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.
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.
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 aspheric, large and small metal mirrors, low RMS surface finish polished mirrors, planar mirrors, reflective Porro prisms, and thermally stable optical mirrors. Plating specialties include void-free gold and electroless nickel.
b) UV Filter Optical Components
This product line consists of crystals and crystal devices including UV filter materials of both patented and proprietary 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.
The Crystals and Devices 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 2019 and 2018, the Company’s product sales were made to customers in the following market areas:
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 37.0% and 22.5% of sales in 2019 and 2018, respectively. Sales increased by approximately $1.1 million or 43.5% from 2018. The increase in military and defense spending resulted in increase in demand for our products in 2019.
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
Sales in the Process Control and Metrology (PC&M) market decreased by $1.7 million, or 28.9% in 2019, compared to 2018 and represented 41.9% of sales compared to 51.3% in the prior year. Decreased demand for critical components in the semiconductor capital equipment market negatively impacted sales in 2019. The reduced demand and delayed delivery schedules from two OEM customers resulted in the decrease in 2019, while an increase in bookings in late 2017 and early 2018 to two OEM customers resulted the strong shipments in 2018.
The Company believes that the optical and x-ray inspection segment of the semiconductor industry offers continued growth opportunities which match its capabilities in precision optics, crystal products, and monochromators.
Laser Systems
This market consists principally of customers who are OEM manufacturers of industrial, medical, and R&D lasers, which the Company serves as an OEM supplier of standard and custom optical components and laser accessories. The Company also serves a number of smaller customers in other niche markets and international distributors.
Sales in this market were 12.1% of sales in 2019, compared to 13.5% in 2018. The decrease of $0.3 million, or 21.8%, from the prior year was due to cancelation of orders from one international customer.
Scientific / R&D
These sales consist of product sales directly to researchers at various educational and research institutions and through distributors into that same market internationally. Sales to customers within the Scientific / R&D market consist primarily of x-ray monochromators, non-linear crystals for laser research, and Pockels cells. Sales in 2019 decreased by $0.6 million, or 38.4%, and as a percentage of total sales decreased from 12.7% to 9.0% in 2019. Reduced revenue on a federal government contract, combined with reduced orders from a national lab, led to the decline in revenue.
Major Customers
The Company’s sales have historically been concentrated within a small number of customers, although the top customers have varied from year to year.
In 2019, the Company’s sales to its top three customers accounted for 39.2% of sales. These customers included a US based defense contractor of electro-optical systems for U.S. and foreign governments and two OEM manufacturers of process control and metrology equipment. These customers represented 18.5%, 14.7%, and 6.1% of total sales during the year, respectively. Two of those same customers represented 12.9% and 22.3% of sales in 2018.
Sales to the Company’s top five customers represented approximately 47.2% and 56.1% of sales, in 2019 and 2018, 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 31.9%, and 40.0% of product sales in 2019 and 2018, 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 Canada, the United Kingdom, the European Union, Israel, and Japan.
Sales and marketing efforts are coordinated by the Vice President, Sales and Marketing, to promote our product lines through various means including, participation in trade shows, internet-based marketing, media and non-media advertising and promotions, and management of international sales representatives and distributors.
Backlog
The Company’s order backlog at December 31, 2019, was $5.1 million. The Company’s order backlog as of December 31, 2018 was $6.5 million.
We anticipate shipping a substantial majority of the present backlog during fiscal year 2020. 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.
Employees
As of the close of business on March 27, 2020, the Company had 58 full-time employees.
Patents and Licenses
The Company mainly relies on its manufacturing and technological expertise, know-how, and trade secrets in addition to its exclusive license patent, to maintain its competitive position in the industry. The Company takes precautionary and protective measures to safeguard its technical design and manufacturing processes. The Company executes nondisclosure agreements with its employees and, where appropriate, with its customers, suppliers, and other associates.
Regulation
Foreign sales of certain of the Company’s products to certain countries may require export licenses from the United States Department of Commerce and/or Department of State. Such licenses are obtained when required. All requested export licenses of Inrad Optics products have been granted or deemed not-required.
International Traffic in Arms Regulations (“ITAR”) governs much of the Company’s domestic defense sector business, and the Company is capable of handling its customers’ technical information under these regulations. Inrad Optics, Inc. is registered with the United States Department of State Directorate of Defense Trade Controls, and utilizes a supplier base of similarly registered companies.
There are no other federal regulations or any unusual state regulations that directly affect the sale of the Company’s products other than those environmental compliance regulations that generally affect companies engaged in manufacturing operations in New Jersey.
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.
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 history of losses
We recorded a net loss of $0.8 million for the year ended December 31, 2019. We had net income in 2018 of $0.7 million, and a net loss of $0.6 million in 2017. 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 2019, and our inability to achieve and sustain profitability may negatively affect our business, financial condition, results of operations, and cash flows.
b)The Company may need to raise additional capital to repay indebtedness and to fund our operations
We may need to raise additional financing to repay our outstanding indebtedness of approximately $2.7 million, as well as, to fund our current level of operations. Additional financing, which is not in place at this time, may be from the sale of equity or convertible or other debt securities in a public or private offering, or from an additional credit facility. We may be unable to raise sufficient additional capital on favorable terms, if at all, to supply the working capital needs of our existing operations or to expand our business.
c)The Company has exposure to Government Markets
Sales to customers in the defense industry represent a significant part of our business. These customers in turn generally contract with government agencies. Most governmental programs are subject to funding approval through congressional appropriations which can be modified or terminated without warning upon the determination of a legislative or administrative body. Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. Government which could reduce available funding for most federal agencies, including the Department of Defense. It is difficult to assess how this may impact our defense industry customers and the business we do with them in the future. The loss or failure to obtain certain contracts or a loss of a major government customer could have a material adverse effect on our business, results of operations, or financial condition.
d)The Company’s revenues are concentrated in its largest customer accounts
For the year ended December 31, 2019, five customer accounts represented approximately 47.2% of total revenues and two of these customers each accounted for more than 10% of revenues. We are a supplier of custom manufactured components to OEM customers, and have a number of large customers in both the commercial and defense markets, but the relative size and identity of our largest customers change year to year. In the short term, the loss of any of these large customer accounts or a decline in demand in the markets which they represent could have a material adverse effect on our business, results of operations, or financial condition.
e)The Company depends on, but may not succeed in, developing and acquiring new products and processes
To meet the Company’s strategic objectives, the Company needs to continue to develop new processes, improve existing processes, and manufacture and market new products. As a result, the Company may continue to make investments in process development and additions to its product portfolio. There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a way that achieves market acceptance or other pertinent targeted results. The Company also cannot be sure that it will have the human or financial resources to pursue or succeed in such activities.
f)The Company’s stock price may fluctuate widely
The Company’s stock is thinly traded. Many factors, including, but not limited to, future announcements concerning the Company, its competitors or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding the Company’s industries in the financial press or investment advisory publications, could cause the market price of the Company’s stock to fluctuate substantially. In addition, the Company’s stock price may fluctuate widely for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military conflicts, or market or related declines, may materially affect the market price of the Company’s common stock. In addition, any information concerning the Company, including projections of future operating results, appearing in investment advisory publications or on-line bulletin boards or otherwise emanating from a source other than the Company could in the future contribute to volatility in the market price of the Company’s common stock.
g)The Company’s business success depends on its ability to recruit and retain key personnel
The Company depends on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and on the Company’s ability to recruit additional personnel. There is competition for the services of these personnel, and there is no assurance that the Company will be able to retain or attract the personnel necessary for its success, despite the Company’s efforts to do so. The loss of services of the Company’s key personnel could have a material adverse effect on its business, results of operations, or financial condition.
h)Many of the Company’s customers are in cyclical industries
The Company’s business is significantly dependent on the demand its customers experience for their products. Many of their end users are in industries that historically have experienced a cyclical demand for their products. The industries include, but are not limited to, the defense electro-optics industry and the manufacturers of process control capital equipment for the semiconductor tools industry. As a result, demand for the Company’s products are subject to cyclical fluctuations, and this could have a material adverse effect on our business, results of operations, or financial condition.
i)The Company’s manufacturing processes require products from limited sources of supply
The Company utilizes many relatively uncommon materials and compounds to manufacture its products. Many of the materials have long lead times and the Company’s suppliers could fail to deliver sufficient quantities of these necessary materials on a timely basis, or deliver contaminated or inferior quality materials, or markedly increase their prices. Any such actions could have an adverse effect on the Company’s business, despite the Company’s efforts to secure long term commitments from its suppliers. Adverse results might include reducing the Company’s ability to meet commitments to its customers, compromising the Company’s relationship with its customers, adversely affecting the Company’s ability to meet expanding demand for its products, or causing the Company’s financial results to deteriorate.
j)The Company faces competition
The Company encounters substantial competition from other companies positioned to serve the same market sectors. Some competitors may have financial, technical, capacity, marketing or other resources more extensive than ours, or may be able to respond more quickly than the Company to new or emerging technologies and other competitive pressures. Some competitors have manufacturing operations in low-cost labor regions such as the Far East and Eastern Europe and can offer products at lower prices than the Company. The Company may not be successful in winning orders against the Company’s present or future competitors, and competition may have a material adverse effect on our business, results of operations, or financial condition.
k)The Company may not be able to fully protect its intellectual property
The Company currently holds one patent for a material applicable to an important product, but does not in general rely on patents to protect its products or manufacturing processes. The Company generally relies on a combination of trade secrets and employee non-compete and nondisclosure agreements to protect its intellectual property rights. There can be no assurance that the steps the Company takes will be adequate to prevent misappropriation of the Company’s technology. In addition, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company. Asserting the Company’s rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting the Company’s business, results of operations, or financial condition.
l)Data breach and breakdown of information and communication technologies
In the course of our business, we collect and store sensitive data, including intellectual property. We could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an incident, if we are unable to prevent such security or privacy breaches, our operations would be disrupted or we could suffer, financial loss, property damage, reputational damage, or regulatory penalties because of lost or misappropriated information.
m)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. On March 11, 2020, the World Health Organization declared the COVID-19 virus a pandemic. The spread of COVID-19 has impacted the global economy and may impact our operations, including the potential interruption of our production activities or our supply chain. The spread of an infectious disease, including COVID-19, may also result in the inability of our suppliers to deliver 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. The extent to which the recent global coronavirus pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions to contain or treat its impact, among others. Any significant infectious disease outbreak, including the COVID-19 pandemic, could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations, including our ability to obtain additional funding, if needed. The Company is currently working to enhance its business continuity plans to include measures to protect our employees in the event of infection in our offices and production facility, or in response to potential mandatory quarantines.
Item 1B.
Item 1B.Unresolved Staff Comments
None
Item 2.
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.
Item 3.Legal Proceedings
We are not party to any legal proceedings as of the date hereof.
Item 4.
Item 4.Mine Safety Disclosures
Not Applicable
PART II
Item 5.
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, 2020, there were approximately 123 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.
Item 6.Selected Financial Data
The following selected statement of operations data for the years ended December 31, 2019 and 2018, is derived from our audited financial statements included within this Annual Report.
Item 7.
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
The Company adopted the provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e. point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e. over time), which approximates the previously used percentage-of-completion method of accounting. As such, the adoption of ASU 2014-09 had no material impact to the Company’s financial position or results of operations.
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost of manufactured goods includes material, labor and overhead.
The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving, or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues.
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.
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.
Revenues
Sales were $10.0 million in 2019, a decrease of 12.8% or $1.5 million, compared to $11.5 million in 2018.
Sales to the defense and aerospace market in 2019 increased 43.5% to $3.7 million from $2.6 million in 2018, representing 37.0% and 22.5% of total sales, respectively. The increase in military and defense spending has resulted in stronger demand for our products in 2019.
Sales in the process control and metrology market decreased to $4.2 million in 2019, from $5.9 million in 2018, down $1.7 million, or 28.9%. These sales represented 41.9% and 51.3% of total sales in 2019 and 2018, respectively. Decreased demand for critical components in the semiconductor capital equipment market negatively impacted sales in 2019. The reduced demand and delayed delivery schedules from two OEM customers resulted in the decrease in 2019.
The Company serves as an OEM supplier of standard and custom optical components and laser accessories within the non-military laser industry. Sales to this and related markets were $1.2 million in 2019 and $1.6 million in 2018. Overall, sales of laser devices and related products represented 12.1% of revenues in 2019, a decrease of $0.3 million or 21.8%. The decrease in 2019 was due to the cancelation of orders from one international customer.
Sales to customers within the Scientific / R&D market decreased in 2019 to $0.9 million, from $1.5 million in 2018. This 38.4% decrease is mainly due to reduced revenue on a federal government contract, combined with reduced orders from a national lab. As a percentage of total sales, this market represented 9.0% and 12.7% of total sales in 2019 and 2018, respectively.
Bookings
The Company booked new orders totaling approximately $8.8 million in 2019, net of $242,000 in cancelation of orders from an international customer. The Company’s backlog as of December 31, 2019, was $5.1 million, compared to $6.5 million as of December 31, 2018.
Cost of Goods Sold and Gross Profit Margin
Cost of goods sold as a percentage of sales increased to 80.0% in 2019, compared to 73.0% for the year ended December 31, 2018, or 4.4%.
The cost of goods sold in 2019 was $8.0 million compared to $8.4 million in 2018, a decrease of $0.4 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 $2,614,000 in 2019, compared to $2,234,000 in 2018, an increase of $380,000 or 17%. The increase is attributable to increased SG&A salaries, wages and associated benefits of approximately $223,000, due to investments in our Sales group and other sales and marketing related expenses as planned.
As a percentage of sales, SG&A was 26.1% of sales in 2019, compared to 19.4% in 2018, primarily due to higher sales in 2018.
Operating Income (Loss)
The Company had an operating loss of $622,000 in 2019, compared to operating income of $867,000 in 2018.
Other Income and Expenses
Net interest expense was $154,000 in 2019, a slight decrease from $159,000 in 2018.
Income Taxes
In 2019 and 2018, 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 $776,000 in 2019, compared to net income of $707,000 in 2018.
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, 2019 and December 31, 2018, cash and cash equivalents were $951,000 and $1,186,000, respectively.
On April 12, 2018, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2021, from April 1, 2019. The notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement to extend the maturity date of the notes, the expiration dates of the warrants were extended from April 1, 2022 to April 1, 2024.
The Company paid $112,500 and $187,500 for interest on the subordinated convertible promissory notes in 2019 and 2018, respectively. Accrued interest of $112,500 and $75,000 is included in Accounts payable and accrued liabilities as of December 31, 2019 and 2018, respectively.
In total, the Company paid $121,000 and $198,000 of interest in 2019 and 2018, respectively on its outstanding debt, including interest paid on the subordinated convertible promissory notes.
In 2019 and 2018, the Company had capital expenditures of $310,000 and $154,000, respectively. The increase in capital spending reflects the Company’s investment in upgrades to 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 decrease in cash of $235,000 for the twelve months ended December 31, 2019 compared to a net increase in cash of $386,000 for the twelve months ended December 31, 2018.
Cash flows pertaining to our source and use of cash are presented below (in thousands):
Overview of Financial Condition
The Company recorded a net loss of $776,000 for the twelve months ended December 31, 2019, compared to net income of $707,000 in the same period last year. The Company’s cash and cash equivalents decreased to $951,000 at December 31, 2019, from $1,186,000 at December 31, 2018.
The Company’s management expects that future cash flows from operations and its existing cash reserves will provide adequate liquidity for the Company’s operations and working capital requirements through at least March 31, 2021.
Contractual Obligations
The following table describes our contractual obligations as of December 31, 2019 (in thousands):
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements at December 31, 2019 and 2018.
Impact of COVID-19 to Operations
The impacts of the global emergence of COVID-19 on our business and financial results are currently unknown. We are conducting business to ensure the safety of our employees and associates actively and earnestly, following all best practice CDC guidelines for prevention in the workplace. We have applied social distancing in our operations and implemented a connected, remote workforce where practicable. While our operations are considered essential business under the Executive Orders of New Jersey’s Governor, we cannot predict what further actions may be required by federal, state, or local authorities. Nor can we predict what actions these mandates may have on our customers and suppliers. We will continue to actively monitor the situation and may be required to take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, partners, suppliers and shareholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our financial results.
Item 7A.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
N/A
Item 8.
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.
Item 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
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, 2019 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, 2019. In making this assessment, management used the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment and the criteria set forth by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019.
c) Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Item 9BOther Information
None
PART III
Item 10.
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 2020 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.
Item 11.
Item 11.Executive Compensation
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2020 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.
Item 12.
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 2020 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.
Item 13.
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 2020 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.
Item 14.
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 2020 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2019.
PART IV
Item 15.
Item 15.Exhibits and Financial Statement Schedules
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements and Financial Statement Schedule commencing on Page 19.
(a) (2) Financial Statement Schedule.
Reference is made to the Index to Financial Statements and Financial Statement Schedule on Page 19. 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.
(a) (3) Exhibits.
Exhibit No.
Description of Exhibit
3.1
Restated Certificate of Incorporation of Photonics Products Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 25, 2004)
3.2
By-Laws of Photonic Products Group, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 25, 2004)
3.3
Certificate of Amendment to Restated Certificate of Incorporation of Photonics Products Group, Inc., dated June 2, 2010 (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2010).
3.4
Certificate of Amendment to Restated Certificate of Incorporation of Photonics Products Group, Inc., dated January 23, 2012 (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 23, 2012).
4.1
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 25, 2004)
4.2
Note dated March 9, 2018, held by Clarex, Ltd.*
4.3
Note dated March 9, 2018, held by Welland, Ltd.*
4.4
Description of Securities*
10.2
2010 Equity Compensation Program (incorporated by reference to Exhibit B to the Company’s Proxy Statement for the 2010 Meeting of Stockholders filed with the Securities and Exchange Commission on April 30, 2010)
10.3
Proposal to Renew and Extend Lease dated June 1, 2015, between Inrad Optics, Inc. (“Tenant”) and S & R Costa Realty, LLP (“Landlord”) (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2016)
10.4
Amendment and Extension of Lease, dated July 8, 2019, by and between V&R Costa Management, LLC, and Inrad Optics, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2019)
14.1
Code of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2006)
21.1
List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2006)
23.1*
Consent of PKF O’Connor Davies, LLP Independent Registered Public Accounting Firm
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith ** Furnished herewith
Item 16.Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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. 2020
Jan M. Winston
/s/ William J. Foote
Director
March 30. 2020
William J. Foote
/s/ Luke P. LaValle, Jr.
Director
March 30. 2020
Luke P. LaValle, Jr.
/s/ Dennis G. Romano
Director
March 30. 2020
Dennis G. Romao
/s/ N.E. Rick Strandlund
Director
March 30. 2020
N.E. Rick Strandlund
/s/ Amy Eskilson
President, Chief Executive Officer
March 30. 2020
Amy Eskilson
and Director (Principal Executive Officer)
/s/ Theresa A. Balog
Chief Financial Officer, Secretary, and Treasurer
March 30. 2020
Theresa A. Balog
(Principal Financial and Accounting Officer)
INRAD OPTICS, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
CONTENTS
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, 2019 and 2018, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 11 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PKF O’Connor Davies, LLP
We have served as the Company’s auditor since 2017.
New York, New York
March 30, 2020
INRAD OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements
INRAD OPTICS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements
INRAD OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
INRAD OPTICS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements
INRAD OPTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 2019
1.Nature of Business and Operations and Summary of Significant Accounting Policies and Estimates
a.Nature of Business and Operations
Inrad Optics, Inc. and Subsidiaries (the “Company”), was incorporated in the state of New Jersey and is a manufacturer of crystals, crystal devices, electro-optic and optical components, and sophisticated laser devices and instruments. The Company has administrative offices and manufacturing operations in Northvale, New Jersey.
The Company’s principal customers include commercial instrumentation companies and OEM laser systems manufacturers, research laboratories, government agencies, and defense contractors. The Company’s products are sold domestically using its own sales staff, and in major overseas markets, principally Europe, Israel, Japan, and Asia, using independent sales agents.
b.Liquidity
As of December 31, 2019, the Company had working capital of $3.1 million and cash and cash equivalents of $1.0 million. Management believes based on the Company’s operations and its existing working capital resources together with existing cash flows, the Company has sufficient cash flows to fund operations through at least March 31, 2021.
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.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Tax Act and guidance, and the company has maintained the full valuation allowance on its deferred tax asset.
The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
The Company had no unrecognized tax benefits or liabilities, and no adjustment to its financial position, results of operations, or cash flows relating to uncertain tax positions taken on all open tax years. The Company is no longer subject to federal income tax examinations by tax authorities for the years before 2016 and state or local income tax examinations by tax authorities for the years before 2016.
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, using the modified retrospective approach. Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e. point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e. over time). 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 $45,000 and $25,000 for the years ended December 31, 2019 and 2018, respectively. Advertising costs are charged to expense when the related services are incurred or related events take place.
p.Concentrations and credit risk
The concentration of credit risk in the Company’s accounts receivable is mitigated by the Company’s credit evaluation process, familiarity with its small base of recurring customers and reasonably short collection terms and the geographical dispersion of revenue. The Company generally does not require collateral but, in some cases, the Company negotiates cash advances prior to the undertaking of the work. These cash advances are recorded as current liabilities on the balance sheet until corresponding revenues are realized.
The Company utilizes many relatively uncommon materials and compounds to manufacture its products and relies on outside vendors for certain manufacturing services. Therefore, any failure by its suppliers to deliver materials of an adequate quality and quantity could have an adverse effect on the Company’s ability to meet the commitments of its customers.
For the year ended December 31, 2019, the Company had three customers who had sales representing 18.5%, 14.7% and 6.1% of total revenues. In 2018, the Company’s three top customers had sales representing 22.3%, 12.9% and 9.4% 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 May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e. point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e. over time), which approximates the previously used percentage-of-completion method of accounting. As such, the adoption of ASU 2014-09 had no material impact to the Company’s financial position or results of operations; however, the Company has now presented the disclosures required by this new standard, refer to Note 2.
In January 2017, the FASB issued guidance which clarifies the definition of a business and provides revised criteria and a framework to determine whether an integrated set of assets and activities is a business. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted the new guidance on January 1, 2018, as required, with no impact on the Company’s consolidated financial statements upon adoption.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) which provides guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company adopted the new guidance on January 1, 2018 as required. There are no significant impacts to the Company’s consolidated financial statements from the adoption of the new guidance.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”) which amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2022, with earlier application permitted in 2019. 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 11a. 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.
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 3.1% and 5.0% of revenue for 2019 and 2018, respectively. Revenue under these long-term government contracts are generally recognized over time using an input measure based upon the proportion of actual costs incurred to estimated total project costs, which is a method used to best depict the Company’s performance to date under the terms of the contract.
Accounting for these long-term government contracts involves the use of various techniques to estimate total revenue and costs. The Company estimates profit on these long-term government contracts as the difference between total estimated revenue and expected costs to complete a contract and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include, among other things, labor productivity, costs and availability of materials, and timing of funding by the U.S. government. The nature of these long-term agreements may give rise to several types of variable consideration, such as claims, awards and incentive fees. Historically, these amounts of variable consideration are not considered significant. Additionally, contract estimates may include additional revenue for submitted contract modifications if there exists an enforceable right to the modification, the amount can be reasonably estimated and its realization is probable. These estimates are based on historical collection experience, anticipated performance, and the Company’s best judgement at the time. These amounts are generally included in the contract’s transaction price and are allocated over the remaining performance obligations. Changes in judgments on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income. Under these long-term government contracts, the Company may receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. In the event a contract loss becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statements of Operations.
The majority of the Company’s revenue is from products and services transferred to customers at a point in time and were approximately 96.9% and 95.0% of revenue for 2019 and 2018, 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:
3.Inventories, net
Inventories are comprised of the following and are shown net of inventory reserves of approximately $2,489,000 for 2019 and $2,486,000 for 2018:
4.Plant and Equipment
Plant and equipment are comprised of the following:
Depreciation expense recorded by the Company totaled approximately $256,000 and $240,000 for 2019 and 2018, respectively. Fully depreciated assets of $16,000 and $184,000 were written off in 2019 and 2018, respectively.
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, 2019, its long-lived assets were not impaired.
5.Related Party Transactions
On April 12, 2018, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2021, from April 1, 2019. The notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement, the expiration dates of the warrants were extended from April 1, 2022, to April 1, 2024.
The Company paid $112,500 and $187,500 for interest on the notes in 2019 and 2018, respectively. Accrued interest of $112,500 and $75,000 is included in Accounts payable and accrued liabilities as of December 31, 2019 and 2018, respectively.
6.Other Long-Term Notes
Other Long-Term Notes consist of the following:
Other Long-Term Notes mature as follows:
7.Accounts Payable and Accrued Liabilities
Accounts payable and accrued expenses are comprised of the following:
8.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, 2019 and 2018, the Company had estimated Federal net operating loss carry forwards of approximately $9.3 million and $8.7 million, respectively, and state net operating loss carry forwards of approximately $5.8 million and $5.2 million, respectively. The 2019 and 2018 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.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Act eliminates alternative minimum taxes and lowers the U.S. federal corporate income tax from 34% to 21% effective January 1, 2018.
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 negative evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2019 and 2018, the valuation allowance was decreased by $19,000 and $59,000, respectively. The company concluded it was more likely than not that it would not be able to realize any portion of the benefit on the deferred tax assets and the valuation allowance was adjusted to provide a full valuation against the deferred tax assets.
The Company files income tax returns in the United States, which typically provides for a three-year statute of limitations on assessments. The Company is no longer subject to federal, state or local income tax examinations by tax authorities for the years before 2016.
The guidance for accounting for uncertainties in income taxes requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. There were no unrecognized tax benefits that impacted our effective tax rate and accordingly, there was no material effect to our financial position, results of operations or cash flows.
Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.
We do not anticipate that our unrecognized tax benefits will significantly increase in the next 12 months.
9.Equity Compensation Program and Stock-based Compensation
a.2010 Equity Compensation Program
The Company’s 2010 Equity Compensation Program provides for grants of options, stock appreciation rights and restricted stock awards to employees, officers, directors, and others who render services to the Company. The Program is comprised of four parts including: (i) the Incentive Stock Option Plan which provides for grants of “incentive stock options,” (ii) the Supplemental Stock Option Plan which provides for grants of stock options that shall not be “incentive stock options,” (iii) the Stock Appreciation Rights Plan which allows the granting of stock appreciation rights and, (iv) the Restricted Stock Award Plan which provides for the granting of restrictive shares of Common Stock and restricted stock units. The plan is administered by the Compensation Committee of the Board of Directors. Under this plan, an aggregate of up to 4,000,000 shares of common stock may be granted.
b.2000 Equity Compensation Program
The Company’s 2000 Equity Compensation Program expired on June 2, 2010. All outstanding grants of options, stock appreciation rights and performance shares issued under the Program will remain outstanding and shall expire on the date determined by the terms of the original grant. The latest date of expiration for outstanding grants under the plan is March 28, 2020.
c.Stock Option Expense
The Company's results for the years ended December 31, 2019 and 2018, include stock-based compensation expense for stock option grants totaling $133,000 and $80,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($37,000 for 2019 and $22,000 for 2018), and selling, general and administrative expenses ($96,000 for 2019 and $58,000 for 2018).
As of December 31, 2019 and 2018, there were $199,000 and $180,000 of unrecognized compensation costs, net of estimated forfeitures, related to non-vested stock options, which are expected to be recognized over a weighted average period of approximately 1.89 years and 1.4 years, respectively.
The weighted average estimated fair value of stock options granted in the two years ended December 31, 2019 and 2018, was $0.76 and $0.98, 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, 2019 and 2018:
d.Stock Option Activity
A summary of the Company’s outstanding stock options as of and for the years ended December 31, 2019 and 2018, 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, 2019, exceeds the exercise prices of the respective options.
(b) Based on the Company’s historical forfeiture rate, the number of options expected to vest is the same as the total outstanding at December 31, 2019.
The following table represents non-vested stock options granted, vested, and forfeited for the year ended December 31, 2019:
The total weighted average grant date fair value of options vested during the years ended December 31, 2019 and 2018, was $109,000 and $62,000, respectively.
The following table summarizes information about stock options outstanding at December 31, 2019:
10.Net (Loss) Income per Share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options, stock grants and warrants using the average market prices during the period, including potential common shares issuable upon conversion of outstanding convertible notes, except if the effect on the per share amounts is anti-dilutive.
For the year ended December 31, 2019, all common equivalent shares outstanding have been excluded from the diluted computation because their effect is anti-dilutive. This included 1,147,267 common stock equivalents related to outstanding options, in addition to 2,500,000 common shares issuable upon conversion of outstanding convertible notes and 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes.
For the year ended December 31, 2018, a total of 2,500,000 anti-dilutive common shares issuable upon conversion of outstanding convertible notes and 1,875,000 common shares underlying warrants issuable upon conversion of outstanding related party convertible notes have been excluded from the diluted computation of net income per share because their effect is anti-dilutive. In addition, 1,058,208 common stock equivalents related to outstanding options have been excluded from the diluted computation because their effect is anti-dilutive.
11.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 $800,000 was recognized as a non-cash asset addition with the signing of the July 8, 2019, lease amendment. Cash paid for amounts included in the present value of the operating lease liability was $179,000 during the year ended December 31 2019, 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 lease as of December 31, 2019:
The Company’s total rent expense for the year ended December 31, 2019 and 2018, was $300,000 and $290,000, respectively.
The Company also paid real estate taxes and insurance premiums under the terms of the lease that totaled approximately $90,000 in 2019 and $94,000 in 2018.
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 2019, the Company’s 401(k) matching contribution for employees was $124,355. This will be funded by way of a contribution of 89,751 shares of the Company’s common stock, which will be issued to the Plan in April, 2020. In 2018, the Company’s 401(k) matching contribution for employees was $124,783. This was funded by way of cash contribution of $31,000 and a contribution of 98,189 shares of the Company’s common stock, which were issued to the Plan in June, 2019. The Company records the distribution of the common shares in the Consolidated Statement of Shareholders’ Equity as of the date of distribution to the 401(k) Plan administrator.
12.Product Sales, Foreign Sales and Sales to Major Customers
The Company’s export sales, which are primarily to customers in countries within Europe, Israel, Asia and Japan, amounted to approximately 31.9% and 40% of product sales in 2019 and 2018, respectively.
The Company had sales to three major customers which accounted for approximately 39.2% of sales in 2019. 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 18.5% of 2019 sales. The two other customers included two foreign-based manufacturers of process control and metrology equipment whose sales represented 14.7% and 6.1% of sales, respectively. For 2018, the top three customers represented 22.3%, 12.9% and 9.4% respectively.
During the past two years, sales to the Company’s top five customers represented approximately 47.2% and 56.1% of sales, respectively. Given the concentration of sales within a small number of customers, the loss of any of these customers would have a significant negative impact on the Company and its business units.
13.Shareholders’ Equity
a.Common shares reserved at December 31, 2019, are as follows:
b.Warrants
The Company had no outstanding warrants as of December 31, 2019 and 2018.
14.Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of the following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash, current receivables and payables and certain other short-term financial instruments approximate their fair value as of December 31, 2019, due to their short-term maturities.
Long-Term Debt: The fair value of the Company’s long-term debt, including the current portion, for notes payable and subordinated convertible debentures, was estimated using a discounted cash flow analysis, based on the Company’s assumed incremental borrowing rates for similar types of borrowing arrangements. The fair value of long-term debt is estimated to be $2.3 million compared to its carrying amount of $2.7 million as of December 31, 2019.
15.Subsequent Event
On March 11, 2020, the World Health Organization declared the global novel coronavirus disease (“COVID-19”) a pandemic. While the Company has taken steps to protect our employees in the event of infection in our offices and production facility and continues to enhance its business continuity plans, the Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on its financial condition and operations.