financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, on a prospective basis, with early adoption permitted. The Company is currently evaluating the impact of adoption of this guidance and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU update is intended to simplify the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. This guidance is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
| s. | Subsequent events |
Management has performed an evaluation of subsequent events through the date that the financial statements were issued and has determined that it does not have any additional material subsequent events to disclose in these financial statements.
| 2. | Revenue |
| Years Ended December 31, | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Market (In thousands) | Net Sales | % | Net Sales | % | ||||||||||||
| Aerospace & Defense | $ | 3,916 | 43.5 | $ | 3,710 | 37.0 | ||||||||||
| Process Control & Metrology | 3,328 | 36.9 | 4,189 | 41.9 | ||||||||||||
| Laser Systems | 667 | 7.4 | 1,212 | 12.1 | ||||||||||||
| Scientific / R&D | 1,097 | 12.2 | 897 | 9.0 | ||||||||||||
| Total | $ | 9,008 | 100.0 | $ | 10,008 | 100.0 | ||||||||||
The Company’s revenues are comprised of product sales as well as products and services provided under long-term government contracts with its customers. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract (either implicit or explicit) by transferring the promised product or service to its customer either when (or as) its customer obtains control of the product or service. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of standalone selling price for each distinct product or service in the contract, which is generally based on an observable price.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales, value added, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
The Company’s performance obligations under long-term government contracts are generally satisfied over time. Revenue from products or services transferred to customers over time accounted for approximately 1.8% and 3.1% of revenue for 2020 and 2019, respectively. Revenue under these long-term government contracts is generally recognized over time using an input measure based upon the proportion of actual costs incurred to estimated total project costs, which is a method used to best depict the Company’s performance to date under the terms of the contract.
29
Accounting for these long-term government contracts involves the use of various techniques to estimate total revenue and costs. The Company estimates profit on these long-term government contracts as the difference between total estimated revenue and expected costs to complete a contract and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include, among other things, labor productivity, costs and availability of materials, and timing of funding by the U.S. government. The nature of these long-term agreements may give rise to several types of variable consideration, such as claims, awards and incentive fees. Historically, these amounts of variable consideration are not considered significant. Additionally, contract estimates may include additional revenue for submitted contract modifications if there exists an enforceable right to the modification, the amount can be reasonably estimated and its realization is probable. These estimates are based on historical collection experience, anticipated performance, and the Company’s best judgement at the time. These amounts are generally included in the contract’s transaction price and are allocated over the remaining performance obligations. Changes in judgments on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income. Under these long-term government contracts, the Company may receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. In the event a contract loss becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statements of Operations.
The majority of the Company’s revenue is from products and services transferred to customers at a point in time and were approximately 98.2% and 96.9% of revenue for 2020 and 2019, respectively. The Company recognizes revenue at the point in time in which the customer obtains control of the product or service, which is generally when product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location.
Net sales by timing to transfers of goods and services is as follows:
| For the years ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| (in thousands) | ||||||||
| Transfer at point in time | $ | 8,842 | $ | 9,696 | ||||
| Transfer over time | 166 | 312 | ||||||
| Total net sales | $ | 9,008 | $ | 10,008 | ||||
| 3. | Inventories, net |
Inventories are comprised of the following and are shown net of inventory reserves of approximately $2.5 million at December 31, 2020 and 2019:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| (in thousands) | ||||||||
| Raw materials | $ | 1,130 | $ | 1,248 | ||||
| Work in process, including manufactured parts and components | 1,718 | 1,090 | ||||||
| Finished goods | 358 | 496 | ||||||
| $ | 3,206 | $ | 2,834 | |||||
30
| 4. | Plant and Equipment |
Plant and equipment are comprised of the following:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Office and computer equipment | $ | 1,474 | $ | 1,345 | ||||
| Machinery and equipment | 11,405 | 11,334 | ||||||
| Leasehold improvements | 2,312 | 2,312 | ||||||
| 15,191 | 14,991 | |||||||
| Less accumulated depreciation and amortization | (14,564 | ) | (14,310 | ) | ||||
| $ | 627 | $ | 681 | |||||
Depreciation expense recorded by the Company totaled approximately $254,000 and $256,000 for 2020 and 2019, respectively. No fully depreciated assets were written off in 2020, and $16,000 were written off in 2019.
The Company evaluates its property and equipment for impairment when events or circumstances indicate and impairment may exist. Based on this evaluation, the Company concluded that, at December 31, 2020, its long-lived assets were not impaired.
| 5. | Related Party Transactions |
On July 22, 2020, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2024, from April 1, 2021. The notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement to extend the maturity date of the notes, the expiration dates of the warrants were extended from April 1, 2022 to April 1, 2027.
The Company paid $0.2 million and $0.1 million for interest on the subordinated convertible promissory notes in 2020 and 2019, respectively. Accrued interest of $37,500 and $112,500 is included in Accounts payable and accrued liabilities as of December 31, 2020 and 2019, respectively.
| 6. | Other Long-Term Notes |
Other Long-Term Notes consist of the following:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| (in thousands) | ||||||||
| U.S. Small Business Administration term note payable in equal monthly installments of $1,922 and bearing an interest rate of 4.0% and expiring in July 2029. | $ | 177 | $ | 183 | ||||
| Less current portion | (16 | ) | (16 | ) | ||||
| Long-term debt, excluding current portion | $ | 161 | $ | 167 | ||||
31
Other Long-Term Notes mature as follows:
| Year ending December 31: | ||||
| (In thousands) | ||||
| 2021 | $ | 16 | ||
| 2022 | 17 | |||
| 2023 | 18 | |||
| 2024 | 18 | |||
| 2025 | 19 | |||
| Thereafter | 89 | |||
| $ | 177 | |||
| 7. | Payroll Protection Program |
On May 6, 2020, the Company received loan proceeds of approximately $973,000 (the “PPP Loan”), under the Paycheck Protection Program (“PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was enacted March 27, 2020. The PPP Loan, which is in the form of a promissory note, dated May 4, 2020, issued by the Company, matures on May 4, 2022, and bears interest at a rate of 1.0% per annum.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the 24-week period after the loan origination for certain eligible purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during a covered eight-week or twenty-four-week period qualify for forgiveness. Any forgiveness of the PPP Loan is subject to approval by the Small Business. At December 31, 2020, the PPP Loan is included in other long-term notes on the accompanying balance sheet.
On January 19, 2021, the Company received notification from the Small Business Association that the Company’s Forgiveness Application of the PPP Loan and accrued interest, totaling $980,000, was approved in full, and the Company had no further obligations related to the PPP Loan.
| 8. | Accounts Payable and Accrued Liabilities |
Accounts payable and accrued expenses are comprised of the following:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Trade accounts payable and accrued purchases | $ | 454 | $ | 507 | ||||
| Accrued payroll | - | 133 | ||||||
| Accrued 401K company matching contribution | 138 | 114 | ||||||
| Accrued expenses – other | 125 | 224 | ||||||
| $ | 717 | $ | 978 | |||||
| 9. | Income Taxes |
The Company did not record a current provision for either state tax or federal tax due to losses incurred for both income tax and financial reporting purposes.
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A reconciliation of the income tax provision computed at the statutory Federal income tax rate to our effective income tax rate follows (in percent):
| Years Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Federal statutory rate | (21 | )% | (21 | )% | ||||
| State statutory rate | (9 | ) | (9 | ) | ||||
| Reduction in State rate due to tax rate change | - | - | ||||||
| Change in Valuation Allowance | 3 | 2 | ||||||
| Permanent Differences | 11 | 14 | ||||||
| Other | 16 | 14 | ||||||
| Effective income tax rate | - | % | - | % | ||||
At December 31, 2020 and 2019, the Company had estimated Federal net operating loss carry forwards of approximately $10.4 million and $9.3 million, respectively, and state net operating loss carry forwards of approximately $5.1 million and $5.8 million, respectively. The 2020 and 2019 net operating loss carryforwards have no expiration dates.
Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carry forwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs. Accordingly, the actual utilization of the net operating loss and carryforwards for tax purposes may be limited annually to a percentage (based on the risk-free interest rate) of the fair market value of the Company at the time of any such ownership change. The Company has not prepared an analysis of ownership changes, but does not believe that a greater than 50% change of ownership has occurred and such limitations would not apply to the Company.
Deferred tax assets (liabilities) are comprised of the following:
| Years Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Account receivable reserves | $ | 25 | $ | 4 | ||||
| Inventory reserves | 692 | 697 | ||||||
| Inventory capitalization | 101 | 89 | ||||||
| Depreciation | 182 | 252 | ||||||
| Loss carry forwards | 2,636 | 2,332 | ||||||
| Gross deferred tax assets | 3,636 | 3,374 | ||||||
| Valuation allowance | (3,636 | ) | (3,374 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
In evaluating the Company’s ability to recover deferred tax assets in future periods, management considers the available positive and negative factors, including the Company’s recent operating results, the existence of cumulative losses and near-term forecasts of future taxable income that is consistent with the plans and estimates management is using to manage the underlying business. A significant piece of objective evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2019.
On the basis of this evaluation, as of December 31, 2020, the valuation allowance was increased by $262,000. The valuation allowance decreased as of December 31, 2019, by $19,000. The company concluded it was more likely than not that it would not be able to realize a significant portion of the benefit on the deferred tax assets and adjusted the valuation allowance accordingly.
The Company files income tax returns in the United States, which typically provides for a three-year statute of limitations on assessments. The Company is no longer subject to federal, state or local income tax examinations by tax authorities for the years before 2017.
The guidance for accounting for uncertainties in income taxes requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. There were no unrecognized tax benefits that impacted our effective tax rate and accordingly, there was no material effect to our financial position, results of operations or cash flows.
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Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.
We do not anticipate that our unrecognized tax benefits will significantly increase in the next 12 months.
| 10. | Equity Compensation Program and Stock-based Compensation |
| a. | 2020 Equity Compensation Program |
On February 12, 2020, the Inrad Optics Board of Directors, adopted the Inrad Optics, Inc. 2020 Equity Compensation Program (the “2020 Program”), and received shareholder approval on June 23, 2020. The 2020 Program provides for grants of options, stock appreciation rights and restricted stock awards to employees, officers, directors, and others who render services to the Company. The 2020 Program is comprised of four parts including: (i) the Incentive Stock Option Plan which provides for grants of “incentive stock options,” (ii) the Supplemental Stock Option Plan which provides for grants of stock options that shall not be “incentive stock options,” (iii) the Stock Appreciation Rights Plan which allows the granting of stock appreciation rights and, (iv) the Restricted Stock Award Plan which provides for the granting of restrictive shares of Common Stock and restricted stock units. The 2020 Program is administered by the Compensation Committee of the Board of Directors. Under the 2020 Program, an aggregate of up to 4,000,000 shares of common stock may be granted.
| b. | 2010 Equity Compensation Program |
The Company’s 2010 Equity Compensation Program (the “2010 Program”) provided for grants of options, stock appreciation rights and restricted stock awards to employees, officers, directors, and others who render services to the Company. The 2010 Program expired on March 23, 2020. All outstanding grants of options, stock appreciation rights and performance shares issued under the 2010 Program will remain outstanding and shall expire on the date determined by the terms of the original grant. The latest date of expiration for outstanding grants under the 2010 Program is March 23, 2030.
| c. | Stock Option Expense |
The Company's results for the years ended December 31, 2020 and 2019, include stock-based compensation expense for stock option grants totaling $112,000 and $133,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($29,000 and $37,000 for 2020 and 2019, respectively), and selling, general and administrative expenses ($83,000 and $96,000 for 2020 and 2019, respectively).
As of December 31, 2020, and 2019, there were $98,000 and $199,000 of unrecognized compensation costs, net of estimated forfeitures, related to non-vested stock options, which are expected to be recognized over a weighted average period of approximately 1.16 years and 1.89 years, respectively.
The weighted average estimated fair value of stock options granted in the two years ended December 31, 2020 and 2019, was $1.41 and $0.76, respectively. The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award. The Company assumes a dividend yield of zero, as the Company has not paid dividends in the past and does not expect to in the foreseeable future. The expected volatility is based upon the historical volatility of our common stock which the Company believes results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant with maturity dates approximately equal to the expected life at the grant date. The expected life is based upon the period of expected benefit based on the Company’s evaluation of historical and expected future employee exercise behavior.
The following range of weighted-average assumptions were used for to determine the fair value of stock option grants during the years ended December 31, 2020 and 2019:
| Years Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Expected Dividend yield | - | % | - | % | ||||
| Expected Volatility | 122.22 | % | 126.86 | % | ||||
| Risk-free interest rate | 1.96 | % | 2.90 | % | ||||
| Expected term | 10 years | 10 years | ||||||
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Stock Option Activity
A summary of the Company’s outstanding stock options as of and for the years ended December 31, 2020 and 2019, is presented below:
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Remaining | Aggregate | ||||||||||||||
| Number of | Price per | Contractual | Intrinsic | |||||||||||||
| Stock Options | Options | Option | Term (years) | Value(a) | ||||||||||||
| Outstanding January 1, 2019 | 1,058,208 | $ | 0.64 | 5.58 | 337,997 | |||||||||||
| Granted | 200,000 | 0.79 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired/Forfeited | (110,941 | ) | 1.05 | |||||||||||||
| Outstanding December 31, 2019 (b) | 1,147,267 | $ | 0.63 | 6.29 | $ | 718,840 | ||||||||||
| Granted | 22,500 | 1.48 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired/Forfeited | (18,900 | ) | 0.99 | |||||||||||||
| Outstanding December 31, 2020 (b) | 1,150,867 | $ | 0.64 | 6.61 | $ | 107,573 | ||||||||||
| Exercisable at December 31, 2020 | 940,027 | $ | 0.58 | 5.68 | $ | 107,573 | ||||||||||
(a) Intrinsic value for purposes of this table represents the amount by which the fair value of the underlying stock, based on the respective market prices as of December 31, 2020, exceeds the exercise prices of the respective options.
(b) Based on the Company’s historical forfeiture rate, the number of options expected to vest is the same as the total outstanding at December 31, 2020.
The following table represents non-vested stock options granted, vested, and forfeited for the year ended December 31, 2020:
| Weighted-average | ||||||||
| Grant-date Fair Value | ||||||||
| Options | ($) | |||||||
| Non-Vested - January 1, 2020 | 371,669 | 0.80 | ||||||
| Granted | 22,500 | 1.41 | ||||||
| Vested | (183,329 | ) | 0.77 | |||||
| Forfeited | - | - | ||||||
| Non-Vested - December 31, 2020 | 210,840 | 0.89 | ||||||
The total weighted average grant date fair value of options vested during the years ended December 31, 2020 and 2019, was $142,000 and $109,000, respectively.
The following table summarizes information about stock options outstanding at December 31, 2020:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||
| Exercise Price | Outstanding | Life in Years | Price | Outstanding | Price | |||||||||||||||
| $0.18 - $0.35 | 402,167 | 5.13 | $ | 0.29 | 402,167 | $ | 0.29 | |||||||||||||
| $0.50 - $1.00 | 711,200 | 6.56 | $ | 0.79 | 532,860 | $ | 0.79 | |||||||||||||
| $1.40 - $1.80 | 37,500 | 9.89 | $ | 1.61 | 5,000 | $ | 1.80 | |||||||||||||
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| 11. | Net (Loss) Income per Share |
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options, stock grants and warrants using the average market prices during the period, including potential common shares issuable upon conversion of outstanding convertible notes, except if the effect on the per share amounts is anti-dilutive.
For the year ended December 31, 2020, and 2019, all common equivalent shares outstanding have been excluded from the diluted computation because their effect is anti-dilutive. This included 1,150,867 common stock equivalents related to outstanding options, in addition to 2,500,000 common shares issuable upon conversion of outstanding convertible notes and 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes.
| 12. | Commitments and Contingencies |
| a. | Lease commitments |
The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019. Under the guidance of ASU 2016-02, Leases (Topic 842), the Company determines if such an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease at inception of the arrangement. The Company determined that this lease is an operating lease and presented as a right-of-use lease asset, short term lease liability and long-term lease liability on the consolidated balance sheet. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental borrowing rate.
Lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales and general and administrative expenses on the consolidated statement of operations.
An initial right-of-use asset of approximately $0.8 million was recognized as a non-cash asset addition with the signing of the July 8, 2019, lease amendment. Cash paid for amounts included in the present value of the operating lease liability was $0.3 million during the year ended December 31, 2020, and is included in operating cash flows.
The following table presents information about the amount and timing of cash flows arising from the Company’s operating and capital leases as of December 31, 2020:
| Maturity of Lease Liability | (in thousands) | |||
| 2021 | $ | 322 | ||
| 2022 | 143 | |||
| 2023 | 3 | |||
| Total undiscounted operating and capital lease payments | 468 | |||
| Less: imputed interest | (19 | ) | ||
| Present value of lease liabilities | $ | 449 | ||
| Other Information | ||||
| Remaining lease term (in months) | ||||
| Operating lease | 17 | |||
| Capital lease | 26 | |||
| Discount rate for operating lease | 5.80 | % | ||
| Discount rate for capital lease | 3.99 | % | ||
The Company’s total rent expense for the year ended December 31, 2020 and 2019, was $0.3 million and $0.3 million, respectively.
The Company also paid real estate taxes and insurance premiums under the terms of the lease that totaled approximately $0.1 million in 2020 and 2019.
| b. | Retirement plans |
The Company maintains a 401(k) savings plan (the “Plan”) for all eligible employees (as defined in the plan). The 401(k) Plan allows employees to contribute up to 70% of their compensation on a salary reduction, pre-tax basis up to the statutory limitation. The 401(k) Plan also provides that the Company, at the discretion of the Board of Directors, may match employee contributions based on a pre-determined formula.
In 2020, the Company’s 401(k) matching contribution for employees was $138,000. This will be funded by way of a cash contribution of $34,000 and a contribution of 142,329 shares of the Company’s common stock, which will be issued to the Plan in April, 2021. In 2019, the Company’s 401(k) matching contribution for employees was $124,000. This was funded by way of a contribution of 89,751 shares of the Company’s common stock, which were issued to the Plan in June, 2020. The Company records the distribution of the common shares in the Consolidated Statement of Shareholders’ Equity as of the date of distribution to the 401(k) Plan administrator.
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| 13. | Product Sales, Foreign Sales and Sales to Major Customers |
The Company’s export sales, which are primarily to customers in countries within Europe, Israel, Asia and Japan, amounted to approximately 29.4% and 31.9% of product sales in 2020 and 2019, respectively.
The Company had sales to three major customers which accounted for approximately 30.6% of sales in 2020. One customer, a division of a major U.S. defense industry corporation that manufactures electro-optical systems for U.S. and foreign governments accounted for 17.1% of 2020 sales. The two other customers included two foreign-based manufacturers of process control and metrology equipment whose sales represented 7.0% and 6.5% of sales, respectively. For 2019, the top three customers represented 18.5%, 14.7%, and 6.1% respectively.
During the past two years, sales to the Company’s top five customers represented approximately 43.0% and 47.2%, respectively. Given the concentration of sales within a small number of customers, the loss of any of these customers would have a significant negative impact on the Company and its business units.
| 14. | Shareholders’ Equity |
| a. | Common shares reserved for future issuances at December 31, 2020, are as follows: |
| 2020 Equity compensation plan | 4,000,000 | |||
| 2010 Equity compensation plan | 1,150,867 | |||
| Subordinated convertible notes | 2,500,000 | |||
| Warrants issuable on conversion of Subordinated convertible notes | 1,875,000 | |||
| 9,525,867 |
| b. | Warrants |
The Company had no outstanding warrants as of December 31, 2020 and 2019.
| 15. | Fair Value of Financial Instruments |
The methods and assumptions used to estimate the fair value of the following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash, current receivables and payables and certain other short-term financial instruments approximate their fair value as of December 31, 2020, due to their short-term maturities.
Long-Term Debt: The fair value of the Company’s long-term debt, including the current portion, for notes payable and subordinated convertible debentures, was estimated using a discounted cash flow analysis, based on the Company’s assumed incremental borrowing rates for similar types of borrowing arrangements. The fair value of long-term debt is estimated to be $3.1 million compared to its carrying amount of $3.6 million as of December 31, 2020.
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Exhibit 10.2
INRAD OPTICS, INC.
2020 EQUITY COMPENSATION PROGRAM
1. Purposes. This Inrad Optics, Inc. 2020 Equity Compensation Program (the “Program”) is intended to secure for Inrad Optics, Inc. (the “Company”), its direct and indirect present and future subsidiaries, including without limitation any entity which the Company reasonably expects to become a subsidiary (the “Subsidiaries”), and its shareholders, the benefits arising from ownership of the Company's Common Stock, par value $.01 per share (“Common Stock”), by those selected directors, officers, employees and consultants of the Company and the Subsidiaries who are responsible for future growth. The Program is designed to help attract and retain superior individuals for positions of substantial responsibility with the Company and the Subsidiaries and to provide these persons with an additional incentive to contribute to the success of the Company and the Subsidiaries.
2. Elements of the Program. In order to maintain flexibility in the award of benefits, the Program is comprised of four parts -- the Incentive Stock Option Plan (“Incentive Plan”), the Supplemental Stock Option Plan (“Supplemental Plan”), the Stock Appreciation Rights Plan (“SAR Plan”) and the Restricted Stock Award Plan (“Restricted Stock Plan”). Copies of the Incentive Plan, Supplemental Plan, SAR Plan and Restricted Stock Plan are attached hereto as Parts I, II, III and IV, respectively. Each such plan is referred to herein as a “Plan” and all such plans are collectively referred to herein as the “Plans.” The grant of any options, stock appreciation rights, restricted shares, unrestricted shares or restricted stock units under one of the Plans (collectively, the “Awards”) shall not be construed to prohibit the grant of options, stock appreciation rights, restricted shares, unrestricted shares or restricted stock units under any of the other Plans.
3. Applicability of General Provisions. Unless any Plan specifically indicates to the contrary, all Plans shall be subject to the general provisions of the Program set forth below under the heading “General Provisions of the Equity Compensation Program” (the “General Provisions”).
GENERAL PROVISIONS OF THE EQUITY COMPENSATION PROGRAM
Administration. The Program shall be administered by the Board of Directors of the Company (the “Board” or the “Board of Directors”) or any duly created committee appointed by the Board and charged with the administration of the Program (a “Committee”). Except as otherwise determined by the Board, the Committee shall consist solely of two or more directors each of whom is a “Non-Employee Director” within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Within the scope of such authority, the Board or the Committee may delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. Nothing herein shall create an inference that an Award is not validly granted under the Program in the event Awards are granted under the Program by a compensation committee of the Board that does not at all times consist solely of two or more Non-Employee Directors.
The Board, or any duly appointed Committee, when acting to administer the Program, is referred to as the “Program Administrator”. Any action of the Program Administrator shall be taken by majority vote at a meeting or by unanimous written consent of all members without a meeting. No Program Administrator or member of the Board of the Company shall be liable for any action or determination made in good faith with respect to the Program or with respect to any option, stock appreciation right, restricted stock award or restricted stock unit award granted pursuant to the Program, and each of the foregoing shall be entitled in all cases to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including without limitation reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors’ and officers’ liability insurance coverage which may be in effect from time to time.
Authority of Program Administrator. Subject to the other provisions of this Program, and with a view to effecting its purpose, the Program Administrator shall have the authority: (a) to construe and interpret the Program; (b) to define the terms used herein; (c) to prescribe, amend and rescind rules and regulations relating to the Program; (d) to determine the persons to whom Awards shall be granted under the Program; (e) to determine the time or times at which Awards shall be granted under the Program; (f) to determine the number of shares subject to any Award; (g) to determine the exercise price of any option or stock appreciation right, and the duration of each option or stock appreciation right granted under the Program; (h) to determine all other terms and conditions of any Award; and (i) to make any other determinations necessary or advisable for the administration of the Program and to do everything necessary or appropriate to administer the Program; provided, however, that, unless otherwise determined by the Program Administrator, no such action shall cause an Award previously exempt from Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “Code”) to become subject to Section 409A. All decisions, determinations and interpretations made by the Program Administrator shall be binding and conclusive on all participants in the Program and on their legal representatives, heirs and beneficiaries.
Maximum Number of Shares Subject to the Program. The maximum aggregate number of shares of Common Stock issuable pursuant to the Program shall be 4,000,000 shares. No one person participating in the Program may receive options, separately exercisable stock appreciation rights or other awards for more than 500,000 shares of Common Stock in any calendar year. All such shares may be issued under any Plan which is part of the Program. If any of the options (including incentive stock options) or stock appreciation rights granted under the Program expire or terminate for any reason before they have been exercised in full, the unissued shares subject to those expired or terminated options and/or stock appreciation rights shall again be available for purposes of the Program. If the conditions associated with the grant of any restricted shares or restricted stock units are not satisfied within the time period required by the Award, the shares of Common Stock associated with such Award shall again be available for purposes of the Program. Any shares of Common Stock delivered pursuant to the Program may consist, in whole or in part, of authorized and unissued shares or treasury shares.
Eligibility and Participation. All directors, officers, employees and consultants of the Company and the Subsidiaries shall be eligible to participate in the Program. The term “employee” shall include any person who has agreed to become an employee and the term “consultant” shall include any person who has agreed to become a consultant.
Effective Date and Term of Program. The Program shall become effective immediately upon approval of the Program by the Board of Directors of the Company, subject to approval of the Program by the shareholders of the Company within twelve months after the date of approval of the Program by the Board of Directors. The Program shall continue in effect for a term of ten years from the date that the Program is adopted by the Board of Directors, unless sooner terminated by the Board of Directors of the Company.
Adjustments. In the event that the outstanding shares of Common Stock of the Company are hereafter increased, decreased, changed into or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split (an “Adjustment Event”), an appropriate and proportionate adjustment shall be made by the Program Administrator in the maximum number and kind of shares as to which Awards may be granted under the Program. A corresponding adjustment changing the number or kind of shares allocated to unexercised options, stock appreciation rights, restricted shares and restricted stock units which shall have been granted prior to any such Adjustment Event, shall likewise be made. Any such adjustment in outstanding options and stock appreciation rights shall be made without change in the aggregate purchase price applicable to the unexercised portion of the option or stock appreciation right but with a corresponding adjustment in the price for each share or other unit of any security covered by the option or stock appreciation right. In making any adjustment pursuant to this Article 6, any fractional shares shall be disregarded.
Termination and Amendment of Program and Awards. No Award shall be granted under the Program after the termination of the Program. The Program Administrator may at any time amend or revise the terms of the Program or of any outstanding Award issued under the Program, provided, however, that (a) any shareholder approval required by applicable law or regulation shall be obtained and (b) no amendment, suspension or termination of the Program or of any outstanding Award shall, without the consent of the person who has received such Award, impair any of that person's rights or obligations under such Award.
Privileges of Stock Ownership. Notwithstanding the exercise of any option or stock appreciation rights granted pursuant to the terms of the Program or the satisfaction of any condition specified in any Award of restricted shares or restricted stock units granted pursuant to the terms of the Program, no person shall have any of the rights or privileges of a stockholder of the Company in respect of any shares of stock issuable upon the exercise of his or her option or stock appreciation right or achievement of such condition(s) until the issuance and/or ownership of such shares is recorded on the books and records of the Company (or, as applicable, its transfer agent or stock plan administrator) unless otherwise determined by the Board or required by any applicable law, rule or regulation. The holder of shares of restricted stock shall have voting rights with respect to such shares unless the Program Administrator provides otherwise. No adjustment shall be made for dividends or any other distributions for which the record date is prior to the date on which any issuance and/or ownership of such shares is recorded pursuant to the Program.
Reservation of Shares of Common Stock. During the term of the Program, the Company will at all times reserve and keep available such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of the Program.
Tax Withholding. The exercise of any option or stock appreciation right, and the delivery of any shares of Common Stock upon vesting or lapse of any conditions or restrictions associated with restricted shares or restricted stock units under the Program, is subject to the condition that, if at any time the Company shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in any connection with, such exercise or the delivery or purchase of shares pursuant thereto, then, in such event, the exercise of the option or stock appreciation right or delivery of shares of Common Stock in connection with the vesting or lapse of any conditions or restrictions associated with restricted shares or restricted stock units, shall not be effective unless such withholding tax or other withholding liabilities shall have been satisfied in a manner acceptable to the Company.
Employment; Service as a Consultant or Director. Nothing in the Program gives to any person any right to continued employment by the Company or the Subsidiaries or to continued service as a consultant to or director of the Company or the Subsidiaries or limits in any way the right of the Company or the Subsidiaries at any time to terminate or alter the terms of that employment or service.
Investment Letter; Restrictions on Obligation of the Company to Issue Securities; Restrictive Legend. Any person acquiring or receiving Common Stock or other securities of the Company pursuant to the Program, as a condition precedent to receiving the shares of Common Stock or other securities, may be required by the Program Administrator to submit a letter to the Company stating that the shares of Common Stock or other securities are being acquired for investment and not with a view to the distribution thereof. The Company shall not be obligated to sell or issue any shares of Common Stock or other securities pursuant to the Program unless, on the date of sale and issuance thereof, the shares of Common Stock or other securities are either registered under the Securities Act of 1933, as amended, and all applicable state securities laws, or exempt from registration thereunder. All shares of Common Stock and other securities issued pursuant to the Program shall bear a restrictive legend referring to any restrictions on transferability applicable thereto, including, if such shares are not then covered by an effective registration statement, those imposed by federal and state securities laws.
Rights Upon Termination of Employment, Service as a Consultant or Service as a Director. Notwithstanding any other provision of the Program, any Award granted to an individual who has agreed to become an employee or a consultant of the Company or any Subsidiary or to become an employee of any entity which the Company reasonably expects to become a Subsidiary, shall immediately terminate if the Program Administrator determines, in its sole discretion, that such person will not become an employee or consultant of the Company or any Subsidiary. If a recipient ceases to be employed by or to provide consulting services or services as a director to the Company or any Subsidiary, or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies, for any reason other than death or disability, then, unless any other provision of the Program provides for earlier termination or the grant agreement provides otherwise:
(a) all options and stock appreciation rights (other than “Naked Rights”, as hereinafter defined) shall terminate immediately in the event the recipient's employment or consulting services are terminated for cause and shall be exercisable, to the extent exercisable on the date of termination, for a period of:
90 days after the date of such termination if such termination is due to the recipient’s resignation; and
12 months after the date of such termination if such termination is due to the involuntary termination of the recipient’s service or employment other than for cause.
(b) subject to Section 5(b) of the SAR Plan, all Naked Rights not payable on the date of termination shall terminate immediately; and
(c) all restricted share and restricted stock unit awards shall terminate immediately unless the conditions of the Award have been satisfied.
Rights Upon Disability. If a recipient becomes disabled within the meaning of Section 22(e)(3) of the Code while employed by or while rendering consulting services or services as a director to the Company or any Subsidiary (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), then, unless any other provision of the Program provides for earlier termination or the grant agreement provides otherwise:
(d) all options and stock appreciation rights (other than Naked Rights) may be exercised, to the extent exercisable on the date of termination,, at any time within one year after the date of termination due to disability;
(e) all Naked Rights shall be fully paid by the Company as of the date of disability; and
(f) all restricted share and restricted stock unit awards for which all conditions of the Award have been satisfied (other than continued employment or status as a consultant on the Vesting Date) shall be paid in full by the Company; all other restricted shares and restricted stock units shall terminate immediately.
Rights Upon Death. If a recipient dies while employed by or while rendering consulting services or services as a director to the Company or any Subsidiary (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), then, unless any other provision of the Program provides for earlier termination or the grant agreement provides otherwise:
(g) all options and stock appreciation rights (other than Naked Rights) may be exercised by the person or persons to whom the recipient's rights shall pass by will or by the laws of descent and distribution, to the extent exercisable on the date of death,, at any time within one year after the date of death unless any other provision of the Program provides for earlier termination;
(h) all Naked Rights shall be fully paid by the Company as of the date of death; and
(i) all restricted share and restricted stock unit awards for which all conditions of the Award have been satisfied (other than continued employment or status as a consultant on the Vesting Date) shall be paid in full by the Company; all other restricted shares and restricted stock units shall terminate immediately.
Non-Transferability. Options and stock appreciation rights granted under the Program may not be sold, pledged, assigned or transferred in any manner by the recipient otherwise than by will or by the laws of descent and distribution and shall be exercisable (a) during the recipient's lifetime only by the recipient and (b) after the recipient's death only by the recipient's executor, administrator or personal representative, provided, however that the Program Administrator may permit the recipient of an option granted pursuant to Part II of the Program to transfer options and/or stock appreciation rights granted in tandem with such options to a family member or a trust or partnership created for the benefit of family members. In the case of such a transfer, the transferee's rights and obligations with respect to the applicable options or stock appreciation rights shall be determined by reference to the recipient and the recipient's rights and obligations with respect to the applicable options or stock appreciation rights had no transfer been made. The recipient shall remain obligated pursuant to Articles 10 and 12 hereunder if required by applicable law. Common Stock which represents restricted shares or restricted stock units prior to the satisfaction of the stated conditions may not be sold, pledged, assigned or transferred in any manner.
Change in Control.. The Program Administrator shall have the authority to provide, either at the time that any Award is granted or thereafter, that an option or stock appreciation right shall become fully exercisable upon the occurrence of a Change in Control Event or that all restrictions, and risks of forfeiture pertaining to restricted shares and restricted stock units shall lapse upon the occurrence of a Change in Control Event. Notwithstanding anything herein to the contrary, to the extent necessary for compliance with Section 409A, an Award agreement shall provide that an Award subject to the requirements of Section 409A that would otherwise become payable upon a Change in Control Event shall only become payable to the extent that the requirements for a “change in control” for purposes of Section 409A have been satisfied. As used in the Program, a “Change in Control Event” shall be deemed to have occurred if any of the following events occur:
(j) the consummation of any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or any consolidation or merger in which the holders of the Company's Shares immediately prior to the consolidation or merger do not own fifty percent (50%) or more of the common stock of the surviving corporation immediately after the consolidation or merger; or
(k) the consummation of any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, other than to a subsidiary or affiliate; or
(l) an approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company; or
(m) (A) a purchase by any person (as such term is defined in Section 13(d) of the Exchange Act), corporation or other entity of any voting securities of the Company (the “Voting Securities”) (or securities convertible into Voting Securities) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, unless, prior to the making of such purchase of Voting Securities (or securities convertible into Voting Securities), the Board shall determine that the making of such purchase shall not be deemed a Change in Control for purposes of the Program, or (B) any action pursuant to which any person (as such term is defined in Section 13(d) of the Exchange Act), corporation or other entity (other than the Company or any benefit plan sponsored by the Company or any of its subsidiaries) shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding Voting Securities ordinarily (and apart from any rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) in the case of rights to acquire any such securities), unless, prior to such person so becoming such beneficial owner, the Board shall determine that such person so becoming such beneficial owner shall not be deemed to constitute a Change in Control for purposes of the Program; or
(n) the individuals (A) who, as of the date on which the Program is first adopted by the Board of Directors, constitute the Board (the “Original Directors”) and (B) who thereafter are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two thirds of the Original Directors then still in office (such Directors being called “Additional Original Directors”) and (C) who thereafter are elected to the Board and whose election or nomination for election to the Board was approved by a vote of at least two thirds of the Original Directors and Additional Original Directors then still in office, cease for any reason to constitute a majority of the members of the Board.
Merger or Asset Sale. For purposes of the Program, a merger or consolidation which would constitute a Change in Control Event pursuant to Article 17 and a sale of assets which would constitute a Change in Control Event pursuant to Article 17 are hereinafter referred to as “Article 18 Events”. In the event of an Article 18 Event, each outstanding Award shall be assumed or an equivalent benefit shall be substituted by the entity determined by the Board of Directors of the Company to be the successor corporation. However, in the event that any such successor corporation does not agree in writing, at least 15 days prior to the anticipated date of consummation of such Article 18 Event, to assume or so substitute each such Award, each option and stock appreciation right not so assumed or substituted shall be deemed to be fully vested and exercisable and the restrictions or conditions associated with each restricted stock award and restricted stock unit award not so assumed or substituted shall immediately lapse or be deemed satisfied immediately prior to the Article 18 Event and the shares of Common Stock associated with such restricted stock award or restricted stock unit award shall be issued and delivered to the recipient of such Award. If an option or stock appreciation right becomes fully vested and exercisable pursuant to the terms of this Article 18, the Program Administrator shall notify the holder thereof in writing or electronically that (a) such holder’s option or stock appreciation right shall be fully exercisable until immediately prior to the consummation of such Article 18 Event and (b) such holder’s option or stock appreciation right shall terminate upon the consummation of such Article 18 Event. For purposes of this Article 18, an Award shall be considered assumed if, immediately following consummation of the applicable Article 18 Event, the Award confers the right to purchase or receive, for each share of Common Stock subject to the Award immediately prior to the consummation of such Article 18 Event, the consideration (whether stock, cash or other securities or property) received in such Article 18 Event by holders of Common Stock for each share of Common Stock held on the effective date of such Article 18 Event (and, if holders of Common Stock are offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if such consideration received in such Article 18 Event is not solely common stock of such successor, the Program Administrator may, with the consent of such successor company, provide for the consideration to be received in connection with such Award to be solely common stock of such successor equal in fair market value to the per share consideration received by holders of Common Stock in the Article 18 Event.
Method of Exercise. Any holder of an option or stock appreciation right may exercise his or her option or stock appreciation right from time to time by giving written notice thereof to the Company at its principal office together with payment in full for the shares of Common Stock to be purchased. The date of such exercise shall be the date on which the Company receives such notice. Such notice shall state the number of shares to be purchased. The purchase price of any shares purchased upon the exercise of any option or stock appreciation right granted pursuant to the Program shall be paid in full at the time of exercise of the option or stock appreciation right by certified or bank cashier's check payable to the order of the Company, by tender of shares of Common Stock which have a Fair Market Value on the date of tender equal to the purchase price, or by a combination of checks and shares of Common Stock; provided however that any shares of Common Stock so tendered shall have been owned by the optionee for a period of at least six months free of any substantial risk of forfeiture or were purchased on the open market without assistance, direct or indirect, from the Company. The Program Administrator may, subject to such rules and procedures as the Program Administrator may prescribe, permit a holder of an option or stock appreciation right to effect a net exercise or make “cashless exercise” arrangements, to the extent permitted by applicable law, and may require such holders to utilize the services of a single broker selected by the Program Administrator in connection with any cashless exercise. No option or stock appreciation right may be exercised for a fraction of a share of Common Stock. If any portion of the purchase price is paid in shares of Common Stock, those shares shall be valued at their then Fair Market Value as determined by the Program Administrator in accordance with Section 4 of the Incentive Plan.
Ten-Year Limitations. Notwithstanding any other provision of the Program, (a) no Award may be granted pursuant to the Program more than ten years after the date on which the Program was adopted by the Board of Directors and (b) any option or stock appreciation right granted under the Program shall, by its terms, not be exercisable more than ten years after the date of grant.
Substitute Options. In the event that the Company, directly or indirectly, acquires another entity, the Program Administrator may authorize the issuance of stock options (“substitute options”) to the individuals performing services for the acquired entity in substitution of stock options previously granted to those individuals in connection with their performance of services for such entity upon such terms and conditions as the Program Administrator shall determine, taking into account the conditions of Code Section 424(a), as from time to time amended or superseded, in the case of a substitute option that is intended to be an incentive stock option within the meaning of Section 422 of the Code. Shares of Common Stock underlying substitute stock options shall not constitute shares of Common Stock issued pursuant to the Plan for any purpose.
Sunday or Holiday. In the event that the time for the performance of any action or the giving of any notice is called for under the Program within a period of time which ends or falls on a Sunday or legal holiday, such period shall be deemed to end or fall on the next day following such Sunday or legal holiday which is not a Sunday or legal holiday.
Governing Law. The Program shall be governed by and construed in accordance with the laws of the State of New Jersey.
Covenant Against Competition. The Program Administrator shall have the right to condition any Award upon the recipient's execution and delivery to the Company of an agreement in a form satisfactory to the Program Administrator containing such non-compete, non-solicitation and non-disclosure terms as shall be determined by the Program Administrator.
Termination, Rescission and Recapture of Awards.
(o) Each Award under the Plan is intended to align the recipient’s long-term interest with those of the Company. If the recipient engages in certain activities discussed below, either during employment or service with the Company or after service with the Company terminates for any reason, the recipient is acting contrary to the long-term interests of the Company. Accordingly, but only to the extent expressly provided in an Award agreement, the Company may terminate any outstanding, unexercised, unexpired or unpaid Awards (“Termination”), rescind any exercise, payment or delivery pursuant to the Award (“Rescission”), or recapture any Common Stock (whether restricted or unrestricted) or proceeds from the recipient’s sale of shares of Common Stock issued pursuant to the Award (“Recapture”), if the recipient does not comply with the conditions of subsections (b), (c) and (e) hereof (collectively, the “Conditions”).
(p) A recipient shall not, without the Company’s prior written authorization, disclose to anyone outside the Company, or use in other than the Company’s business, any proprietary or confidential information or material, as those or other similar terms are used in any applicable patent, confidentiality, inventions, secrecy, or other agreement between the recipient and the Company with regard to any such proprietary or confidential information or material.
(q) Pursuant to any agreement between the recipient and the Company with regard to intellectual property (including but not limited to patents, trademarks, copyrights, trade secrets, inventions, developments, improvements, proprietary information, confidential business and personnel information), a recipient shall promptly disclose and assign to the Company or its designee all right, title, and interest in such intellectual property, and shall take all reasonable steps necessary to enable the Company to secure all right, title and interest in such intellectual property in the United States and in any foreign country.
(r) The recipient acknowledges receipt of the following notice under the Defend Trade Secrets Act: An individual will not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret if he/she (i) makes such disclosure in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney and such disclosure is made solely for the purpose of reporting or investigating a suspected violation of law; or (ii) such disclosure was made in a complaint or other document filed in a lawsuit or other proceeding if such filing is made under seal. In addition, an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the employer's trade secrets to his or her attorney and use the trade secret information in the court proceeding if the individual: (i) files any document containing the trade secret under seal; and (ii) does not disclose the trade secret, except pursuant to court order.
(s) Upon exercise, payment, or delivery of cash or Common Stock pursuant to an Award, the recipient shall certify on a form acceptable to the Company that he or she is in compliance with the terms and conditions of the Plan and, if a severance of service has occurred for any reason, shall state the name and address of the recipient’s then-current employer or any entity for which the recipient performs business services and the recipient’s title, and shall identify any organization or business in which the recipient owns a greater-than-five-percent equity interest.
(t) If the Company determines, in its sole and absolute discretion, that (i) a recipient has violated any of the Conditions or (ii) during his or her service with the Company or its Subsidiaries, or within one (1) year after its termination for any reason, a recipient (x) has rendered services to or otherwise directly or indirectly engaged in or assisted, any organization or business that, in the judgment of the Company in its sole and absolute discretion, is or is working to become competitive with the Company; (y) has solicited any non-administrative employee of the Company to terminate employment with the Company; or (z) has engaged in activities which are materially prejudicial to or in conflict with the interests of the Company, including any breach of fiduciary duty or the duty of loyalty, then the Company may, in its sole and absolute discretion, impose a Termination, Rescission, and/or Recapture with respect to any or all of the recipient’s relevant Awards, Shares, and the proceeds thereof.
(u) Within ten days after receiving notice from the Company of any such activity described in Article 25(f) above, the recipient shall deliver to the Company the shares of Common Stock acquired pursuant to the Award, or, if recipient has sold the shares, the gain realized, or payment received as a result of the rescinded exercise, payment, or delivery; provided, that if the recipient returns shares that the recipient purchased pursuant to the exercise of an Option (or the gains realized from the sale of such Common Stock), the Company shall promptly refund the exercise price, without earnings, that the recipient paid for such shares. Any payment by the recipient to the Company pursuant to this Article 25 shall be made either in cash or by returning to the Company the number of shares that the recipient received in connection with the rescinded exercise, payment, or delivery. It shall not be a basis for Termination, Rescission or Recapture if after termination of a recipient’s service with the Company and its Subsidiaries, the recipient purchases, as an investment or otherwise, stock or other securities of such an organization or business, so long as (i) such stock or other securities are listed upon a recognized securities exchange or traded over-the-counter, and (ii) such investment does not represent more than a five percent (5%) equity interest in the organization or business.
(v) Notwithstanding the foregoing provisions of this Article 25, the Company has sole and absolute discretion not to require Termination, Rescission and/or Recapture, and its determination not to require Termination, Rescission and/or Recapture with respect to any particular act by a particular recipient or Award shall not in any way reduce or eliminate the Company’s authority to require Termination, Rescission and/or Recapture with respect to any other act or recipient or Award. Nothing in this Section shall be construed to impose obligations on the recipient to refrain from engaging in lawful competition with the Company after the termination of employment that does not violate subsections (b) or (c) of this Article, other than any obligations that are part of any separate agreement between the Company and the recipient or that arise under applicable law.
(w) All administrative and discretionary authority given to the Company under this Article shall be exercised by the most senior human resources executive of the Company or such other person or committee (including without limitation the Program Administrator) as the Program Administrator may designate from time to time.
(x) Notwithstanding any provision of this Article, if any provision of this Article is determined to be unenforceable or invalid under any applicable law, such provision will be applied to the maximum extent permitted by applicable law, and shall automatically be deemed amended in a manner consistent with its objectives to the extent necessary to conform to any limitations required under applicable law. Furthermore, if any provision of this Article is illegal under any applicable law, such provision shall be null and void to the extent necessary to comply with applicable law.
Notwithstanding the foregoing, but subject to any contrary terms set forth in any Award agreement, this Article shall not be applicable) to any recipient from and after his or her termination of service with the Company and its Subsidiaries after a Change in Control Event.
Recoupment of Awards. Unless otherwise specifically provided in an Award agreement, and to the extent permitted by applicable law, the Program Administrator may in its sole and absolute discretion, without obtaining the approval or consent of the Company’s shareholders or any recipient with respect to his or her outstanding Awards, require that each recipient agree to reimburse the Company for all or any portion of any Awards granted under this Plan (“Reimbursement”), or the Program Administrator may require the Termination or Rescission of, or the Recapture associated with, any Award, if –
(y) the granting, vesting, or payment of such Award (or portion thereof) was predicated upon the achievement of certain financial results or other criteria;
(z) in the Program Administrator’s view, the recipient either benefited from a calculation that later proves to be materially inaccurate, or engaged in one or more material acts of fraud or misconduct that caused or partially caused the need for a financial restatement by the Company or any material Subsidiary; and
(aa) a lower granting, vesting, or payment of such Award would have occurred based upon the conduct described in clause (b) of this Article.
In each instance, the Program Administrator will, to the extent practicable and allowable under applicable laws, require Reimbursement, Termination or Rescission of, or Recapture relating to, any such Award granted to a recipient, including reimbursement for any gains realized on the exercise of Options or SARs attributable to such Awards, plus a reasonable rate of interest, effecting the cancellation of restricted shares, restricted stock units, unrestricted shares, and outstanding Options and SARs; provided that the Company will not seek Reimbursement, Termination or Rescission of, or Recapture relating to, any such Awards that were paid or vested more than three years prior to the date the applicable restatement is disclosed.
Section 409A Compliance. To the extent applicable, it is intended that the Program and all Awards hereunder comply with the requirements of Section 409A of the Code or an exemption thereto, and the Program and all Award agreements shall be interpreted and applied by the Program Administrator in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A of the Code. Notwithstanding anything in the Program or an Award agreement to the contrary, in the event that any provision of the Program or an Award agreement is determined by the Program Administrator, in its sole discretion, to not comply with the requirements of Section 409A of the Code or an exemption thereto, the Program Administrator shall, in its sole discretion, have the authority to take such actions and to make such interpretations or changes to the Program or an Award agreement as the Program Administrator deems necessary, regardless of whether such actions, interpretations, or changes shall adversely affect a participant, subject to the limitations, if any, of applicable law. If an Award is subject to Section 409A of the Code, any payment made to a participant who is a “specified employee” of the Company or any Subsidiary shall not be made before the date that is six months after the Participant’s “separation from service” to the extent required to avoid the adverse consequences of Section 409A of the Code. For purposes of this Article 27, the terms “separation from service” and “specified employee” shall have the meanings set forth in Section 409A of the Code. In no event whatsoever shall the Company be liable for any additional tax, interest or penalties that may be imposed on any participant by Section 409A of the Code or any damages for failing to comply with Section 409A of the Code.
PART I
INCENTIVE STOCK OPTION PLAN
The following provisions shall apply with respect to options granted by the Program Administrator pursuant to Part I of the Program:
General. This Incentive Stock Option Plan (“Incentive Plan”) is Part I of the Company's Program. The Company intends that options granted pursuant to the provisions of the Incentive Plan will qualify and will be identified as “incentive stock options” within the meaning of Section 422 of the Code. Unless any provision herein indicates to the contrary, this Incentive Plan shall be subject to the General Provisions of the Program.
Terms and Conditions. The Program Administrator may grant incentive stock options to purchase Common Stock to any employee of the Company or its Subsidiaries; provided, however, that on the date of grant, such person is considered an employee of the Company or any Subsidiary under Treasury Regulation §1.421-1(h). The terms and conditions of options granted under the Incentive Plan may differ from one another as the Program Administrator shall, in its discretion, determine, as long as all options granted under the Incentive Plan satisfy the requirements of the Incentive Plan.
Duration of Options. Each option and all rights thereunder granted pursuant to the terms of the Incentive Plan shall expire on the date determined by the Program Administrator, but in no event shall any option granted under the Incentive Plan expire later than ten years from the date on which the option is granted. Notwithstanding the foregoing, any option granted under the Incentive Plan to any person who owns more than 10% of the combined voting power of all classes of stock of the Company or any Subsidiary shall expire no later than five years from the date on which the option is granted.
Purchase Price. The option price with respect to any option granted pursuant to the Incentive Plan shall not be less than the Fair Market Value of the shares on the date of the grant of the option; except that the option price with respect to any option granted pursuant to the Incentive Plan to any person who owns more than 10% of the combined voting power of all classes of stock of the Company shall not be less than 110% of the Fair Market Value of the shares on the date the option is granted. For purposes of the Program, the phrase “Fair Market Value” shall mean on the date of grant or other relevant date: (i) the closing price of a share of Common Stock as reported on the principal nationally recognized stock exchange on which shares of Common Stock are traded on such date, or if no prices are reported with respect to such shares on such date, the closing price of a share of Common Stock on the last preceding date on which there were reported prices of such shares; or (ii) if shares of Common Stock are not listed or admitted to unlisted trading privileges on a nationally recognized stock exchange, but are traded on the OTC Bulletin Board, the closing sale price of the Common Stock for such date (or the closing bid price for that date or the nearest preceding date if no sale price is available on that date) on the OTC Bulletin Board, or (iii) if neither (i) nor (ii) apply and the Common Stock is reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported on such date (or the nearest preceding date); or (iv) if none of (i), (ii) or (iii) apply, the Fair Market Value of a share the Common Stock will be determined in good faith by the Program Administrator acting in its discretion using the reasonable application of a reasonable valuation method based on the facts and circumstances existing on the valuation date, in a manner consistent with Section 409A of the Code and Treasury Regulation 1.409A-1(b)(5)(iv) (or any successor regulation or interpretation), which determination will be conclusive.
Maximum Amount of Options in Any Calendar Year. The aggregate Fair Market Value (determined as of the time the option is granted) of the Common Stock with respect to which incentive stock options are exercisable for the first time by any employee during any calendar year (under the terms of the Incentive Plan and all incentive stock option plans of the Company and the Subsidiaries) shall not exceed $100,000.
Exercise of Options. Unless otherwise provided by the Program Administrator at the time of grant or unless the installment provisions set forth herein are subsequently accelerated pursuant to the General Provisions of the Program or otherwise by the Program Administrator with respect to any one or more previously granted options, incentive stock options may only be exercised to the following extent during the following periods of time:
| Option Which May be During | Maximum Percentage of Shares Covered by Purchased | ||
| First 12 months after grant | 0% | ||
| First 24 months after grant | 33-1/3% | ||
| First 36 months after grant | 66-2/3% | ||
| Beyond 36 months after grant | 100% |
Failure to Satisfy Applicable Requirements. In the event that an option is intended to be granted pursuant to the provisions of this Incentive Plan but fails to satisfy one or more requirements of this Incentive Plan, such option shall be deemed to have been granted pursuant to the Supplemental Plan set forth as Part II of the Program, provided that such option satisfies the requirements of the Supplemental Plan.
PART II
SUPPLEMENTAL STOCK OPTION PLAN
The following provisions shall apply with respect to options granted by the Program Administrator pursuant to Part II of the Program:
· General. This Supplemental Stock Option Plan (“Supplemental Plan”) is Part II of the Company's Program. Any option granted pursuant to this Supplemental Plan shall not be an incentive stock option as defined in Section 422 of the Code. Unless any provision herein indicates to the contrary, this Supplemental Plan shall be subject to the General Provisions of the Program.
Terms and Conditions. The Program Administrator may grant supplemental stock options to any person eligible under Article 4 of the General Provisions. The terms and conditions of options granted under this Supplemental Plan may differ from one another as the Program Administrator shall, in its discretion, determine as long as all options granted under this Supplemental Plan satisfy the requirements of this Supplemental Plan.
Duration of Options. Each option and all rights thereunder granted pursuant to the terms of this Supplemental Plan shall expire on the date determined by the Program Administrator, but in no event shall any option granted under this Supplemental Plan expire later than ten years from the date on which the option is granted.
Purchase Price. The option price with respect to any option granted pursuant to this Supplemental Plan shall not be less than the Fair Market Value (determined as set forth in Section 4 of the Incentive Plan) of the shares on the date of the grant of the option unless the Award (with such lesser option price) otherwise complies with Section 409A of the Code or is exempt from Section 409A of the Code.
Exercise of Options. Unless otherwise provided by the Program Administrator at the time of grant or unless the installment provisions set forth herein are subsequently accelerated pursuant to the General Provisions of the Program or otherwise by the Program Administrator with respect to any one or more previously granted options, supplemental stock options may only be exercised to the following extent during the following periods of time:
| During | Maximum Percentage of Shares Covered by Option Which May be Purchased | ||
| First 12 months after grant | 0% | ||
| First 24 months after grant | 33-1/3% | ||
| First 36 months after grant | 66-2/3% | ||
| Beyond 36 months after grant | 100% |
PART III
STOCK APPRECIATION RIGHTS PLAN
The following provisions shall apply with respect to stock appreciation rights granted by the Program Administrator pursuant to Part III of the Program:
· General. This Stock Appreciation Rights Plan (“SAR Plan”) is Part III of the Company's Program.
Terms and Conditions. The Program Administrator may grant stock appreciation rights to any person eligible under Article 4 of the General Provisions. Stock appreciation rights may be granted either in tandem with supplemental stock options or incentive stock options as described in Section 4 of this SAR Plan or as naked stock appreciation rights as described in Section 5 of this SAR Plan.
Mode of Payment. At the discretion of the Program Administrator, payments to recipients upon exercise of stock appreciation rights may be made in (a) cash or by the Company’s check, (b) shares of Common Stock having a Fair Market Value (determined in the manner provided in Section 4 of the Incentive Plan) equal to the amount of the payment, or (c) any combination of the foregoing in an aggregate amount equal to the amount of the payment.
Stock Appreciation Right in Tandem with Supplemental or Incentive Stock Option. A SAR granted in tandem with a supplemental stock option or an incentive stock option (in either case, an “Option”) shall be on the following terms and conditions:
a. Each SAR shall relate to a specific Option or portion of an Option granted under the Supplemental Plan or Incentive Plan, as the case may be, and may be granted by the Program Administrator at the same time that the Option is granted or at any time thereafter prior to the last day on which the Option may be exercised.
(bb) A SAR shall entitle a recipient, upon surrender of the unexpired related Option, or a portion thereof, to receive from the Company an amount equal to the excess of (i) the Fair Market Value (determined in accordance with Section 4 of the Incentive Plan) of the shares of Common Stock which the recipient would have been entitled to purchase on that date pursuant to the portion of the Option surrendered over (ii) the amount which the recipient would have been required to pay to purchase such shares upon exercise of such Option.
(cc) A SAR shall be exercisable only for the same number of shares of Common Stock, and only at the same times, as the Option to which it relates. SARs shall be subject to such other terms and conditions as the Program Administrator may specify.
(dd) A SAR shall lapse at such time as the related Option is exercised or lapses pursuant to the terms of the Program. On exercise of the SAR, the related Option shall lapse as to the number of shares exercised.
1. Naked Stock Appreciation Right. SARs granted by the Program Administrator as naked stock appreciation rights (“Naked Rights”) shall be subject to the following terms and conditions:
The Program Administrator may award Naked Rights to recipients for periods not exceeding ten years. Each Naked Right shall represent the right to receive the excess of the Fair Market Value of one share of Common Stock (determined in accordance with Section 4 of the Incentive Plan) on the date of exercise of the Naked Right over the Fair Market Value of one share of Common Stock (determined in accordance with Section 4 of the Incentive Plan) on the date the Naked Right was awarded to the recipient.
(ee) Unless otherwise provided by the Program Administrator at the time of award or unless the installment provisions set forth herein are subsequently accelerated pursuant to the General Provisions of the Program or otherwise by the Program Administrator with respect to any one or more previously granted Naked Rights, Naked Rights may only be exercised to the following extent during the following periods of employment or service as a consultant or director:
| During | Maximum Percentage of Naked Rights Which May Be Exercised | ||
| First 12 months after award | 0% | ||
| First 24 months after award | 33-1/3% | ||
| First 36 months after award | 66-2/3% | ||
| Beyond 36 months after award | 100% |
(ff) The Naked Rights solely measure and determine the amounts to be paid to recipients upon exercise as provided in Section 5(a). Naked Rights do not represent Common Stock or any right to receive Common Stock. The Company shall not hold in trust or otherwise segregate amounts which may become payable to recipients of Naked Rights; such funds shall be part of the general funds of the Company. Naked Rights shall constitute an unfunded contingent promise to make future payments to the recipient.
PART IV
RESTRICTED STOCK AWARD PLAN
The following provisions shall apply with respect to restricted shares and restricted stock units granted by the Program Administrator pursuant to Part IV of the Program:
General. This Restricted Stock Award Plan (“Restricted Stock Plan”) is Part IV of the Company’s Program. Unless any provision herein indicates to the contrary, this Restricted Stock Plan shall be subject to the General Provisions of the Program.
Terms and Conditions. The Program Administrator may in its sole discretion grant restricted shares of Common Stock to any person eligible under Article 4 of the General Provisions and shall evidence such grant in an Award agreement that is delivered to the recipient and that sets forth the number of restricted shares of Common Stock, the purchase price for such restricted shares (if any), and the terms upon which the restricted shares may become vested. In addition, the Company may in its discretion grant to any person eligible under Article 4 of the General Provisions the right to receive shares of Common Stock after certain vesting requirements are met (“restricted stock units”), and shall evidence such grant in an Award agreement that is delivered to the recipient which sets forth the number of shares of Common Stock (or formula, that may be based on future performance or conditions, for determining the number of shares of Common Stock) that the recipient shall be entitled to receive upon vesting and the terms upon which the shares subject to a restricted stock unit may become vested. The Program Administrator may condition any Award of restricted shares or restricted stock units upon receiving from the recipient such further assurances and documents as the Program Administrator may require to enforce the restrictions. In addition, the Program Administrator may grant Awards hereunder in the form of unrestricted shares of Common Stock; that is, shares of Common Stock without conditions and conveying immediate ownership to the holder upon the date of grant or such other date as the Program Administrator may determine.
Vesting and Forfeiture. The Program Administrator shall set forth in an Award agreement granting restricted shares or restricted stock units, the terms and conditions under which the recipient’s interest in the restricted shares or the shares subject to restricted stock units will become vested and non-forfeitable, which conditions may be based on the recipient’s continued employment or services to the Company and its Subsidiaries and/or the achievement of such specified performance objectives as the program Administrator may establish.
Issuance of Shares upon Vesting. As soon as practicable after vesting of a holder’s restricted shares (or right to receive shares of Common Stock underlying restricted stock units) and the recipient’s satisfaction of applicable tax withholding requirements, the Company shall release to the recipient, free from the vesting restrictions, one share of Common Stock for each vested restricted share (or issue one share of Common Stock free of the vesting restriction for each vested restricted stock unit), unless an Award agreement provides otherwise. No fractional shares shall be distributed, and cash shall be paid in lieu thereof.
Dividends Payable on Vesting. Unless otherwise provided in an Award agreement, whenever shares of Common Stock are released to an individual as a result of the vesting of restricted shares, such individual shall also be entitled to receive (unless otherwise provided in the Award agreement), with respect to each share of Common Stock released or issued a number of shares of Common Stock equal to (i) any stock dividends, which were declared and paid to the holders of shares of Common Stock between the date of the Award and the date such share of Common Stock is released from the vesting restrictions, and (ii) in the discretion of the Program Administrator, (x) a number of shares of Common Stock equal to the shares of Common Stock that the individual could have purchased at Fair Market Value on the payment date of any cash dividends for shares of Common Stock if the individual had received such cash dividends with respect to each restricted share between the date of the Award and lapse of the restrictions of such restricted share, and/or (y) a cash amount equal to the cumulative amount of such cash dividends.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (See File No. 333-17883, effective December 31, 1996, File No. 333-119664, effective October 12, 2004, and File No. 333-167679, effective June 22, 2010) of our report dated March 30, 2021, with respect to the consolidated financial statements of Inrad Optics, Inc. and Subsidiaries included in this Annual Report on Form 10-K for the year ended December 31, 2020.
/s/ PKF O’Connor Davies, LLP
March 30, 2021
New York, NY
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Amy Eskilson, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2020, of Inrad Optics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated Subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: March 30, 2021 | |
| /s/ Amy Eskilson | |
| Amy Eskilson | |
| Chief Executive Officer |
A signed original of this written statement required by Sections 302 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission, or its staff, upon request.
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Theresa A. Balog, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2020, of Inrad Optics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated Subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: March 30, 2021 | |
| /s/ Theresa A. Balog | |
| Theresa A. Balog | |
| Chief Financial Officer, Secretary and Treasurer |
A signed original of this written statement required by Sections 302 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission, or its staff, upon request.
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Inrad Optics, Inc. (the "Company") on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the "Report"), I, Amy Eskilson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and consolidated results of operations of the Company for the periods presented.
| Dated: March 30, 2021 | |
| /s/ Amy Eskilson | |
| Amy Eskilson | |
| Chief Executive Officer |
This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
A signed original of this written statement required by Sections 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission, or its staff, upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Inrad Optics, Inc. (the "Company") on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the "Report"), I, Theresa A. Balog, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and consolidated results of operations of the Company for the periods presented.
| Dated: March 30, 2021 | |
| /s/ Theresa A. Balog | |
| Theresa A. Balog | |
| Chief Financial Officer, Secretary and Treasurer |
This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
A signed original of this written statement required by Sections 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission, or its staff, upon request.
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2020 |
Mar. 30, 2021 |
Jun. 30, 2020 |
|
| Document and Entity Information | |||
| Document Type | 10-K | ||
| Amendment Flag | false | ||
| Entity Well-known Seasoned Issuer | No | ||
| Document Period End Date | Dec. 31, 2020 | ||
| Document Fiscal Year Focus | 2020 | ||
| Document Fiscal Period Focus | FY | ||
| Entity Registrant Name | Inrad Optics, Inc. | ||
| Entity Central Index Key | 0000719494 | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Current Reporting Status | Yes | ||
| Entity Voluntary Filers | No | ||
| Entity Filer Category | Non-accelerated Filer | ||
| Title of 12(g) Security | Common stock, par value $.01 Per Share | ||
| No Trading Symbol Flag | true | ||
| Entity Common Stock, Shares Outstanding | 13,820,328 | ||
| Entity Public Float | $ 5,762,963 | ||
| Entity Small Business | true | ||
| Entity Emerging Growth Company | false | ||
| Entity Shell Company | false | ||
| Entity Interactive Data Current | Yes |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| CONSOLIDATED BALANCE SHEETS | ||
| Allowance for doubtful accounts (in dollars) | $ 91,000 | $ 15,000 |
| Common stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
| Common stock, shares authorized | 60,000,000 | 60,000,000 |
| Common stock, shares issued | 13,824,928 | 13,735,177 |
| Treasury stock, shares | 4,600 | 4,600 |
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||
| Total revenue | $ 9,007,562 | $ 10,007,655 |
| Cost and expenses: | ||
| Cost of goods sold | 7,218,119 | 8,015,148 |
| Selling, general and administrative expenses | 2,537,630 | 2,614,229 |
| Costs and Expenses, Total | 9,755,750 | 10,629,377 |
| (Loss) income from operations | (748,188) | (621,722) |
| Other expense: | ||
| Interest expense-net | (150,374) | (153,938) |
| Loss on exchange of precious metals | (438) | |
| Nonoperating Income (Expense) | (150,374) | (154,376) |
| (Loss) income before income taxes | (898,561) | (776,098) |
| Income tax (provision) benefit | 0 | 0 |
| Net (loss) income | $ (898,561) | $ (776,098) |
| Net (loss) income per common share - basic | $ (0.07) | $ (0.06) |
| Net (loss) income per common share - diluted | $ (0.07) | $ (0.06) |
| Weighted average shares outstanding - basic | 13,762,795 | 13,672,235 |
| Weighted average shares outstanding - diluted | 13,762,795 | 13,672,235 |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($) |
Common Stock |
Capital in excess of par value |
Accumulated Deficit |
Treasury Stock |
Total |
|---|---|---|---|---|---|
| Balance at Dec. 31, 2018 | $ 136,371 | $ 19,055,615 | $ (16,610,294) | $ (14,950) | $ 2,566,742 |
| Balance (in shares) at Dec. 31, 2018 | 13,636,988 | ||||
| 401K contribution | $ 982 | 92,605 | 0 | 0 | 93,587 |
| 401K contribution (in shares) | 98,189 | ||||
| Stock-based compensation expense | $ 0 | 133,035 | 0 | 0 | 133,035 |
| Net income (loss) for the year | 0 | 0 | (776,098) | 0 | (776,098) |
| Balance at Dec. 31, 2019 | $ 137,353 | 19,281,255 | (17,386,392) | (14,950) | 2,017,266 |
| Balance (in shares) at Dec. 31, 2019 | 13,735,177 | ||||
| 401K contribution | $ 898 | 123,457 | 0 | 0 | 124,355 |
| 401K contribution (in shares) | 89,751 | ||||
| Stock-based compensation expense | $ 0 | 111,651 | 0 | 0 | 111,651 |
| Net income (loss) for the year | 0 | 0 | (898,561) | 0 | (898,561) |
| Balance at Dec. 31, 2020 | $ 138,251 | $ 19,516,363 | $ (18,284,953) | $ (14,950) | $ 1,354,711 |
| Balance (in shares) at Dec. 31, 2020 | 13,824,928 |
Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates |
12 Months Ended |
|---|---|
Dec. 31, 2020 | |
| Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates | |
| Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates | 1. Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates
a. Nature of Business and Operations
Inrad Optics, Inc. and Subsidiaries (the “Company”), was incorporated in the state of New Jersey and is a manufacturer of crystals, crystal devices, electro-optic and optical components, and sophisticated laser devices and instruments. The Company has administrative offices and manufacturing operations in Northvale, New Jersey. The Company’s principal customers include commercial instrumentation companies and OEM laser systems manufacturers, research laboratories, government agencies, and defense contractors. The Company’s products are sold domestically using its own sales staff, and in major overseas markets, principally Europe, Israel, Japan, and Asia, using independent sales agents. b. Liquidity
As of December 31, 2020, the Company had working capital of $3.5 million and cash and cash equivalents of $1.1 million. Management believes based on the Company’s operations and its existing working capital resources together with existing cash flows, the Company has sufficient cash flows to fund operations through at least March 31, 2022. c. Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts and transactions are eliminated. d. Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates include, but are not limited to, determining our allowance for doubtful accounts, our allowance for inventory obsolescence, the fair value and depreciable lives of long-lived tangible and intangible assets, and deferred taxes and the associated valuation allowance. Actual results could differ from these estimates. e. Cash and cash equivalents
The Company considers cash-on-hand and highly liquid investments with original maturity dates of three months or less at the date of purchase to be cash and cash equivalents. f. Accounts receivable
Accounts receivable are carried at net realizable value, net of write-offs and allowances. The Company establishes an allowance for doubtful accounts based on estimates as to the collectability of accounts receivable. Management specifically analyzes past-due accounts receivable balances and, additionally, considers bad debt history, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Uncollectible accounts receivable are written-off when it is determined that the balance will not be collected. g. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or net-realizable value. Cost of manufactured goods includes material, labor and overhead. The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues. h. Plant and Equipment
Plant and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets which range between five and seven years. Amortization of leasehold improvements is computed using the straight-line method over the lesser of 10 years or the remaining term of the lease including optional renewal periods, as appropriate, when failure to renew the lease imposes an economic penalty on the Company in such an amount that renewal appears to be probable. In determining the amount of the economic penalty, management considers such factors as (i) the costs associated with the physical relocation of the offices, manufacturing facility and equipment, (ii) the economic risks associated with business interruption and potential customer loss during relocation and transition to new premises, (iii) the significant costs of leasehold improvements required at any new location to custom fit our specific manufacturing requirements, and (iv) the economic loss associated with abandonment of existing leasehold improvements or other assets whose value would be impaired by vacating the facility. Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and a gain or loss is recorded. i. Income taxes
Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements. The Company had no unrecognized tax benefits or liabilities, and no adjustment to its financial position, results of operations, or cash flows relating to uncertain tax positions taken on all open tax years. The Company is no longer subject to federal income tax examinations by tax authorities for the years before 2017 and state or local income tax examinations by tax authorities for the years before 2017. j. Impairment of long-lived assets
Long-lived assets, such as plant and equipment and purchased intangibles with finite lives, which are subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Long-lived assets held for sale would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and would no longer be depreciated. k. Stock-based compensation
Stock based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period. l. Revenue recognition
The Company adopted the provisions of ASU 2014-09, “Revenues from Contracts with Customers (ASC 606)” on January 1, 2018, which requires recognition of revenue at the time performance obligations are satisfied. Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e., point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e., over time). See Note 2. m. Internal research and development costs
Internal research and development costs are charged to expense as incurred. n. Precious metals
Precious metals are stated at cost and consist of various fixtures used in the high temperature crystal growth manufacturing process. From time to time the quoted market values of these precious metals may be below cost. Management evaluates these market adjustments on a recurring basis and if it is determined that they are other than temporary the carrying value would be adjusted. o. Advertising costs
Advertising costs included in selling, general and administrative expenses were $18,000 and $45,000 for the years ended December 31, 2020 and 2019, respectively. Advertising costs are charged to expense when the related services are incurred or related events take place. p. Concentrations and credit risk
The concentration of credit risk in the Company’s accounts receivable is mitigated by the Company’s credit evaluation process, familiarity with its small base of recurring customers and reasonably short collection terms and the geographical dispersion of revenue. The Company generally does not require collateral but, in some cases, the Company negotiates cash advances prior to the undertaking of the work. These cash advances are recorded as current liabilities on the balance sheet until corresponding revenues are realized. The Company utilizes many relatively uncommon materials and compounds to manufacture its products and relies on outside vendors for certain manufacturing services. Therefore, any failure by its suppliers to deliver materials of an adequate quality and quantity could have an adverse effect on the Company’s ability to meet the commitments of its customers. For the year ended December 31, 2020, the Company had three customers who had sales representing 17.1%, 7.0% and 6.5% of total revenues. For the year ended December 31, 2019, the Company had three customers who had sales representing 18.5%, 14.7% and 6.1% of total revenues. Since the Company is a supplier of custom manufactured components to OEM customers, the relative size and identity of the largest customer accounts changes somewhat from year to year. In the short term, the loss of any one of these large customer accounts could have a material adverse effect on business, results of operations, and financial condition. q. Fair value measurements
The Company follows U.S. GAAP accounting guidance which establishes a framework for measuring fair value and expanded related disclosures. The framework requires fair value to be determined based on the exchange price that would be received for an asset, or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The valuation techniques required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The accounting guidance requires the following fair value hierarchy: Level 1 - Quoted prices (unadjusted) for identical assets and liabilities in active markets that the Company has the ability to access at the measurement date. Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 - Values determined by models, significant inputs to which are unobservable and are primarily based on internally derived assumptions regarding the timing and amount of expected cash flows. Long-lived assets may be measured at fair value if such assets are held for sale or if there is a determination that the asset is impaired. Management’s determination of fair value, although highly subjective, is based on the best information available, including internal projections of future earnings and cash flows discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets, broker quotes and independent appraisals, as appropriate. r. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016‑13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (“ASU 2016‑13”) which amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2023, with earlier application permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases" (ASC 842), and subsequently issued updates as part of ASU 2018-11, "Leases, Targeted Improvements." The new guidance requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The Company adopted ASC 842, effective January 1, 2019. The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019, and accordingly recorded an initial right-of-use asset of $0.8 million. See Note 12a. Lease Commitments. The adoption of ASU 842 and ASU 2018-11 did not have a material impact on the Company's statements of operations or cash flows.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Shared-Based Payment Accounting. The ASU update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 effective January 1, 2019. The adoption did not have a material impact on its financial statements and related disclosures. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, on a prospective basis, with early adoption permitted. The Company is currently evaluating the impact of adoption of this guidance and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU update is intended to simplify the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. This guidance is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have a material impact on the Company’s consolidated financial statements. s. Subsequent events
Management has performed an evaluation of subsequent events through the date that the financial statements were issued and has determined that it does not have any additional material subsequent events to disclose in the financial statements. |
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| Revenue | 2. Revenue
The Company’s revenues are comprised of product sales as well as products and services provided under long-term government contracts with its customers. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract (either implicit or explicit) by transferring the promised product or service to its customer either when (or as) its customer obtains control of the product or service. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of standalone selling price for each distinct product or service in the contract, which is generally based on an observable price. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales, value added, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold. The Company’s performance obligations under long-term government contracts are generally satisfied over time. Revenue from products or services transferred to customers over time accounted for approximately 1.8% and 3.1% of revenue for 2020 and 2019, respectively. Revenue under these long-term government contracts is generally recognized over time using an input measure based upon the proportion of actual costs incurred to estimated total project costs, which is a method used to best depict the Company’s performance to date under the terms of the contract. Accounting for these long-term government contracts involves the use of various techniques to estimate total revenue and costs. The Company estimates profit on these long-term government contracts as the difference between total estimated revenue and expected costs to complete a contract and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include, among other things, labor productivity, costs and availability of materials, and timing of funding by the U.S. government. The nature of these long-term agreements may give rise to several types of variable consideration, such as claims, awards and incentive fees. Historically, these amounts of variable consideration are not considered significant. Additionally, contract estimates may include additional revenue for submitted contract modifications if there exists an enforceable right to the modification, the amount can be reasonably estimated and its realization is probable. These estimates are based on historical collection experience, anticipated performance, and the Company’s best judgement at the time. These amounts are generally included in the contract’s transaction price and are allocated over the remaining performance obligations. Changes in judgments on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income. Under these long-term government contracts, the Company may receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. In the event a contract loss becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statements of Operations. The majority of the Company’s revenue is from products and services transferred to customers at a point in time and were approximately 98.2% and 96.9% of revenue for 2020 and 2019, respectively. The Company recognizes revenue at the point in time in which the customer obtains control of the product or service, which is generally when product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location.
Net sales by timing to transfers of goods and services is as follows:
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Inventories, net |
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| Inventories, net | 3. Inventories, net
Inventories are comprised of the following and are shown net of inventory reserves of approximately $2.5 million at December 31, 2020 and 2019:
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Plant and Equipment |
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| Plant and Equipment | 4. Plant and Equipment
Plant and equipment are comprised of the following:
Depreciation expense recorded by the Company totaled approximately $254,000 and $256,000 for 2020 and 2019, respectively. No fully depreciated assets were written off in 2020, and $16,000 were written off in 2019. The Company evaluates its property and equipment for impairment when events or circumstances indicate and impairment may exist. Based on this evaluation, the Company concluded that, at December 31, 2020, its long-lived assets were not impaired. |
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Related Party Transactions |
12 Months Ended |
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Dec. 31, 2020 | |
| Related Party Transactions | |
| Related Party Transactions | 5. Related Party Transactions
On July 22, 2020, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2024, from April 1, 2021. The notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement to extend the maturity date of the notes, the expiration dates of the warrants were extended from April 1, 2022 to April 1, 2027. The Company paid $0.2 million and $0.1 million for interest on the subordinated convertible promissory notes in 2020 and 2019, respectively. Accrued interest of $37,500 and $112,500 is included in Accounts payable and accrued liabilities as of December 31, 2020 and 2019, respectively. |
Other Long-Term Notes |
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| Other Long-Term Notes | 6. Other Long-Term Notes
Other Long-Term Notes consist of the following:
Other Long-Term Notes mature as follows:
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Payroll Protection Program |
12 Months Ended |
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Dec. 31, 2020 | |
| Payroll Protection Program | |
| Payroll Protection Program | 7. Payroll Protection Program On May 6, 2020, the Company received loan proceeds of approximately $973,000 (the “PPP Loan”), under the Paycheck Protection Program (“PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was enacted March 27, 2020. The PPP Loan, which is in the form of a promissory note, dated May 4, 2020, issued by the Company, matures on May 4, 2022, and bears interest at a rate of 1.0% per annum. The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the 24-week period after the loan origination for certain eligible purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during a covered eight-week or twenty-four-week period qualify for forgiveness. Any forgiveness of the PPP Loan is subject to approval by the Small Business. At December 31, 2020, the PPP Loan is included in other long-term notes on the accompanying balance sheet. On January 19, 2021, the Company received notification from the Small Business Association that the Company’s Forgiveness Application of the PPP Loan and accrued interest, totaling $980,000, was approved in full, and the Company had no further obligations related to the PPP Loan. |
Accounts Payable and Accrued Liabilities |
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| Accounts Payable and Accrued Liabilities | 8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued expenses are comprised of the following:
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Income Taxes |
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| Income Taxes | 9. Income Taxes
The Company did not record a current provision for either state tax or federal tax due to losses incurred for both income tax and financial reporting purposes. A reconciliation of the income tax provision computed at the statutory Federal income tax rate to our effective income tax rate follows (in percent):
At December 31, 2020 and 2019, the Company had estimated Federal net operating loss carry forwards of approximately $10.4 million and $9.3 million, respectively, and state net operating loss carry forwards of approximately $5.1 million and $5.8 million, respectively. The 2020 and 2019 net operating loss carryforwards have no expiration dates. Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carry forwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs. Accordingly, the actual utilization of the net operating loss and carryforwards for tax purposes may be limited annually to a percentage (based on the risk-free interest rate) of the fair market value of the Company at the time of any such ownership change. The Company has not prepared an analysis of ownership changes, but does not believe that a greater than 50% change of ownership has occurred and such limitations would not apply to the Company. Deferred tax assets (liabilities) are comprised of the following:
In evaluating the Company’s ability to recover deferred tax assets in future periods, management considers the available positive and negative factors, including the Company’s recent operating results, the existence of cumulative losses and near-term forecasts of future taxable income that is consistent with the plans and estimates management is using to manage the underlying business. A significant piece of objective evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2019. On the basis of this evaluation, as of December 31, 2020, the valuation allowance was increased by $262,000. The valuation allowance decreased as of December 31, 2019, by $19,000. The company concluded it was more likely than not that it would not be able to realize a significant portion of the benefit on the deferred tax assets and adjusted the valuation allowance accordingly. The Company files income tax returns in the United States, which typically provides for a three-year statute of limitations on assessments. The Company is no longer subject to federal, state or local income tax examinations by tax authorities for the years before 2017. The guidance for accounting for uncertainties in income taxes requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. There were no unrecognized tax benefits that impacted our effective tax rate and accordingly, there was no material effect to our financial position, results of operations or cash flows. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been no interest or penalties charged to us in relation to the underpayment of income taxes. We do not anticipate that our unrecognized tax benefits will significantly increase in the next 12 months. |
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Equity Compensation Program and Stock-based Compensation |
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| Equity Compensation Program and Stock-based Compensation | 10. Equity Compensation Program and Stock-based Compensation
a. 2020 Equity Compensation Program
On February 12, 2020, the Inrad Optics Board of Directors, adopted the Inrad Optics, Inc. 2020 Equity Compensation Program (the “2020 Program”), and received shareholder approval on June 23, 2020. The 2020 Program provides for grants of options, stock appreciation rights and restricted stock awards to employees, officers, directors, and others who render services to the Company. The 2020 Program is comprised of four parts including: (i) the Incentive Stock Option Plan which provides for grants of “incentive stock options,” (ii) the Supplemental Stock Option Plan which provides for grants of stock options that shall not be “incentive stock options,” (iii) the Stock Appreciation Rights Plan which allows the granting of stock appreciation rights and, (iv) the Restricted Stock Award Plan which provides for the granting of restrictive shares of Common Stock and restricted stock units. The 2020 Program is administered by the Compensation Committee of the Board of Directors. Under the 2020 Program, an aggregate of up to 4,000,000 shares of common stock may be granted. b. 2010 Equity Compensation Program
The Company’s 2010 Equity Compensation Program (the “2010 Program”) provided for grants of options, stock appreciation rights and restricted stock awards to employees, officers, directors, and others who render services to the Company. The 2010 Program expired on March 23, 2020. All outstanding grants of options, stock appreciation rights and performance shares issued under the 2010 Program will remain outstanding and shall expire on the date determined by the terms of the original grant. The latest date of expiration for outstanding grants under the 2010 Program is March 23, 2030. c. Stock Option Expense
The Company’s results for the years ended December 31, 2020 and 2019, include stock-based compensation expense for stock option grants totaling $112,000 and $133,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($29,000 and $37,000 for 2020 and 2019, respectively), and selling, general and administrative expenses ($83,000 and $96,000 for 2020 and 2019, respectively). As of December 31, 2020, and 2019, there were $98,000 and $199,000 of unrecognized compensation costs, net of estimated forfeitures, related to non-vested stock options, which are expected to be recognized over a weighted average period of approximately 1.16 years and 1.89 years, respectively. The weighted average estimated fair value of stock options granted in the two years ended December 31, 2020 and 2019, was $1.41 and $0.76, respectively. The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award. The Company assumes a dividend yield of zero, as the Company has not paid dividends in the past and does not expect to in the foreseeable future. The expected volatility is based upon the historical volatility of our common stock which the Company believes results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant with maturity dates approximately equal to the expected life at the grant date. The expected life is based upon the period of expected benefit based on the Company’s evaluation of historical and expected future employee exercise behavior. The following range of weighted-average assumptions were used for to determine the fair value of stock option grants during the years ended December 31, 2020 and 2019:
Stock Option Activity
A summary of the Company’s outstanding stock options as of and for the years ended December 31, 2020 and 2019, is presented below:
(a) Intrinsic value for purposes of this table represents the amount by which the fair value of the underlying stock, based on the respective market prices as of December 31, 2020, exceeds the exercise prices of the respective options. (b) Based on the Company’s historical forfeiture rate, the number of options expected to vest is the same as the total outstanding at December 31, 2020. The following table represents non-vested stock options granted, vested, and forfeited for the year ended December 31, 2020:
The total weighted average grant date fair value of options vested during the years ended December 31, 2020 and 2019, was $142,000 and $109,000, respectively. The following table summarizes information about stock options outstanding at December 31, 2020:
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Net (Loss) Income per Share |
12 Months Ended |
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Dec. 31, 2020 | |
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| Net (Loss) Income per Share | 11. Net (Loss) Income per Share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options, stock grants and warrants using the average market prices during the period, including potential common shares issuable upon conversion of outstanding convertible notes, except if the effect on the per share amounts is anti-dilutive. For the year ended December 31, 2020, and 2019, all common equivalent shares outstanding have been excluded from the diluted computation because their effect is anti-dilutive. This included 1,150,867 common stock equivalents related to outstanding options, in addition to 2,500,000 common shares issuable upon conversion of outstanding convertible notes and 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes. |
Commitments and Contingencies |
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| Commitments and Contingencies | 12. Commitments and Contingencies
a. Lease commitments
The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019. Under the guidance of ASU 2016-02, Leases (Topic 842), the Company determines if such an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease at inception of the arrangement. The Company determined that this lease is an operating lease and presented as a right-of-use lease asset, short term lease liability and long-term lease liability on the consolidated balance sheet. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company's incremental borrowing rate. Lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales and general and administrative expenses on the consolidated statement of operations. An initial right-of-use asset of approximately $0.8 million was recognized as a non-cash asset addition with the signing of the July 8, 2019, lease amendment. Cash paid for amounts included in the present value of the operating lease liability was $0.3 million during the year ended December 31, 2020, and is included in operating cash flows. The following table presents information about the amount and timing of cash flows arising from the Company's operating and capital leases as of December 31, 2020:
The Company’s total rent expense for the year ended December 31, 2020 and 2019, was $0.3 million and $0.3 million, respectively. The Company also paid real estate taxes and insurance premiums under the terms of the lease that totaled approximately $0.1 million in 2020 and 2019. b. Retirement plans
The Company maintains a 401(k) savings plan (the “Plan”) for all eligible employees (as defined in the plan). The 401(k) Plan allows employees to contribute up to 70% of their compensation on a salary reduction, pre-tax basis up to the statutory limitation. The 401(k) Plan also provides that the Company, at the discretion of the Board of Directors, may match employee contributions based on a pre-determined formula. In 2020, the Company’s 401(k) matching contribution for employees was $138,000. This will be funded by way of a contribution of $34,000 and a contribution of 142,329 shares of the Company’s common stock, which will be issued to the Plan in April, 2021. In 2019, the Company’s 401(k) matching contribution for employees was $124,000. This was funded by way of a contribution of 89,751 shares of the Company’s common stock, which were issued to the Plan in June, 2020. The Company records the distribution of the common shares in the Consolidated Statement of Shareholders’ Equity as of the date of distribution to the 401(k) Plan administrator. |
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Product Sales, Foreign Sales and Sales to Major Customers |
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Dec. 31, 2020 | |
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| Product Sales, Foreign Sales and Sales to Major Customers | 13. Product Sales, Foreign Sales and Sales to Major Customers
The Company’s export sales, which are primarily to customers in countries within Europe, Israel, Asia and Japan, amounted to approximately 29.4% and 31.9% of product sales in 2020 and 2019, respectively. The Company had sales to three major customers which accounted for approximately 30.6% of sales in 2020. One customer, a division of a major U.S. defense industry corporation that manufactures electro-optical systems for U.S. and foreign governments accounted for 17.1% of 2020 sales. The two other customers included two foreign-based manufacturers of process control and metrology equipment whose sales represented 7.0% and 6.5% of sales, respectively. For 2019, the top three customers represented 18.5%, 14.7%, and 6.1% respectively. During the past two years, sales to the Company’s top five customers represented approximately 43.0% and 47.2%, respectively. Given the concentration of sales within a small number of customers, the loss of any of these customers would have a significant negative impact on the Company and its business units. |
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| Shareholder's Equity | 14. Shareholders’ Equity
a. Common shares reserved for future issuances at December 31, 2020, are as follows:
b. Warrants
The Company had no outstanding warrants as of December 31, 2020 and 2019. |
Fair Value of Financial Instruments |
12 Months Ended |
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Dec. 31, 2020 | |
| Fair Value of Financial Instruments | |
| Fair Value of Financial Instruments | 15. Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities: The carrying amount of cash, current receivables and payables and certain other short-term financial instruments approximate their fair value as of December 31, 2020, due to their short-term maturities. Long-Term Debt: The fair value of the Company’s long-term debt, including the current portion, for notes payable and subordinated convertible debentures, was estimated using a discounted cash flow analysis, based on the Company’s assumed incremental borrowing rates for similar types of borrowing arrangements. The fair value of long-term debt is estimated to be $3.1 million compared to its carrying amount of $3.6 million as of December 31, 2020. |
Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates (Policies) |
12 Months Ended |
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Dec. 31, 2020 | |
| Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates | |
| Nature of Business and Operations | 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 |
| Liquidity | b. Liquidity
As of December 31, 2020, the Company had working capital of $3.5 million and cash and cash equivalents of $1.1 million. Management believes based on the Company’s operations and its existing working capital resources together with existing cash flows, the Company has sufficient cash flows to fund operations through at least March 31, 2022. |
| Principles of consolidation | 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. |
| Use of Estimates | d. Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates include, but are not limited to, determining our allowance for doubtful accounts, our allowance for inventory obsolescence, the fair value and depreciable lives of long-lived tangible and intangible assets, and deferred taxes and the associated valuation allowance. Actual results could differ from these estimates. |
| Cash and cash equivalents | 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 | f. Accounts receivable
Accounts receivable are carried at net realizable value, net of write-offs and allowances. The Company establishes an allowance for doubtful accounts based on estimates as to the collectability of accounts receivable. Management specifically analyzes past-due accounts receivable balances and, additionally, considers bad debt history, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Uncollectible accounts receivable are written-off when it is determined that the balance will not be collected. |
| Inventories | g. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or net-realizable value. Cost of manufactured goods includes material, labor and overhead. The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues. |
| Plant and Equipment | h. Plant and Equipment
Plant and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets which range between five and seven years. Amortization of leasehold improvements is computed using the straight-line method over the lesser of 10 years or the remaining term of the lease including optional renewal periods, as appropriate, when failure to renew the lease imposes an economic penalty on the Company in such an amount that renewal appears to be probable. In determining the amount of the economic penalty, management considers such factors as (i) the costs associated with the physical relocation of the offices, manufacturing facility and equipment, (ii) the economic risks associated with business interruption and potential customer loss during relocation and transition to new premises, (iii) the significant costs of leasehold improvements required at any new location to custom fit our specific manufacturing requirements, and (iv) the economic loss associated with abandonment of existing leasehold improvements or other assets whose value would be impaired by vacating the facility. Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and a gain or loss is recorded. |
| Income Taxes | i. Income taxes
Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements. The Company had no unrecognized tax benefits or liabilities, and no adjustment to its financial position, results of operations, or cash flows relating to uncertain tax positions taken on all open tax years. The Company is no longer subject to federal income tax examinations by tax authorities for the years before 2017 and state or local income tax examinations by tax authorities for the years before 2017. |
| Impairment of long-lived assets | 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. |
| Stock-Based Compensation | 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. |
| Revenue recognition | l. Revenue recognition
The Company adopted the provisions of ASU 2014-09, “Revenues from Contracts with Customers (ASC 606)” on January 1, 2018, which requires recognition of revenue at the time performance obligations are satisfied. Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e., point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e., over time). See Note 2. |
| Internal research and development costs | m. Internal research and development costs
Internal research and development costs are charged to expense as incurred. |
| Precious metals | n. Precious metals
Precious metals are stated at cost and consist of various fixtures used in the high temperature crystal growth manufacturing process. From time to time the quoted market values of these precious metals may be below cost. Management evaluates these market adjustments on a recurring basis and if it is determined that they are other than temporary the carrying value would be adjusted. |
| Advertising costs | o. Advertising costs
Advertising costs included in selling, general and administrative expenses were $18,000 and $45,000 for the years ended December 31, 2020 and 2019, respectively. Advertising costs are charged to expense when the related services are incurred or related events take place. |
| Concentrations and credit risk | p. Concentrations and credit risk
The concentration of credit risk in the Company’s accounts receivable is mitigated by the Company’s credit evaluation process, familiarity with its small base of recurring customers and reasonably short collection terms and the geographical dispersion of revenue. The Company generally does not require collateral but, in some cases, the Company negotiates cash advances prior to the undertaking of the work. These cash advances are recorded as current liabilities on the balance sheet until corresponding revenues are realized. The Company utilizes many relatively uncommon materials and compounds to manufacture its products and relies on outside vendors for certain manufacturing services. Therefore, any failure by its suppliers to deliver materials of an adequate quality and quantity could have an adverse effect on the Company’s ability to meet the commitments of its customers. For the year ended December 31, 2020, the Company had three customers who had sales representing 17.1%, 7.0% and 6.5% of total revenues. For the year ended December 31, 2019, the Company had three customers who had sales representing 18.5%, 14.7% and 6.1% of total revenues. Since the Company is a supplier of custom manufactured components to OEM customers, the relative size and identity of the largest customer accounts changes somewhat from year to year. In the short term, the loss of any one of these large customer accounts could have a material adverse effect on business, results of operations, and financial condition. |
| Fair value measurements | q. Fair value measurements
The Company follows U.S. GAAP accounting guidance which establishes a framework for measuring fair value and expanded related disclosures. The framework requires fair value to be determined based on the exchange price that would be received for an asset, or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The valuation techniques required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The accounting guidance requires the following fair value hierarchy: Level 1 - Quoted prices (unadjusted) for identical assets and liabilities in active markets that the Company has the ability to access at the measurement date. Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 - Values determined by models, significant inputs to which are unobservable and are primarily based on internally derived assumptions regarding the timing and amount of expected cash flows. Long-lived assets may be measured at fair value if such assets are held for sale or if there is a determination that the asset is impaired. Management’s determination of fair value, although highly subjective, is based on the best information available, including internal projections of future earnings and cash flows discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets, broker quotes and independent appraisals, as appropriate. |
| Recent Accounting Pronouncements | r. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016‑13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (“ASU 2016‑13”) which amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2023, with earlier application permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases" (ASC 842), and subsequently issued updates as part of ASU 2018-11, "Leases, Targeted Improvements." The new guidance requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The Company adopted ASC 842, effective January 1, 2019. The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019, and accordingly recorded an initial right-of-use asset of $0.8 million. See Note 12a. Lease Commitments. The adoption of ASU 842 and ASU 2018-11 did not have a material impact on the Company's statements of operations or cash flows.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Shared-Based Payment Accounting. The ASU update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 effective January 1, 2019. The adoption did not have a material impact on its financial statements and related disclosures. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, on a prospective basis, with early adoption permitted. The Company is currently evaluating the impact of adoption of this guidance and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU update is intended to simplify the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. This guidance is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have a material impact on the Company’s consolidated financial statements. |
| Subsequent events | s. Subsequent events
Management has performed an evaluation of subsequent events through the date that the financial statements were issued and has determined that it does not have any additional material subsequent events to disclose in the financial statements. |
Revenue (Tables) |
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| Schedule of revenue, remaining performance obligation, expected timing of satisfaction |
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Inventories, net (Tables) |
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Plant and Equipment (Tables) |
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| Schedule of property, plant and equipment |
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Other Long-Term Notes (Tables) |
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| Schedule of Debt |
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| Schedule of Maturities of Long-term Debt [Table Text Block] |
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Accounts Payable and Accrued Liabilities (Tables) |
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| Schedule of Accounts Payable and Accrued Liabilities [Table Text Block] |
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Income Taxes (Tables) |
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| Schedule of Effective Income Tax Rate Reconciliation [Table Text Block] |
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| Schedule of Deferred Tax Assets and Liabilities [Table Text Block] |
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Equity Compensation Program and Stock-based Compensation (Tables) |
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| Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions | The following range of weighted-average assumptions were used for to determine the fair value of stock option grants during the years ended December 31, 2020 and 2019:
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| Schedule of Share-based Compensation, Stock Options, Activity | A summary of the Company’s outstanding stock options as of and for the years ended December 31, 2020 and 2019, is presented below:
(a) Intrinsic value for purposes of this table represents the amount by which the fair value of the underlying stock, based on the respective market prices as of December 31, 2020, exceeds the exercise prices of the respective options. (b) Based on the Company’s historical forfeiture rate, the number of options expected to vest is the same as the total outstanding at December 31, 2020. |
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| Schedule of Share Based Compensation Arrangement By Share Based Payment Award Options Non Vested | The following table represents non-vested stock options granted, vested, and forfeited for the year ended December 31, 2020:
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| Schedule of Share-based Compensation, Shares Authorized under Stock Option Plans, by Exercise Price Range [Table Text Block] | The following table summarizes information about stock options outstanding at December 31, 2020:
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Commitments (Tables) |
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| Schedule of other information |
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Shareholders' Equity (Tables) |
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| Schedule of Common shares reserved | Common shares reserved for future issuances at December 31, 2020, are as follows:
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Revenue - Disaggregation of Revenue (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
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| Disaggregation of Revenue [Line Items] | ||
| Revenues | $ 9,007,562 | $ 10,007,655 |
| Percentage of Revenue from Products or Services | 100.00% | 100.00% |
| Aerospace & Defense [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Revenues | $ 3,916,000 | $ 3,710,000 |
| Percentage of Revenue from Products or Services | 43.50% | 37.00% |
| Process Control & Metrology [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Revenues | $ 3,328,000 | $ 4,189,000 |
| Percentage of Revenue from Products or Services | 36.90% | 41.90% |
| Laser Systems [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Revenues | $ 667,000 | $ 1,212,000 |
| Percentage of Revenue from Products or Services | 7.40% | 12.10% |
| Scientific / R&D [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Revenues | $ 1,097,000 | $ 897,000 |
| Percentage of Revenue from Products or Services | 12.20% | 9.00% |
Revenue - Additional Information (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
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| Disaggregation of Revenue [Line Items] | ||
| Percentage of Revenue from Products or Services | 100.00% | 100.00% |
| Transferred over Time [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Percentage of Revenue from Products or Services | 1.80% | 3.10% |
| Transferred at Point in Time [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Percentage of Revenue from Products or Services | 98.20% | 96.90% |
Revenue - Transfer of Goods and Services (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
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| Disaggregation of Revenue [Line Items] | ||
| Revenues | $ 9,007,562 | $ 10,007,655 |
| Transferred at Point in Time [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Revenues | 8,842,000 | 9,696,000 |
| Transferred over Time [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Revenues | $ 166,000 | $ 312,000 |
Inventories, net - Schedule of inventory (Details) - USD ($) |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Inventories, net | ||
| Raw materials | $ 1,130,000 | $ 1,248,000 |
| Work in process, including manufactured parts and components | 1,718,000 | 1,090,000 |
| Finished goods | 358,000 | 496,000 |
| Inventories, net | $ 3,206,057 | $ 2,834,107 |
Inventories, net - Textual (Details) - USD ($) $ in Millions |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Inventories, net | ||
| Inventory Reserves | $ 2.5 | $ 2.5 |
Plant and Equipment - Schedule of plant and equipment (Details) - USD ($) |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | $ 15,191,610 | $ 14,990,773 |
| Less accumulated depreciation and amortization | (14,564,186) | (14,309,992) |
| Total plant and equipment | 627,424 | 680,781 |
| Office and Computer Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | 1,474,000 | 1,345,000 |
| Machinery and Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | 11,405,000 | 11,334,000 |
| Leasehold Improvements [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | $ 2,312,000 | $ 2,312,000 |
Plant and Equipment - Textual (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Plant and Equipment | ||
| Depreciation | $ 254,000 | $ 256,000 |
| Write Off Of Fixed Assets | $ 16,000 | |
Other Long-Term Notes (Details) - USD ($) |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| U.S. Small Business Administration term note payable in equal monthly installments of $1,922 and bearing an interest rate of 4.0% and expiring in July 2029. | $ 177,000 | |
| Less current portion | (16,288) | $ (16,044) |
| Long-term debt, excluding current portion | 161,000 | 167,000 |
| Us Small Business Administration Note Payable [Member] | ||
| Debt Instrument [Line Items] | ||
| U.S. Small Business Administration term note payable in equal monthly installments of $1,922 and bearing an interest rate of 4.0% and expiring in July 2029. | $ 177,000 | $ 183,000 |
Other Long-Term Notes - Textual (Details) - Us Small Business Administration Note Payable [Member] |
24 Months Ended |
|---|---|
|
Dec. 31, 2020
USD ($)
| |
| Debt Instrument [Line Items] | |
| Monthly installment payment | $ 1,922 |
| Debt Instrument, Interest Rate, Stated Percentage | 4.00% |
Other Long-Term Notes - Schedule of other long-term note maturities (Details) $ in Thousands |
Dec. 31, 2020
USD ($)
|
|---|---|
| Other Long-Term Notes | |
| 2021 | $ 16 |
| 2022 | 17 |
| 2023 | 18 |
| 2024 | 18 |
| 2025 | 19 |
| Thereafter | 89 |
| Other Notes Payable, Total | $ 177 |
Payroll Protection Program (Details) - USD ($) |
12 Months Ended | |||
|---|---|---|---|---|
May 06, 2020 |
Dec. 31, 2020 |
Dec. 31, 2019 |
Jan. 19, 2021 |
|
| Debt Instrument [Line Items] | ||||
| Proceeds from PPP Loan | $ 973,166 | $ 0 | ||
| PPP Loan | ||||
| Debt Instrument [Line Items] | ||||
| Proceeds from PPP Loan | $ 973,000 | |||
| PPP Loan | Subsequent Event | ||||
| Debt Instrument [Line Items] | ||||
| PPP Loan and accrued interest forgiven | $ 980,000 | |||
Accounts Payable and Accrued Liabilities (Details) - USD ($) |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Accounts Payable and Accrued Liabilities | ||
| Trade accounts payable and accrued purchases | $ 454,000 | $ 507,000 |
| Accrued payroll | 133,000 | |
| Accrued 401K company matching contribution | 138,000 | 114,000 |
| Accrued expenses - other | 125,000 | 224,000 |
| Accounts Payable and Accrued Liabilities, Current, Total | $ 717,537 | $ 978,184 |
Income Taxes - Reconciliation of income tax provision (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Income Taxes | ||
| Federal statutory rate | (21.00%) | (21.00%) |
| State statutory rate | (9.00%) | (9.00%) |
| Change in Valuation Allowance | 3.00% | 2.00% |
| Permanent Differences | 11.00% | 14.00% |
| Other | 16.00% | 14.00% |
Income Taxes - Deferred tax assets (liabilities) (Details) - USD ($) $ in Thousands |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Income Taxes | ||
| Account receivable reserves | $ 25 | $ 4 |
| Inventory reserves | 692 | 697 |
| Inventory capitalization | 101 | 89 |
| Depreciation | 182 | 252 |
| Loss carry forwards | 2,636 | 2,332 |
| Gross deferred tax assets | 3,636 | 3,374 |
| Valuation allowance | (3,636) | (3,374) |
| Net deferred tax asset | $ 0 | $ 0 |
Income Taxes - Textual (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Income Tax Disclosure [Line Items] | ||
| Effective Income Tax Rate Reconciliation, Change in Deferred Tax Assets Valuation Allowance, Amount | $ (262,000) | $ (19,000) |
| Unrecognized Tax Benefits that Would Impact Effective Tax Rate | 0 | |
| Unrecognized Tax Benefits, Income Tax Penalties and Interest Expense | 0 | |
| Significant Change in Unrecognized Tax Benefits is Reasonably Possible, Amount of Unrecorded Benefit | 0 | |
| Domestic Tax Authority [Member] | ||
| Income Tax Disclosure [Line Items] | ||
| Operating Loss Carryforwards | 10,400,000 | 9,300,000 |
| State and Local Jurisdiction [Member] | ||
| Income Tax Disclosure [Line Items] | ||
| Operating Loss Carryforwards | $ 5,100,000 | $ 5,800,000 |
Equity Compensation Program and Stock-based Compensation (Details) - Employee Stock Option [Member] - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Allocated Share-based Compensation Expense | $ 112,000 | $ 133,000 |
| Cost of Sales [Member] | ||
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Allocated Share-based Compensation Expense | 29,000 | 37,000 |
| Selling, General and Administrative Expenses [Member] | ||
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Allocated Share-based Compensation Expense | $ 83,000 | $ 96,000 |
Equity Compensation Program and Stock-based Compensation - Weighted-average assumptions (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Equity Compensation Program and Stock-based Compensation | ||
| Expected Dividend yield | 0.00% | 0.00% |
| Expected Volatility | 122.22% | 126.86% |
| Risk-free interest rate | 1.96% | 2.90% |
| Expected term | 10 years | 10 years |
Equity Compensation Program and Stock-based Compensation - Non-vested stock option activity (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2020
$ / shares
shares
| |
| Equity Compensation Program and Stock-based Compensation | |
| Options - Non-vested - January 1, 2020 | shares | 371,669 |
| Options - Granted | shares | 22,500 |
| Options - Vested | shares | (183,329) |
| Options - Forfeited | shares | 0 |
| Options - Non-vested - December 31, 2020 | shares | 210,840 |
| Weighted-Average Grant-Date Fair Value - Non-vested at Ending balance (in dollars per share) | $ / shares | $ 0.80 |
| Weighted-Average Grant-Date Fair Value - Granted (in dollars per share) | $ / shares | 1.41 |
| Weighted-Average Grant-Date Fair Value - Vested (in dollars per share) | $ / shares | 0.77 |
| Weighted-Average Grant-Date Fair Value - Forfeited (in dollars per share) | $ / shares | 0.00 |
| Weighted-Average Grant-Date Fair Value - Non-vested at Ending balance (in dollars per share) | $ / shares | $ 0.89 |
Commitments and Contingencies - Maturity of Lease Liability (Details) $ in Thousands |
12 Months Ended |
|---|---|
|
Dec. 31, 2020
USD ($)
| |
| Commitments and Contingencies | |
| 2021 | $ 322 |
| 2022 | 143 |
| 2023 | 3 |
| Total undiscounted operating lease payments | 468 |
| Less: imputed interest | (19) |
| Present value of operating lease liability | $ 449 |
| Lease, Cost | |
| Remaining lease term (in months) | 17 months |
| Remaining capital lease term | 26 months |
| Discount rate for operating leases | 5.80% |
| Discount rate for capital lease | 3.99 |
Commitments and Contingencies (Details) - USD ($) |
12 Months Ended | 24 Months Ended | |
|---|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
Dec. 31, 2020 |
|
| Commitments and Contingencies | |||
| Operating Leases, Rent Expense | $ 300,000 | $ 300,000 | |
| Operating Lease, Payments | $ 300,000 | ||
| Real Estate Taxes and Insurance, Total | $ 100,000 | ||
| Defined Contribution Plan, Maximum Annual Contributions Per Employee, Percent | 70.00% | 70.00% | |
| Defined Contribution Plan, Maximum Annual Contributions Per Employee, Amount | $ 138,000 | $ 124,000 | |
| Defined Contribution Plan Employer Matching Contribution (In Shares) | 142,329 | 89,751 | |
| Defined Contribution Plan Employer Matching Contribution In Cash | $ 34,000 | ||
Product Sales, Foreign Sales and Sales to Major Customers (Details) - Sales Revenue, Net [Member] - Customer Concentration Risk [Member] - customer |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Customers In Europe Asia Japan [Member] | ||
| Concentration Risk [Line Items] | ||
| Concentration Risk, Percentage | 29.40% | 31.90% |
| Top Three Major Customers [Member] | ||
| Concentration Risk [Line Items] | ||
| Concentration Risk, Percentage | 30.60% | |
| Number Of Major Customers | 3 | 3 |
| Major Customers One [Member] | ||
| Concentration Risk [Line Items] | ||
| Concentration Risk, Percentage | 17.10% | 18.50% |
| Major Customers Two [Member] | ||
| Concentration Risk [Line Items] | ||
| Concentration Risk, Percentage | 7.00% | 14.70% |
| Major Customers Three [Member] | ||
| Concentration Risk [Line Items] | ||
| Concentration Risk, Percentage | 6.50% | 6.10% |
| Top Five Customers [Member] | ||
| Concentration Risk [Line Items] | ||
| Concentration Risk, Percentage | 43.00% | 47.20% |
| Number Of Major Customers | 5 | 5 |
Fair Value of Financial Instruments (Details) $ in Millions |
Dec. 31, 2020
USD ($)
|
|---|---|
| Fair Value of Financial Instruments | |
| Long-term Debt, Fair Value | $ 3.1 |
| Long-term Debt, Gross | $ 3.6 |