EDGAR 10-K Filing

Company CIK: 719494
Filing Year: 2021
Filename: 719494_10-K_2021_0001104659-21-044437.json

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ITEM 1. BUSINESS
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.
Years Ended December 31,
Category (In thousands) Net Sales % Net Sales %
Optical Components $ 8,341 92.6 $ 8,796 87.9
Laser Devices/Instrumentation 7.4 1,212 12.1
Total $ 9,008 100.0 $ 10,008 100.0
Products Manufactured by the Company
Optical Components
a) Custom Optics and Optical Coating Services
Manufacturing of high-performance custom optics is a major product area for Inrad Optics and is addressed in the marketplace by the Company’s Custom and Metal Optics product lines.
The Custom Optics product line focuses on products manufactured to specific customer requirements. It specializes in the manufacture of optical components, optical coatings (ultra-violet wavelengths through infra-red wavelengths) and subassemblies for the aerospace, industrial medical marketplace and military. Planar, prismatic and spherical components are fabricated from glass and synthetic crystals, including fused silica, germanium, magnesium fluoride, quartz, silicon, zinc selenide, and zinc sulfide. Components consist of cavity optics for lasers, large form factor transmission flats, optical windows for airborne applications, multi-element optical assemblies, lenses, mirrors, polarizing optics, prisms, wave plates, and x-ray monochromators.
Most optical components and sub-assemblies require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect and transmit specific wavelengths. The Custom Optics optical coating specialties include anti-reflective high laser damage resistance, highly reflective, infra-red, polarizing, and coating to complex multi-wavelength requirements on a wide range of substrate materials. Coating deposition process technologies employed included electron beam, ion and plasma assisted deposition systems and thermal.
The Metal Optics product line is a fully integrated precision metal optics and optical assembly operation which employs high precision diamond machining, polishing, and plating of aluminum, AlBeMet™, beryllium, and stainless steel. The Metal Optics product line offers opto-mechanical design and assembly services as part of its manufactured deliverables and can support prototyping through production of arc-second accuracy polygons, diamond machined precision aspheres, large and small metal mirrors, low RMS surface finish polished mirrors, planar mirrors, reflective Porro prisms, and thermally stable optical mirrors. Plating specialties include void-free gold and electroless nickel.
b) UV Filter Optical Components
This product line consists of crystals and crystal devices including UV filter materials of both patented and proprietary formulations with unique transmission and absorption characteristics. These materials are used in critical applications in defense systems such as missile warning sensors.
Laser Devices/Instrumentation
This product line consists of crystal-based products that are used in, or alongside, laser systems. Developing growth processes for high quality synthetic crystals is a core competency of the Crystals and Devices manufacturing team. These crystals are embedded in our value-added devices and instrumentation products manufactured in our Northvale facility and include crystals for wavelength conversion, modulation and polarization, Pockels cells, and wavelength conversion instruments. In addition to the filter materials used in the UV Filter Optical components described above, current materials produced include beta barium borate (BBO), lithium niobate, potassium dideuterium phosphate, potassium dihydrogen phosphate, Stilbene, and zinc germanium diphosphide. Applications for these materials include defense, homeland security, industrial processing lasers and surgical lasers.
The Crystals and Devices manufacturing team is also engaged in ongoing research and development efforts to develop new materials for evolving applications. Some of the major products produced for the photonics marketplace include:
a) Crystal Components
The Company grows and fabricates electro-optic and nonlinear crystal devices for altering the intensity, polarization or wavelength of a laser beam. Other crystal components, produced as part of the Crystals and Devices product line, are used in laser research, in commercial laser systems and in detection of fast neutrons.
b) Pockels Cells and Drivers
A line of Pockels cells and associated electronics is manufactured for sale in multiple market sectors. Pockels cells are devices that include one or more crystal components and are used in applications that require fast switching of the polarization direction of a beam of light. These uses include Q-switching of laser cavities to generate pulsed laser light, coupling light into and out from regenerative amplifiers, and light intensity modulation. These devices are sold to medical and industrial laser original equipment manufacturers (“OEM”), research institutes and laser system design engineers.
Sales by Market
The photonics industry serves a broad, fragmented, and expanding set of markets. As technologies are discovered, developed, and commercialized, the applications for photonic systems and devices, and the components embedded within those devices, expand across traditional market boundaries. While a significant part of the Company’s business remains firmly in the process control and metrology and defense and aerospace markets, other markets served include OEM manufacturers in the medical and industrial laser market, university research institutes and national labs worldwide. Scanning, detection and imaging technologies for homeland security and surface inspection also provide opportunities for the Company and these sectors are expected to continue to account for potential future growth and demand for our products and capabilities.
In 2020 and 2019, the Company’s product sales were made to customers in the following market areas:
Years Ended December 31,
Market (In thousands) Net Sales % Net Sales %
Aerospace & Defense $ 3,916 43.5 $ 3,710 37.0
Process Control & Metrology 3,328 36.9 4,189 41.9
Laser Systems 7.4 1,212 12.1
Scientific / R&D 1,097 12.2 9.0
Total $ 9,008 100.0 $ 10,008 100.0
Aerospace & Defense
This market consists of sales to OEM defense electro-optical systems and subsystems manufacturers, U.S. based prime defense contractors, and direct sales to governments where the products have the same end-use.
End-use applications for the Company’s products in the aerospace and defense sector include military laser systems, military electro-optical systems, satellite-based systems, and missile warning sensors and systems that protect aircraft. The dollar volume of shipments of product within this sector depends in large measure on the U.S. Defense Department budget and its priorities, that of foreign governments, the timing of their release of contracts to their prime equipment and systems contractors, and the timing of competitive awards from this customer community to the Company.
Sales in the aerospace and defense market represented approximately 43.5% and 37.0% of sales in 2020 and 2019, respectively. Sales increased by approximately $0.2 million, or 5.6% from 2019. The increase in sales is primarily due to the increase in military and defense spending in 2020.
The Company believes that the aerospace and defense sector will continue to represent a significant market for the Company’s products and offers an ongoing opportunity for growth given the Company’s capabilities in specialty crystal, glass and metal precision optics.
Process Control and Metrology
This market consists of capital equipment manufacturers whose products are used in the areas of manufacturing process and control, optics-based metrology, quality assurance, and inventory and product control. Examples of applications for such equipment include semiconductor wafer inspection, nanoscale surface defect analysis, and optical sensing systems
Sales in the Process Control and Metrology (PC&M) market decreased by approximately $0.9 million, or 20.6% in 2020, compared to 2019, and represented 36.9% and 41.9% of sales in 2020 and 2019 respectively. Decreased sales to two OEM customers resulted in the decrease in 2020.
The Company believes that the optical and x-ray inspection segment of the semiconductor industry offers continued growth opportunities which match its capabilities in precision optics, crystal products, and monochromators However, COVID-19-related temporary customer shutdowns impacted the sales in this market during 2020. Stronger bookings in the second half of 2020 indicate a rebound for our products in the PC&M market.
Laser Systems
This market consists principally of customers who are OEM manufacturers of industrial, medical, and R&D lasers, which the Company serves as an OEM supplier of standard and custom optical components and laser accessories. The Company also serves a number of smaller customers in other niche markets and international distributors.
Sales in this market were 7.4% of total sales in 2020 compared to 12.1% of total sales in 2019. The decrease of approximately $0.5 million, or 45%, from the prior year was due the sharp reduction in demand for products serving the laser markets and excess inventory in the distribution channel.
Scientific / R&D
These sales consist of product sales directly to researchers at various educational and research institutions and through distributors into that same market internationally. Sales to customers within the Scientific / R&D market consist primarily of x-ray monochromators, non-linear crystals for laser research, and Pockels cells. Sales in 2020 increased approximately $0.2 million, or 22.3%, and as a percentage of total sales increased from 9.0% in 2019 to 12.2% in 2020 due to demand for our monochromators as a result of expanded applications in the R&D market.
Major Customers
The Company’s sales have historically been concentrated within a small number of customers, although the top customers have varied from year to year.
In 2020, the Company’s sales to its top three customers accounted for 30.6% of sales. These customers included a two U.S. based defense contractors of electro-optical systems for U.S. and foreign governments and one OEM manufacturer of process control and metrology equipment. These customers represented 17.1%, 7.0%, and 6.5% of total sales during the year.
Sales to the Company’s top five customers represented approximately 43.0% and 47.2% of sales, in 2020 and 2019, respectively. All these customers are OEM manufacturers either within the defense, process control and metrology or laser systems sector.
Export Sales
The Company’s export sales are primarily to customers in Europe, Israel, and Asia and amounted to approximately 29.4% and 31.9% of product sales in 2020 and 2019, respectively.
Long-Term Contracts
Certain of the Company’s agreements with customers provide for periodic deliveries at fixed prices over a long period of time. In such cases, the Company negotiates to obtain firm price commitments, as well as cash advances from its customers for the purchase of the materials necessary to fulfill the order.
Marketing and Business Development
The Company markets its products domestically, through the coordinated efforts of the sales, marketing and customer service team.
The Company has moved towards a strategy of utilizing these combined sales and marketing resources for cross-selling all products across all business lines. This strategy is well suited to the diverse and fragmented markets that utilize photonic technologies.
Independent sales agents are used in major non-U.S. markets, including the United Kingdom, the European Union, Israel, and Japan.
Sales and marketing efforts are coordinated by the Vice President, Sales and Marketing, to promote our product lines through various means including, participation in trade shows, internet-based marketing, media and non-media advertising and promotions, customer visits, and management of international sales representatives and distributors. Our sales efforts were significantly impacted by COVID-19-related government mandates and limitations on travel.
Backlog
The Company’s order backlog at December 31, 2020, was $5.9 million. The Company’s order backlog as of December 31, 2019, was $5.1 million.
We anticipate shipping a substantial majority of the present backlog during fiscal year 2021. However, our backlog at any given date may consist of orders with delivery schedules that extend beyond 12 months into the future.
Competition
Within each product category in which the Company’s business units are active, there is competition.
Our optical components manufacturing capabilities offer unique solutions designed for highly specialized applications. We are an industry leader in supplying bent crystal analyzers used in x-ray photoelectron spectroscopy, synchrotron beamline focusing, and plasma diagnostics in controlled nuclear fusion research facilities. We are a leading supplier of large precision flats produced in volume for semiconductor defect inspection tools and metrology systems. We have a broad range of materials expertise to produce products across the spectrum from the ultraviolet to the far infrared. Specialized custom optical and opto-mechanical components that we produce are used in military imaging platforms and early warning missile sensing systems. By utilizing a team of scientists, engineers, and manufacturing experts we believe we have a competitive advantage over traditional optical component manufacturers.
The Laser Devices/Instrumentation products have the advantage of vertical integration within our facility that includes crystal growth, fabrication, and design and assembly of instrumentation. Our crystals and devices are used in critical laser applications such as laser surgery, quantum technology, and scientific research. We are a sole supplier of Stilbene scintillation crystals to the nuclear science and radiation detection community and produce associated instrumentation. We believe our vertical integration provides best in class control of quality, delivery, and traceability in our products and allows us to respond quickly to market trends and newly innovative demands from our customers.
Although price is a principal factor in many product categories, competition is also based on product design, performance, customer confidence, quality, delivery, and customer service. Based on its performance to date, the Company believes that it can continue to compete successfully, although no assurances can be given in this regard.
Competitors for our custom optical components used in military and process control applications include several large publicly traded, broad capability, photonics companies. There is also competition from a range of smaller niche businesses catering to a limited set of product offerings. In metal optics, we have competition for mirrors used in aerospace telescopes and EO/IR modules from large and well-capitalized public companies. Our laser devices compete with several small and midsize companies both in the U.S., as well as Asia and Europe. There is also limited competition from commodity supply chain optics value added resellers.
Human Capital
We believe that each employee contributes to our culture of integrity, innovation, and teamwork.
We offer a variety of benefits such as health insurance, paid and unpaid leave, retirement, life and disability/accident coverage as applicable.
Our commitment to diversity and inclusion is an important driver of company performance.
Our workplace health and safety programs include robust policies, procedures, training programs, and self-audits. Our manufacturing facility is in Northvale, NJ, where we maintain high standards of workplace safety and employee protection. We have also been demonstrating a focus on health and safety in our response to the COVID-19 pandemic, including work-from-home flexibility and requiring those who may be sick to stay home. Measures adopted onsite include multiple COVID-19 safety protocols, such as social distancing, use of personal protective equipment, enhanced cleaning practices, regular internal communication regarding impacts of the COVID-19 pandemic, daily health certifications, and restrictions on domestic and international travel.
For our manufacturing activities, the speed at which we can recruit, train and deploy quality new and replacement personnel is an important part of our ability to ramp up and maintain our production capacity. We rely upon both employees and resources from staffing firms to meet our needs for direct labor. We face strong competition from companies in a variety of technology fields to secure the engineering and fabrication talent that we require.
As of the close of business on March 29, 2021, the Company had 51 full-time employees.
Patents and Licenses
The Company mainly relies on its manufacturing and technological expertise, know-how, and trade secrets in addition to its exclusive license patent, to maintain its competitive position in the industry. The Company takes precautionary and protective measures to safeguard its technical design and manufacturing processes. The Company executes nondisclosure agreements with its employees and, where appropriate, with its customers, suppliers, and other associates.
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.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. The risks described below are those we currently consider to be material. However, there may be other risks, which we now consider immaterial, or which are unknown or unpredictable, with respect to our business, the markets in which we operate, our competition, the regulatory environment or otherwise that could have a material adverse effect on our business, financial condition, or results of operations.
a) The Company has a history of losses
We recorded a net loss of $0.8 million for each of the years ended December 31, 2020 and 2019. Our history of losses has had an adverse effect on our working capital, total assets, and shareholders’ equity. We are unable to predict, with certainty, whether we will be profitable after 2020, and our inability to achieve and sustain profitability may negatively affect our business, financial condition, results of operations, and cash flows.
b) The Company may need to raise additional capital to repay indebtedness and to fund our operations
We may need to raise additional financing to repay our outstanding indebtedness of approximately $2.6 million, net of the PPP Loan proceeds of $1.0 million forgiven in January 2021, as well as, to fund our current level of operations. Additional financing, which is not in place at this time, may be from the sale of equity or convertible or other debt securities in a public or private offering, or from an additional credit facility. We may be unable to raise sufficient additional capital on favorable terms, if at all, to supply the working capital needs of our existing operations or to expand our business.
c) A pandemic, epidemic or outbreak of an infectious disease in the United States and globally may adversely affect our business.
A pandemic, epidemic or outbreak of an infectious disease occurring in the United States and/or worldwide, may adversely affect production. The spread of an infectious disease, including the COVID-19 virus, which was declared a pandemic by the World Health Organization on March 11, 2020, may also result in the inability of our suppliers to deliver on a timely basis or at all. In addition federal, state, and local governments may curtail and restrict business activities, as well as the ability for our employees to work. Such events may result in a period of business disruption, and in reduced operations, which could materially affect our business, financial condition and results of operations. Any significant infectious disease outbreak, including the COVID-19 pandemic, could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations, including our ability to obtain additional funding, if needed.
The spread of COVID-19 has negatively impacted the global economy and has had an impact our operations, including the curtailment of certain of our production activities and disruptions in our supply chain. The extent to which the global coronavirus pandemic continues to impact our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19, and the actions to contain or treat its impact, among others. The Company continues to monitor safety protocols and enhance its business continuity plans for potential exposure in the event of infection in our offices and production facility, or in response to potential mandatory quarantines.
d) The Company has exposure to Government Markets
Sales to customers in the defense industry represent a significant part of our business. These customers in turn generally contract with government agencies. Most governmental programs are subject to funding approval through congressional appropriations which can be modified or terminated without warning upon the determination of a legislative or administrative body. Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. Government which could reduce available funding for most federal agencies, including the Department of Defense. It is difficult to assess how this may impact our defense industry customers and the business we do with them in the future. The loss or failure to obtain certain contracts or a loss of a major government customer could have a material adverse effect on our business, results of operations, or financial condition.
e) The Company’s revenues are concentrated in its largest customer accounts
For the year ended December 31, 2020, five customer accounts represented approximately 43.0% of total revenues. Only one of these customers accounted for more than 10% of revenues. We are a supplier of custom manufactured components to OEM customers, and have a number of large customers in both the commercial and defense markets, but the relative size and identity of our largest customers change year to year. In the short term, the loss of any of these large customer accounts or a decline in demand in the markets which they represent could have a material adverse effect on our business, results of operations, or financial condition.
f) The Company depends on, but may not succeed in, developing and acquiring new products and processes
To meet the Company’s strategic objectives, the Company needs to continue to develop new processes, improve existing processes, and manufacture and market new products. As a result, the Company may continue to make investments in process development and additions to its product portfolio. There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a way that achieves market acceptance or other pertinent targeted results. The Company also cannot be sure that it will have the human or financial resources to pursue or succeed in such activities.
g) The Company’s stock price may fluctuate widely
The Company’s stock is thinly traded. Many factors, including, but not limited to, future announcements concerning the Company, its competitors or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding the Company’s industries in the financial press or investment advisory publications, could cause the market price of the Company’s stock to fluctuate substantially. In addition, the Company’s stock price may fluctuate widely for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military conflicts, or market or related declines, may materially affect the market price of the Company’s common stock. In addition, any information concerning the Company, including projections of future operating results, appearing in investment advisory publications or on-line bulletin boards or otherwise emanating from a source other than the Company could in the future contribute to volatility in the market price of the Company’s common stock.
h) The Company’s business success depends on its ability to recruit and retain key personnel
The Company depends on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and on the Company’s ability to recruit additional personnel. There is competition for the services of these personnel, and there is no assurance that the Company will be able to retain or attract the personnel necessary for its success, despite the Company’s efforts to do so. The loss of services of the Company’s key personnel could have a material adverse effect on its business, results of operations, or financial condition.
i) Many of the Company’s customers are in cyclical industries
The Company’s business is significantly dependent on the demand its customers experience for their products. Many of their end users are in industries that historically have experienced a cyclical demand for their products. The industries include, but are not limited to, the defense electro-optics industry and the manufacturers of process control capital equipment for the semiconductor tools industry. As a result, demand for the Company’s products is subject to cyclical fluctuations, and this could have a material effect on our business, results of operations, or financial condition.
j) The Company’s manufacturing processes require products from limited sources of supply
The Company utilizes many relatively uncommon materials and compounds to manufacture its products. Many of the materials have long lead times and the Company’s suppliers could fail to deliver sufficient quantities of these necessary materials on a timely basis, or deliver contaminated or inferior quality materials, or markedly increase their prices. Any such actions could have an adverse effect on the Company’s business, despite the Company’s efforts to secure long term commitments from its suppliers. Adverse results might include reducing the Company’s ability to meet commitments to its customers, compromising the Company’s relationship with its customers, adversely affecting the Company’s ability to meet expanding demand for its products, or causing the Company’s financial results to deteriorate.
k) The Company faces competition
The Company encounters substantial competition from other companies positioned to serve the same market sectors. Some competitors may have financial, technical, capacity, marketing or other resources more extensive than ours, or may be able to respond more quickly than the Company to new or emerging technologies and other competitive pressures. Some competitors have manufacturing operations in low-cost labor regions such as the Far East and Eastern Europe and can offer products at lower prices than the Company. The Company may not be successful in winning orders against the Company’s present or future competitors, and competition may have a material adverse effect on our business, results of operations, or financial condition.
l) The Company may not be able to fully protect its intellectual property
The Company currently holds one patent for a material applicable to an important product, but does not in general rely on patents to protect its products or manufacturing processes. The Company generally relies on a combination of trade secrets and employee non-compete and nondisclosure agreements to protect its intellectual property rights. There can be no assurance that the steps the Company takes will be adequate to prevent misappropriation of the Company’s technology. In addition, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company. Asserting the Company’s rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting the Company’s business, results of operations, or financial condition.
m) Data breach and breakdown of information and communication technologies
In the course of our business, we collect and store sensitive data, including intellectual property. We could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an incident, if we are unable to prevent such security or privacy breaches, our operations would be disrupted or we could suffer, financial loss, property damage, reputational damage, or regulatory penalties because of lost or misappropriated information.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None

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ITEM 2. PROPERTIES
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.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are not party to any legal proceedings as of the date hereof.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not Applicable
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
a) Market Information
The Company’s Common Stock, with a par value of $0.01 per share, is traded on the OTC Pink Sheets under the symbol “INRD.”
b) Shareholders
As of March 27, 2021, there were approximately 121 shareholders of record of our Common Stock based on the `Shareholders’ Listing provided by the Company’s transfer agent. As of the same date, the Company estimates there are an additional 240 beneficial shareholders.
c) Dividends
The Company has not historically paid cash dividends. Payment of cash dividends is at the discretion of the Company’s Board of Directors and depends, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company does not anticipate paying cash dividends in the foreseeable future.
d) Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the past year.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Not required.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.
Critical Accounting Policies
The Company’s significant accounting policies are described in Note 1 of the Consolidated Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the Company’s financial statements, the Company made estimates and judgments that affect the results of its operations and the value of assets and liabilities the Company reports. The Company’s actual results may differ from these estimates.
Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosure. The Company believes that the following summarizes critical accounting policies that require significant judgments and estimates in the preparation of the Company’s consolidated financial statements:
Revenue Recognition
Revenue from the Company’s sales continue to generally be recognized either when products are shipped (i.e., point in time) or under certain long-term government contracts, as the Company transfers control of the product or service to its customers (i.e., over time), which approximates the previously used percentage-of-completion method of accounting.
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost of manufactured goods includes material, labor and overhead.
The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving, or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues.
Stock-based compensation
Stock based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.
Income Taxes
Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
Leases
The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019. Under the guidance of ASU 2016-02, Leases (Topic 842), the Company must determine if such an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease at inception of the arrangement. The Company determined that this lease is an operating lease and presented as a right-of-use lease asset, short term lease liability and long-term lease liability on the consolidated balance sheet. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental borrowing rate.
Results of Operations
The following table sets forth, for the past two years, the percentage relationship of statement of operations categories to total revenues.
Years ended December 31,
Revenues:
Product sales 100.0 % 100.0 %
Costs and expenses:
Cost of goods sold 80.1 80.1
Gross profit margin 19.9 19.9
Selling, general and administrative expenses 28.2 26.1
Operating (loss) income (8.3 ) (6.2 )
Net (loss) income (10.0 ) (7.6 )
Revenues
Sales were $9.0 million in 2020, a decrease of 10.0% or $1.0 million, compared to $10.0 million in 2019. Lower bookings in 2019 combined with the effects of mandatory shutdowns, customer pushouts, and reduced demand led to the decrease in sales in 2020.
Sales to the defense and aerospace market in 2020 increased 5.6%, or $0.2 million to $3.9 million from $3.7 million in 2019. Sales in the defense and aerospace market represented 43.5% and 37.0% of total sales in 2020 and 2019, respectively. The increase in military and defense spending resulted in stronger demand for our products in 2020.
Sales in the process control and metrology market decreased $0.9 million, or 20.6% to $3.3 million in 2020 from $4.2 million in 2019. Sales in the process control and metrology represented 36.9% and 41.9% of total sales in 2020 and 2019, respectively. Decreased demand for critical components in the semiconductor capital equipment market negatively impacted sales in 2020 and 2019.
The Company serves as an OEM supplier of standard and custom optical components and laser accessories within the non-military laser industry. Sales to this and related markets were $0.7 million and $1.2 million in 2020 and 2019, respectively. Overall, sales of laser devices and related products represented 7.4% and 12.1% of revenues in 2020 and 2019, respectively, a decrease of $0.5 million or 45.0%. The decrease in 2020 was due to the cancelation of orders from one international customer.
Sales to customers within the Scientific / R&D market increased in 2020 to $1.1 million from $0.9 million in 2019. The 22.3% increase is mainly due to increased orders from a national lab and billings from an SBIR contract awarded in the second quarter of 2020. As a percentage of total sales, this market represented 12.2% and 9.0% of sales in 2020 and 2019, respectively.
Bookings
The Company booked new orders totaling approximately $9.8 million in 2020. The Company’s backlog as of December 31, 2020, was $5.9 million, compared to $5.1 million as of December 31, 2019.
Cost of Goods Sold and Gross Profit Margin
Cost of goods sold as a percentage of sales was 80.1% for each of the years ended December 31, 2020 and 2019.
The cost of goods sold in 2020 was $7.2 million, compared to $8.0 million in 2019, a decrease of $0.8 million, mainly attributable to the decrease in sales, coupled with a change in sales mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $2.5 million in 2020, compared to $2.6 million in 2019, a decrease of $0.1 million, or 2.9%. The decrease is attributable a significant reduction in sales and marketing related expenses, coupled with reduced recruiting and temporary employee costs, offset by an increase in the reserve for doubtful accounts and an increase in insurance costs. The reduction in sales and marketing related expenses is directly related to the protocols and restrictions on travel implemented by the Company as a result of government mandates.
As a percentage of sales, SG&A was 28.2% of sales in 2020 compared to 26.1% of sales in 2019, primarily due to lower sales in 2020.
Operating Income (Loss)
The Company had an operating loss of $0.7 million in 2020, compared to a net operating loss of $0.6 million in 2019.
Other Income and Expenses
Net interest expense was $0.2 million in each of 2020 and 2019.
Income Taxes
In 2020 and 2019, the Company did not record a current provision for either state tax or federal alternative minimum tax due to carry forward losses incurred in prior years for both income tax and financial reporting purposes.
Net Income (Loss)
As a result of the foregoing, the Company recorded a net loss of $0.9 million in 2020, compared to a net operating loss of $0.8 million in 2019.
Liquidity and Capital Resources
The Company’s primary source of liquidity is cash and cash equivalents and on-going collection of our accounts receivable. The Company’s major uses of cash in the past three years have been for operating expenses, capital expenditures, and for repayment and servicing of outstanding debt and accrued interest.
As of December 31, 2020, and December 31, 2019, cash and cash equivalents were $1.1 million and $1.0 million, respectively.
On July 22, 2020, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to April 1, 2024, from April 1, 2021. The notes bear interest at 6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along with principal, may be converted into securities of the Company as follows: the notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share. As part of the agreement to extend the maturity date of the notes, the expiration dates of the warrants were extended from April 1, 2022 to April 1, 2027.
The Company paid $0.2 million and $0.1 million for interest on the subordinated convertible promissory notes in 2020 and 2019, respectively. Accrued interest of $37,500 and $112,500 is included in Accounts payable and accrued liabilities as of December 31, 2020 and 2019, respectively.
In total, the Company paid $0.2 million of interest in each of 2020 and 2019, on its outstanding debt, including interest paid on the subordinated convertible promissory notes.
In 2020 and 2019, the Company had capital expenditures of $0.2 million and $0.3 million, respectively. Capital spending in 2020 reflects the Company’s investment in information and technology system upgrades to address cybersecurity requirements and manufacturing equipment upgrades. The 2019 capital expenditures reflected our investments in our large diamond turning center, our in-process metrology capabilities, and the installation of a new redundant power system to support our crystal growth and IT infrastructure.
The Company had a net increase in cash of $0.2 million for the twelve months ended December 31, 2020, compared to a net decrease in cash of $0.2 million for the twelve months ended December 31, 2019.
On May 6, 2020, the Company received loan proceeds of approximately $973,000, under the Paycheck Protection Program (“PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was enacted March 27, 2020. The PPP Loan, which is in the form of a promissory note dated May 4, 2020, issued by the Company, matures on May 4, 2022, and bears interest at a rate of 1.0% per annum, payable monthly commencing on December 4, 2020. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered 24-week period will qualify for forgiveness. Forgiveness of the PPP Loan is subject to approval by the Small Business Administration.
On January 19, 2021, the Company received notification from the Small Business Association that the Company’s Forgiveness Application of the PPP Loan and accrued interest, totaling $980,000, was approved in full, and the Company had no further obligations related to the PPP Loan.
Cash flows pertaining to our source and use of cash are presented below (in thousands):
Years Ended December 31,
(in thousands)
Net cash provided by (used in) operating activities $ (587 ) $ 150
Capital expenditures and purchase of precious metals (201 ) (310 )
PPP Loan Proceeds
Principal payments on debt obligations (6 ) (75 )
Overview of Financial Condition
The Company recorded a net loss of $0.9 million and $0.8 million for the twelve months ended December 31, 2020 and 2019, respectively. The Company’s cash and cash equivalents increased to $1.1 million from $1.0 million at December 31, 2019.
The Company’s management expects that future cash flows from operations and its existing cash reserves will provide adequate liquidity for the Company’s operations and working capital requirements through at least March 31, 2022.
Contractual Obligations
The following table describes our contractual obligations as of December 31, 2020 (in thousands):
Less than
4-5 Greater
Contractual Obligations Total 1 Year 1-3 Years Years Than 5
Convertible notes payable, including interest $ 2,988 2,838
Notes payable-other, including interest 46
PPP Loan Proceeds *
Total contractual cash obligations $ 4,215 $ 1,169 $ 2,926 $ 46 $ 73
* The PPP Loan amd accrued interest were forgiven on January 21st, 2021.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements at December 31, 2020 and 2019.
Impact of COVID-19 to Operations
We are conducting business to ensure the safety of our employees and associates actively and earnestly, following all best practice CDC guidelines for prevention in the workplace. We have applied social distancing in our operations and implemented a connected, remote workforce where practicable. Our operations are considered essential business under the Executive Orders of New Jersey’s Governor, and we cannot predict what further actions may be required by federal, state, or local authorities in the future. Nor can we predict what actions these mandates may have on our customers and suppliers. We continue to actively monitor the situation and may be required to take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, partners, suppliers and shareholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our financial results.
While the Company’s bookings were stronger in 2020 and sales in our aerospace and defense and scientific markets improved over last year, total sales overall were negatively impacted by business factors resulting from COVID-19 and governmental restrictions, including disruptions to our customers’ and suppliers’ operations. Our sales and marketing efforts were negatively impacted due to travel and other operational restrictions. The total impact of the global emergence of COVID-19 on our business and financial results are not completely known, and we cannot predict what impact it may have on our continuing operations and the effect to our financial results.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
N/A

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures as of December 31, 2020, are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding disclosure.
b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our internal control over financial reporting includes those policies and procedures that:
· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
· provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2020. In making this assessment, management used the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment and the criteria set forth by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020.
c) Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B Other Information
None
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) (1)	 Financial Statements.
Reference is made to the Index to Financial Statements commencing on Page 20.
(a) (2)	 Financial Statement Schedule.
Reference is made to the Index to Financial Statements on Page 20. All other schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Financial Statements or Notes thereto.
(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 July 22, 2020, held by Clarex, Ltd (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2020)
4.3
Note dated July 22, 2020 held by Welland, Ltd. (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2020)
4.4
Description of Securities (incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2020)
10.2
2020 Equity Compensation Program *
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