Inrad Optics, Inc. - Annual Report: 2014 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: December 31, 2014

OR

For the transition period from                 to

Commission file number: 0-11668

Inrad Optics, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code 201-767-1910

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:

Common stock, par value $.01 Per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨.      No x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨.      No x.

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $1,968,253. (For purposes of determining this amount, only directors, executive officers and shareholders with voting power of 10% or more of our stock have been deemed affiliates.)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Shares outstanding as of April 10, 2015 – 12,349,493 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2015 Annual Meeting of Shareholders, to be filed with the Commission not later than 120 days after the close of the registrant’s fiscal year, have been incorporated by reference, in whole or in part, into Part III Items 10, 11, 12, 13 and 14 of this Annual Report on 10-K.

Inrad Optics, Inc.

INDEX

PART 1

Caution Regarding Forward Looking Statements

This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to insure that any forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. The events described in the forward-looking statements contained in this Annual Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of the Company’s plans or strategies, or projections involving anticipated revenues, earnings, or other aspects of the Company’s operating results. The words “may”, “will”, “expect”, “believe”, “anticipate”, “project”, “plan”, “intend”, “estimate”, and “continue”, and their opposites and similar expressions are intended to identify forward-looking statements. The Company cautions you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond the Company’s control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1 (Business) and Item 1A (Risk Factors) of Part I and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of this Annual Report on Form 10-K. Any one or more of these uncertainties, risks, and other influences could materially affect the Company’s results of operations and whether forward-looking statements made by the Company ultimately prove to be accurate. Readers are further cautioned that the Company’s financial results can vary from quarter to quarter, and the financial results for any period may not necessarily be indicative of future results. The foregoing is not intended to be an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by the Company. The Company’s actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise, except as otherwise required by law.

Inrad Optics, Inc. (the “Company”, “Inrad”), was incorporated in New Jersey in 1973. The Company develops, manufactures and markets products and services for use in photonics industry sectors via three distinct but complimentary product areas - “Crystals and Devices”, “Custom Optics” and “Metal Optics.”

The Company is a vertically integrated manufacturer specializing in crystal-based optical components and devices, custom optical components from both glass and metal, and precision optical and opto-mechanical assemblies. Manufacturing capabilities include solution and high temperature crystal growth, extensive optical fabrication capabilities, including precision diamond turning and the ability to handle large substrates, optical coatings and provide 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, about 15 miles northwest of New York City. The Company vacated its Sarasota, Florida facility on March 31, 2014 and the Sarasota operations were transferred to Northvale, New Jersey by the same date.

The products produced by Inrad Optics, Inc. fall into two main categories: Optical Components and Laser System Devices and Instrumentation.

The Optical Components segment of the business is heavily focused on custom optics manufacturing. The Company specializes in high-end precision components. It develops, manufactures and delivers precision custom optics and thin film optical coating services through its Custom Optics and Metal Optics operations. Glass, metal, and crystal substrates are processed using modern manufacturing equipment, complex processes and techniques to manufacture components, deposit optical thin films, and assemble sub-components used in advanced photonic systems. The majority of custom optical components and optical coating services supplied are used in inspection, process control systems, defense and aerospace electro-optical systems, laser system applications, industrial scanners, and medical system applications.

The Laser Devices and 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 R&D applications by engineers within corporations, universities and national laboratories.

The following table summarizes the Company’s net sales by product categories during the past three years. Laser System Devices and Instrumentation includes all non-linear and electro-optical crystal components.

Products Manufactured by the Company

Optical Components

Manufacturing of high-performance custom optics is a major product area for Inrad Optics and is addressed in the marketplace by each of the product groups - Crystals and Devices, Custom Optics and Metal Optics.

The Custom Optics product line focuses on products manufactured to specific customer requirements. It specializes in the manufacture of optical components, optical coatings (ultra-violet wavelengths through infra-red wavelengths) and subassemblies for the military, aerospace, industrial and medical marketplace. Planar, prismatic and spherical components are fabricated from glass and synthetic crystals, including fused silica, quartz, germanium, zinc selenide, zinc sulfide, magnesium fluoride and silicon. Components consist of mirrors, lenses, prisms, wave plates, polarizing optics, monochromators, x-ray mirrors, and cavity optics for lasers.

Most optical components and sub-assemblies require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect, or transmit specific wavelengths. The Custom Optics optical coating specialties include high laser damage resistance, polarizing, highly reflective, anti-reflective, infra-red, and coating to complex multi-wavelength requirements on a wide range of substrate materials. Coating deposition process technologies employed included electron beam, thermal, ion and plasma assisted deposition systems.

The Metal Optics product line is a fully integrated precision metal optics and optical assembly operation which employs high precision CNC and diamond machining, polishing, and plating of aluminum, AlBeMet™, beryllium and stainless steel. The Metal Optics product line offers opto-mechanical design and assembly services as part of its manufactured deliverables and can support prototyping through production of large and small metal mirrors, thermally stable optical mirrors, low RMS surface finish polished mirrors, diamond machined precision aspheric and planar mirrors, reflective porro prisms, and arc-second accuracy polygons and motor assemblies. Plating specialties include void-free gold and electroless nickel.

This product line consists of crystals and crystal devices including UV filter materials of both patented and proprietary materials with unique transmission and absorption characteristics. These materials are used in critical applications in defense systems such as missile warning sensors. Such materials include nickel sulfate and other proprietary materials.

Laser Devices and 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 consumed by the UV Filter Optical components described above, current materials produced include Beta Barium Borate (BBO), Lithium Niobate, Zinc Germanium DiPhosphide, Potassium Dihydrogen Phosphate, Potassium Dideuterium Phosphate and Stilbene. Applications for these materials include defense, homeland security, surgical lasers, and industrial processing lasers. The Crystals and Devices team is also engaged in ongoing R & D efforts to develop new materials for evolving applications. Some of the major products produced for the photonics marketplace include:

The Company grows and fabricates electro-optic and nonlinear crystal devices for altering the intensity, polarization or wavelength of a laser beam. Other crystal components, produced as part of the Crystals and Devices product line, are used in laser research and in commercial laser systems.

A line of Pockels cells and associated electronics is manufactured for sale in multiple market sectors. Pockels cells are devices that include one or more crystal components and are used in applications that require fast switching of the polarization direction of a beam of light. These uses include Q-switching of laser cavities to generate pulsed laser light, coupling light into and out from regenerative amplifiers, and light intensity modulation. These devices are sold to medical and industrial laser original equipment manufacturers, research institutes and laser system design engineers.

Sales by Market

The photonics industry serves a very broad, fragmented and expanding set of markets. As technologies are discovered, developed and commercialized, the applications for photonic systems and devices, and the components embedded within those devices, grow across traditional market boundaries. While a significant part of the Company’s business remains firmly in the defense and aerospace markets, other markets served include the OEM medical and industrial laser market, and the OEM metrology and process control market, university research institutes and national labs worldwide. Scanning, detection and imaging technologies for homeland security and health care markets are beginning to provide opportunities for the Company and these new sectors are expected to account for future growth and demand for our products and capabilities.

In 2014, 2013 and 2012 the Company’s product sales were made to customers in the following market areas:

Defense and Aerospace

This market consists of sales to OEM defense electro-optical systems and subsystems manufacturers, manufacturers of non-military satellite-based electro-optical systems and subsystems, and direct sales to governments where the products have the same end-use.

End-use applications for the Company’s products in the defense and aerospace sector include military laser systems, military electro-optical systems, satellite-based systems, and missile warning sensors and systems that protect aircraft. The dollar volume of shipments of product within this sector depends in large measure on the U.S. Defense Department budget and its priorities, that of foreign governments, the timing of their release of contracts to their prime equipment and systems contractors, and the timing of competitive awards from this customer community to the Company.

Defense/Aerospace sales represented approximately 34.6%, 40.2% and 44.6% of sales in 2014, 2013 and 2012. The decrease in 2014 is primarily due to one large customer whose program funding was delayed in 2014. We expect booking of new orders for this customer to resume in 2015. Despite lower sales, new order bookings from customers in the defense and aerospace market increased in 2014 compared to 2013 resulting in a higher year over year backlog.

Despite the decrease in sales over the past three years, the Company believes that the defense and aerospace sector will continue to represent a significant market for the Company’s products and offers an ongoing opportunity for growth given the Company’s capabilities in specialty crystal, glass and metal precision optics.

Process Control and Metrology

This market consists of customers who are manufacturers of capital equipment used in manufacturing process implementation and control, optics-based metrology, quality assurance and inventory and product control equipment. Examples of applications for such equipment include semiconductor fabrication and testing and inventory management and distribution control.

Sales in the Process Control and Metrology market increased in 2014 as a percentage of total sales, from 23.7% to 35.3%, as sales rose $769,000 or approximately 29% compared to 2013. The increase in 2014 is mainly the result of increased demand from a few large customers along with the introduction of a new product to another customer in this market. Developments made with this customer in 2013 led to a large production order in 2014.

In 2013, sales in this market decreased as a percentage of total sales and actual sales, compared to 2012. The decrease in 2013 correlates with the decline in business activity experienced by the semiconductor market as a whole.

The Company believes that the optical and x-ray inspection segment of the semiconductor industry offers continued opportunities which match its capabilities in precision optics, crystal products, and monochromators.

Laser Systems

This market consists principally of customers who are OEM manufacturers of industrial, medical, and R&D lasers which the Company serves as an OEM supplier of standard and custom optical components and laser accessories, as well as, other markets that are not currently large enough to list individually.

Sales in this market decreased in 2014 as a percentage of sales, compared to 2013 from 26.6% to 22.8%, down $768,000. This was primarily the result of the completion of a large government contract and a delay in the funding of a follow on contract from the same customer which was not received until the fourth quarter of 2014. Sales in 2013 increased over 2012 although sales to OEM customers remained fairly constant while sales to customers in smaller markets increased.

Universities and National Laboratories

These sales consist of product sales directly to researchers at various educational and research institutions and through distributors into that market. Sales to customers within the University and National Laboratories market sector consist primarily of the Company’s legacy systems, Pockels cells and related repairs. Sales in 2014 decreased as a percentage of total sales as compared to 2013 and sales revenue declined by approximately $355,000 primarily as the result of the delayed timing of a large government contract which was not received until the fourth quarter of 2014

Sales in 2013 increased by approximately 160% over 2012, primarily the result of increased demand from one large customer.

Major Customers

Historically, the Company’s sales have been concentrated within a small number of customers, although the top customers have varied from year to year. In 2014, the Company had sales to three major customers which accounted for 14.0%, 10.3%, and 8.1% of sales, respectively. One customer is a domestic manufacturer of medical laser systems while the other major customers included a large U.S. defense contractor who manufactures systems for the U.S. and foreign governments and a large OEM in the process control and metrology market.

In 2013, the top three customers represented 9.4%, 8.2% and 7.3% of sales, respectively. In 2012, the top three customers represented 11.2%, 10.7% and 8.6% of sales, respectively.

Sales to the Company’s top five customers represented approximately 45.4%, 37.7% and 43.1% of sales, in 2014, 2013 and 2012, respectively. These customers are all 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, Asia and Japan and amounted to approximately 19.2%, 14.5%, and 14.3% of product sales in 2014, 2013 and 2012, 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 suppliers for the purchase of the materials necessary to fulfill the order.

Marketing and Business Development

The Company markets its products domestically, through the coordinated efforts of the sales, marketing and customer service teams.

The Company has moved towards a strategy of utilizing these combined sales and marketing resources for cross-selling all products, across all business lines. This strategy is well suited to the diverse and fragmented markets that utilize photonic technologies.

Independent sales agents are used in countries in major non-U.S. markets, including Canada, the United Kingdom, the European Union, Israel, and Japan.

Sales and marketing efforts to promote our product lines and our participation in trade shows, internet-based marketing, media and non-media advertising and promotion, and management of international sales representatives and distributor relationships are coordinated at the corporate level under the auspices of the Vice President, Sales and Marketing.

Backlog

The Company’s order backlog at December 31, 2014 was $6,455,000. The Company’s order backlog as of December 31, 2013 and 2012 was $4,357,000 and $5,898,000, respectively.

We anticipate shipping a majority of the present backlog during fiscal year 2015. However, our backlog at any given date is not necessarily indicative of actual sales for any future period.

Competition

Within each product category in which the Company’s business units are active, there is competition.

Changes in the photonics industry have had an effect on suppliers of custom optics. As end users have introduced products requiring large volumes of optical components, suppliers have responded either by staying small and carving out niche product areas, or by ramping up manufacturing capacity and modernizing their manufacturing methods to meet higher volume production rates. Additionally, the availability of an increasingly large variety of inventoried inexpensive catalog optics has led some OEM manufacturers to “design in” these low-cost solutions rather than utilizing custom designed and manufactured products.

Competition for the Company’s crystal devices and instrumentation is more limited and the Company’s laser devices are considered to be high quality and generally offer a combination of features not available elsewhere. As a result of the Company’s in-house crystal growth capability, this area of the business is highly vertically integrated, providing a competitive advantage over other suppliers.

For crystal products, the market is highly competitive. Many of the Company’s competitors who supply non-linear optical crystals are located overseas, and can offer significantly reduced pricing for some crystal materials. On many occasions, the quality of the crystal component drives the ultimate performance of the component or instrument into which it is installed. Quality and technical support are considered to be valuable attributes for a crystal supplier by some, but not all, OEM customers.

Our metal optics product line has several key competitors who are larger and better equipped to compete on high volume work. There are also several large and small competitors who compete with our products on large form factor optics. The Company has made recent inroads within this competitive landscape, and is building brand awareness in the marketplace.

Although price is a principal factor in many product categories, competition is also based on product design, performance, customer confidence, quality, delivery, and customer service. Based on its performance to date, the Company believes that it can continue to compete successfully, although no assurances can be given in this regard.

Employees

As of the close of business on March 27, 2015, the Company had 70 full-time employees.

Patents and Licenses

The Company mainly relies on its manufacturing and technological expertise, know-how and trade secrets in addition to its patents, to maintain its competitive position in the industry. The Company takes precautionary and protective measures to safeguard its technical design and manufacturing processes. The Company executes nondisclosure agreements with its employees and, where appropriate, with its customers, suppliers and other associates.

Regulation

Foreign sales of certain of the Company’s products to certain countries may require export licenses from the United States Department of Commerce. Such licenses are obtained when required. All requested export licenses of Inrad Optics products have been granted or deemed not-required.

International Traffic in Arms Regulations (“ITAR”) governs much of the Company’s domestic defense sector business, and the Company is capable of handling its customers’ technical information under these regulations. Inrad Optics, Inc. is registered with the Directorate of Defense Trade Controls, and utilizes a supplier base of similarly registered companies.

There are no other federal regulations or any unusual state regulations that directly affect the sale of the Company’s products other than those environmental compliance regulations that generally affect companies engaged in manufacturing operations in New Jersey.

Availability of Reports

Our principal executive offices are located at 181 Legrand Avenue, Northvale, N.J. 07647 which also houses our manufacturing operations. Our telephone number is 201-767-1910 and our corporate website address is www.inradoptics.com. We include our website address in this annual report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website. The information on our website is not incorporated by reference in this annual report on Form 10-K.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports are available free of charge on our web site at www.inradoptics.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”) ( www.sec.gov ). We will also provide electronic or paper copies of such reports free of charge, upon request made to our Corporate Secretary.

The Company cautions investors that its performance (and, therefore, any forward looking statement) is subject to risks and uncertainties. Various important factors, including but not limited to the following, may cause the Company’s future results to differ materially from those projected in any forward looking statement.

The Company has historically incurred substantial net losses. We had a net loss of $2.2 million and $1.6 million for the fiscal years ended December 31, 2014 and 2013, respectively. While we expect losses of a smaller magnitude to continue in the near term, these losses have had, and will continue to have, an adverse effect on our working capital, total assets and stockholders’ equity. We are unable to predict when we will become profitable and our inability to achieve and sustain profitability would negatively affect our business, financial condition, results of operations and cash flows.

We may need to raise additional financing to repay our outstanding indebtedness of approximately $3.2 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.

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 such as the Budget Control Act of 2011 which significantly reduced appropriations below forecasted levels for most federal agencies, including the Department of Defense. In addition, the 2015 Presidential Budget includes reductions in spending for the Department of Defense. It is difficult to assess how this will 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.

For the year ended December 31, 2014, five customer accounts represented approximately 45.4% of total revenues and two of these customers each accounted for more than 10.0% of revenues in 2014. Since 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, the relative size and identity of our largest customers change somewhat from year to year. In the short term, the loss of any of these large customer accounts or a decline in demand in the markets which they represent could have a material adverse effect on our business, results of operations, and financial condition.

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.

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 and adversely 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.

The Company depends on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and on the Company’s ability to recruit additional personnel. There is competition for the services of these personnel, and there is no assurance that the Company will be able to retain or attract the personnel necessary for its success, despite the Company’s efforts to do so. The loss of the services of the Company’s key personnel could have a material adverse effect on its business, results of operations, or financial condition.

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.

The Company utilizes many relatively uncommon materials and compounds to manufacture its products. Examples include optical grade quartz, specialty optical glasses, scarce natural and manmade crystals, beryllium and its alloys, and high purity chemical compounds. 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.

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.

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.

None

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 expired on October 31, 2013 and the Company continues to occupy the facility under the terms of the expired lease paying a reduced amount of monthly rent that includes all real estate taxes, maintenance and operating costs.

The Company’s wholly-owned subsidiary, MRC Precision Metal Optics Inc., moved its operations from Sarasota, Florida into the Northvale location in the first quarter of 2014 and the lease for the facility was terminated.

We believe that our existing facility is adequate to meet current and future projected production needs.

We are not party to any legal proceedings as of the date hereof.

Not Applicable

PART II

The Company’s Common Stock, with a par value of $0.01 per share, is traded on the OTC Bulletin Board under the symbol INRD.

The following table sets forth the range of high and low closing prices for the Company’s Common Stock in each fiscal quarter from the quarter ended March 31, 2013 through the quarter ended December 31, 2014, as reported by the National Association of Securities Dealers NASDAQ System. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

As of March 27, 2015 the Company’s closing stock price was $0.28 per share.

As of March 27, 2015, there were approximately 136 shareholders of record of our Common Stock based upon the Shareholders’ Listing provided by the Company’s Transfer Agent. As of the same date, the Company estimates that there are an additional 300 beneficial shareholders.

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 immediate future.

There have been no sales of unregistered securities during the past three years.

The following data is qualified in its entirety by the financial statements presented elsewhere in this Annual Report on Form 10-K.

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.

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 records revenue from the sale of its products and services when all four of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the sales price is fixed or determinable; and collectability is reasonably assured. Losses on contracts are recorded when identified.

Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or market. 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.

Goodwill and Intangible assets

Intangible assets with finite lives are amortized on a straight-line basis over the assets’ estimated useful life up to 14 years. The Company periodically evaluates on an annual basis, or more frequently when conditions require, whether events or circumstances have occurred indicating the carrying amount of intangible assets may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the associated undiscounted future cash flows compared to the related carrying amount of assets to determine if an impairment loss should be recognized.

Goodwill and intangible assets not subject to amortization are tested in December of each year for impairment, or more frequently if events and circumstances indicate that the assets might have become impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

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

Results of Operations

The following table sets forth, for the past three years, the percentage relationship of statement of operations categories to total revenues.

Revenues

Sales were $9,726,000 in 2014, a decrease of 13%, or $1,510,000 compared to $11,236,000 in 2013.

By product category, the net decrease in 2014 consisted of a decrease of $839,000 or 10% in shipments of optical components and a decrease of $671,000 or 26% in laser systems devices and instrumentation compared to the prior year.

Lower sales from customers in the defense and aerospace, laser systems, and universities/national labs was partially offset by an increase in shipments to customers in the process control and metrology market compared with 2013.

Sales to the defense and aerospace market declined 26% to $3,364,000 compared to $4,520,000 in 2013. This decline reflects the impact of delays or cut-backs in government defense spending on the products or systems supplied by our customers. The Company had a significant decrease in sales to two large defense customers related to a delay in new funding of long-term programs. This was partially offset by increased sales to other customers in this market.

Sales in the process control and metrology market increased in 2014 by 29% to $3,433,000 compared to $2,664,000 in 2013. The increase in 2014 is mainly attributable to increased demand from a few large customers and the introduction of a new product to another customer in this market. Developments made with this customer in 2013 led to a large production order in 2014.

The Company serves the non-military laser industry as an OEM supplier of standard and custom optical components and laser accessories. Sales to this and related markets were $2,220,000 in 2014 compared to $2,988,000 in 2013. Overall, sales of laser devices and related products represented 22.8% of total sales in 2014, a decrease from 26.6% in 2013.

Sales to customers within the university and national laboratories market sector decreased in 2014 to $709,000 compared to $1,064,000 in 2013 mainly as a result of decreased sales to a catalog distributor that sells our products into this market.

In 2013, the Company’s overall sales decreased to $11,236,000 in 2013 or 1.5% compared to $11,404,000 in 2012. The decline in sales was mainly the result of lower orders or the delay in receiving orders from several larger customers compared to 2012.

By product group, sales of optical components of decreased 1.5% and sales of laser system devices and instrumentation decreased by 1.4%.

Sales to the defense and aerospace market of $4,520,000 in 2013 declined 11.2% from $5,089,000 in 2012 due to the impact of the economic downturn on customer demand driven by changes in government spending patterns.

Sales to the process control and metrology market also decreased by 23.5% to $2,664,000 in 2013 from $3,484,000 in 2012 as a result of delays in receiving orders from several larger customers. These declines were partially offset by an increase in the market for laser devices and related products which increased in 2013 to $2,988,000 from $2,421,000 in 2012.

In 2013, sales to university and national laboratories increased to $1,064,000 compared to $410,000 in 2012 mainly as the result of significant increase in customer orders from a catalogue distributor that sells our products in this market.

Bookings

The Company booked new orders totaling approximately $12.0 million in 2014, an increase of 21.5% from $9.8 million in 2013. An increase in demand from the defense and the process control and metrology segments were primarily responsible for the increase. Bookings from our top ten customers increased 31% with the addition of a new customer.  Developments made with this customer in 2013 led to a large production order in 2014.   A second customer factor was an increase of units ordered under a five year contract with the US Army.

In 2013, the Company booked new orders totaling $9.8 million, a decrease of 20.3% from $12.3 million in 2012 as orders from aerospace and defense and government entities slowed, reflecting the reduction for certain U.S defense spending.

The Company’s backlog as of December 31, 2014 increased by approximately 48% to $6.5 million from $4.4 million as of December 31, 2013. Backlog was $5.9 million as of December 31, 2012.

Cost of Goods Sold and Gross Profit Margin

Cost of goods sold as a percentage of sales was 91.2% and 85.1% for the years ended December 31, 2014 and 2013, respectively. In 2014, cost of goods sold was $8,869,000, including restructuring costs of $189,000 related to the closing and relocation of the Sarasota, Fl. facility and associated costs of relocating the operations to the Northvale, NJ facility. In 2013, cost of goods sold was $9,560,000 and included accrued restructuring costs of $313,000 related to the closing and relocation of the Sarasota facility.

The decrease in cost of goods sold in 2014 was mainly attributable to the $1,510,000 decrease in sales. This was partially offset by a reduction in variable manufacturing costs related to the lower sales although a large part of the Company’s manufacturing costs are fixed costs. In addition, the impact of lower sales was partially offset by cost reductions related to the closing of the Sarasota facility, net of one-time restructuring costs in 2014.

In 2013, cost of goods sold was $9,560,000 or 85.1% of sales compared to $8,914,000 or 78.2% in 2012. The increase in cost of goods sold in 2013 was mainly due to restructuring costs ($313,000) and an increase in the overhead cost component of product shipped, partially offset by a decrease in material costs that was mainly due to product mix. Manufacturing wages and salaries and related fringe benefit expenses were relatively unchanged in 2013 compared to 2012.

Gross margin in 2014 was $857,000 or 8.8% which is a decrease from 2013 from $1,675,000 or 14.9% reflecting lower sales levels offset by lower manufacturing and restructuring costs. This compares with a gross margin of $2,490,000 or approximately 21.8% in 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) were $3,041,000 in 2014, a decrease of $131,000 or 4% from 2013. The decrease primarily reflects expense reductions related to the consolidation of the Sarasota operations into the Northvale, NJ location including approximately $140,000 in SG&A salaries, wages and associated benefits, in addition to other administrative fees of approximately $18,000. This was offset by increases in SG&A expense for temporary employees of $23,000.

As a percentage of sales, SG&A increased to 31.3% of sales in 2014 compared to 28.2% in 2013, primarily due to the lower sales in 2014.

Selling, general and administrative expenses (“SG&A”) were $3,173,000 in 2013, a decrease of $166,000 or 5% from $3,339,000 in 2012. The decrease reflects the impact of the workforce reduction in 2013 and the absence of marketing costs incurred in 2012 associated with the Company’s name change and re-branding. As a percentage of sales, SG&A also decreased to 28.2% of sales in 2013 compared to 29.3% in 2012.

Operating (Loss)

The Company had an operating loss of $2,496,000 in 2014 after recording a non-cash charge for the impairment of goodwill of $312,000, as discussed in Note 4 of the Company’s Consolidated Financial Statements. Excluding the charge for goodwill impairment, the Company had an operating loss of $2,184,000 compared to an operating loss of $1,497,000 in 2013 which primarily reflects the lower level of sales in 2014. This included restructuring costs of $189,000 and $313,000 in 2014 and 2013, respectively

In 2013, the Company had an operating loss of $1,497,000 compared to $849,000 in 2012 which primarily reflects the impact of decreased sales and the additional expenses related to accrued restructuring costs in 2013.

Other Income and Expenses

Net interest expense of $181,000 in 2014 decreased from $186,000 in 2013. Interest expense was $184,000 in 2014 compared to $194,000 in 2013 mainly due to lower debt balances. This was offset by a decrease in interest income which was $3,000 in 2014 as compared to $8,000 in 2013.

Net interest expense of $186,000 in 2013 increased 15.3% from $164,000 in 2012. Interest expense was $194,000 in 2013 compared to $181,000 in 2012 mainly due to the full year impact of the term loan payable entered into with Valley National Bank in July 2012 and normal debt repayments. Interest income for 2013 decreased to $8,000 from $16,000 in 2012 mainly as a result of changes in short term cash balances.

In 2014, the Company sold and disposed of surplus equipment and recorded a gain of $65,075. Additionally, the Company recorded a gain of $97,000 as part of a transaction which included the sale of a platinum crucible for $145,000 and the purchase of a re-designed replacement crucible for $127,000 for use in the production of high-temperature crystals.

In 2013, the Company sold and disposed of surplus equipment and recorded a gain of $32,960.

Income Taxes

In 2014 and 2013, the Company did not record a current provision for either state tax or federal alternative minimum tax due to the losses incurred for both income tax and financial reporting purposes.

As of December 31, 2011, the Company had a deferred tax asset of $408,000 which the Company estimated would be recoverable in future periods. 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. In 2012, a significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2012. 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, 2012, the Company concluded it is more likely than not that it will not be able to realize any portion of the benefit on the deferred tax assets and the valuation allowance was increased by $603,000 to provide a full valuation against the net deferred tax assets as of December 31, 2012. As a result, the Company recorded a provision of $408,000 for federal deferred income tax to write off the balance of the Company’s deferred tax asset.

Net (Loss)

In 2014, the Company recorded a net loss of $2,515,000 including a non-cash charge of $312,000 for goodwill impairment compared to a net loss of $1,650,000 in 2013 mainly as a result of the lower sales levels which were greater than the related decreases in manufacturing costs, SG&A, and Other Income/Expense, as well as cost reductions related to the consolidation of the Company’s Florida operations as of March 31, 2014.

In 2013, the Company recorded a net loss of $1,650,000 compared to a net loss of $1,421,000 in 2012 mainly as a result of the impact of certain overhead costs included in cost of goods sold described above.

Liquidity and Capital Resources

The Company’s primary source of liquidity is cash and cash equivalents and on-going collection of our accounts receivable. Other sources of liquidity include the proceeds received from term notes. 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, 2014 and December 31, 2013, we had cash and cash equivalents of $1,003,000 and $2,451,000, respectively.

On July 26, 2012, the Company entered into a term loan agreement with Valley National Bank, Wayne, NJ, in the amount of $750,000. The loan is secured with a security interest in new equipment acquired by the Company in the amount of $825,000 which will enhance the Company’s thin film coating capabilities. The loan is repayable in equal monthly installments over five years beginning in August 2012 and bears an interest rate of 4.35% annually. During 2012, the Company made a down-payment of $500,000 on the equipment which was included with Other Assets at December 31, 2012. The balance of the purchase price of $325,000 was paid in 2013 when the equipment was placed in service. The full amount of the asset is included in Machinery and Equipment at December 31, 2014 and 2013.

On July 29, 2014, 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, 2017 from April 1, 2015. 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, 2018 to April 1, 2020.. The Company is currently paying interest of $37,500 quarterly.

The Company paid $112,500 of current interest in 2014 and $150,000 of current interest on the two notes during 2013.

The Company expects to make quarterly interest payments of $37,500 through the maturity dates of the notes.

The Company had capital expenditures in 2014 of $410,000. Of the total, $311,000 were for leasehold improvements and other capital outlays related to the relocation of the Florida operations to the Northvale facility and an additional $34,000 related to other expenditures for leasehold improvements on the Northvale facility.

The Company had capital expenditures in 2013 of $456,000 that consists of the remaining balance payment for the new thin film coating equipment of $325,000 and other expenditures to the operating facilities and the purchase of new or replacement manufacturing equipment.

In 2012, the Company made a $500,000 deposit on new equipment and had capital expenditures of $293,000 primarily to refurbish operating facilities, purchase new or replacement manufacturing equipment and re-design the Company website.

In 2014, cash decreased by $1,448,000 compared to a decrease of $638,000 in 2013. In 2012, cash decreased by $311,000.

Cash flows pertaining to our source and use of cash are presented below (in thousands):

Overview of Financial Condition

As shown in the accompanying financial statements, the Company recorded a net loss of $2,515,000 compared to a net loss of $1,650,000 in 2013 and a net loss of $1,421,000 in 2012. This included a non-cash charge for goodwill of impairment of $312,000 in 2014 and one-time restructuring charges of $189,000 and $313,000 in 2014 and 2013, respectively.

The net loss in 2012 included a non-cash deferred tax provision of $408,000 from an increase to the valuation allowance. During 2014 and 2013, the Company’s working capital requirements were provided by cash from operation and available cash balances. During 2012, the Company’s working capital requirements were provided by cash from operations, available cash balances and proceeds from a bank term note payable.

In 2014, net cash used by operations was $978,000 compared to net cash used by operations of $70,000 in 2013. The decrease was primarily the result of the increased net loss in 2014 as well as a lower decrease in working capital in 2014 as compared to 2013.l

In 2013, net cash used by operations was $70,000 compared to net cash used by operations of $208,000 in 2012. The decrease was primarily the result of a decrease in inventory (excluding reserve) and an increase in accounts payable and accrued expenses, offset primarily by a decrease in customer advances and an increase in the net loss generated in 2013 compared to 2012..

The Company’s management expects that future cash flow from operations and its existing cash reserves will provide adequate liquidity for the Company’s operations and working capital requirements in 2015.

Contractual Obligations

The following table describes our contractual obligations as of December 31, 2014 (in thousands).

Off-Balance Sheet Arrangements

The Company did not have any off-balance sheet arrangements at December 31, 2014and 2013

N/A

The financial statements and supplementary financial information required to be filed under this Item are presented commencing on page 23 of the Annual Report on Form 10-K, and are incorporated herein by reference.

None

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, 2014 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:

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.

Our management assessed the effectiveness of our system of internal control over financial reporting as of December 31, 2014 In making this assessment, management used the original framework in Internal Control — Integrated Framework (1992) 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, 2014.

c) Changes in Internal Control over Financial Reporting

There have been no significant 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.

None

PART III

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders which we anticipate will be filed within 120 days after our fiscal year ended December 31, 2014.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders.

PART IV

Reference is made to the Index to Financial Statements and Financial Statement Schedule commencing on Page 21

Reference is made to the Index to Financial Statements and Financial Statement Schedule on Page 24. 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.

   * Filed herewith.

** Furnished herewith.

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.

INRAD OPTICS, INC. AND SUBSIDIARIES

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

THREE YEARS ENDED DECEMBER 31, 2014

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit Committee and Board of Directors

Inrad Optics, Inc. and Subsidiaries

Northvale, New Jersey

We have audited the accompanying consolidated balance sheets of Inrad Optics, Inc. and Subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations shareholder's equity and cash flows for the three years in the period ended December 31, 2014. We have also audited the schedule listed in Item 15(a)(2) of this Form 10-K for the years ended December 31, 2014, 2013, and 2012. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inrad Optics, Inc. and Subsidiaries as of December 31, 2014 and 2013 and the results of their operations and cash flows for the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth within.

/s/ Baker Tilly Virchow Krause, LLP

New York, New York

April 13, 2015

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

THREE YEARS ENDED DECEMBER 31, 2014

Inrad Optics, Inc. and Subsidiaries (the “Company”), formerly known as Photonic Products Group, Inc., was incorporated in the state of New Jersey and is a manufacturer of crystals, crystal devices, electro-optic and optical components, and sophisticated laser devices and instruments. The Company had manufacturing operations in Northvale, New Jersey and Sarasota, Florida. In 2014, the Sarasota operations were consolidated within the Company’s Northvale, New Jersey facility and the Florida facility was vacated as of March 31, 2014.

The Company’s principal customers include commercial instrumentation companies and OEM laser systems manufacturers, research laboratories, government agencies, and defense contractors. The Company’s products are sold domestically using its own sales staff, and in major overseas markets, principally Europe, Israel, Japan, and Asia, using independent sales agents.

As of December 31, 2014, the Company had working capital of $3,607,185 and cash and cash equivalents of $1,003,254. In 2014, the Company’s Sarasota operations were consolidated within the Company’s Northvale, New Jersey facility and the Florida facility was vacated as of March 31, 2014. Management believes based on the consolidation of 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 December 31, 2015.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts and transactions are eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates.

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. Investments with original maturity dates exceeding three months are separately disclosed on the Consolidated Balance Sheets and as cash flows from investing activities on the Consolidated Statements of Cash Flows.

Accounts receivable are carried at net realizable value, net of write-offs and allowances. The Company establishes an allowance for doubtful accounts based on estimates as to the collectability of accounts receivable. Management specifically analyzes past-due accounts receivable balances and, additionally, considers bad debt history, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Uncollectible accounts receivable are written-off when it is determined that the balance will not be collected.

Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost of manufactured goods includes material, labor and overhead.

The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues.

Plant and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets which range between five and seven years. Amortization of leasehold improvements is computed using the straight-line method over the lesser of 10 years or the remaining term of the lease including optional renewal periods, as appropriate, when failure to renew the lease imposes an economic penalty on the Company in such an amount that renewal appears to be probable. In determining the amount of the economic penalty, management considers such factors as (i) the costs associated with the physical relocation of the offices, manufacturing facility and equipment, (ii) the economic risks associated with business interruption and potential customer loss during relocation and transition to new premises (iii) the significant costs of leasehold improvements required at any new location to custom fit our specific manufacturing requirements, and (iv) the economic loss associated with abandonment of existing leasehold improvements or other assets whose value would be impaired by vacating the facility.

Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and a gain or loss is recorded.

Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

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, state or local income tax examinations by tax authorities for the years before 2011.

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.

Goodwill represents the excess of purchase price and related costs over the fair value assigned to the net tangible and identifiable assets of business acquisitions. Goodwill and intangible assets with indefinite lives are not amortized. The Company tests for impairment of goodwill and intangible assets with indefinite lives on an annual basis in December of each year, or more frequently whenever events occur or circumstances exist that indicates that impairment may exist.

Stock based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.

The Company records revenue from the sale of products and services used in the photonics industry when all four of the following criteria are met:

Losses on contracts in progress are recorded when identified.

Internal research and development costs are charged to expense as incurred.

Precious metals consist of various fixtures used in the high temperature crystal growth manufacturing process. They are valued at the lower of cost or net realizable value.

Advertising costs included in selling, general and administrative expenses were $9,900, $8,900 and $8,500 for the years ended December 31, 2014, 2013 and 2012, respectively. Advertising costs are charged to expense when the related services are incurred or related events take place.

The Company may invest its excess cash in certificates of deposits with major financial institutions. Generally, the investments range over a variety of maturity dates usually, within three to nine months, and therefore, are subject to little risk. The Company has not experienced losses related to these investments.

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, 2014, the Company’s top five customer accounts in the aggregate represented approximately 45.4% of total revenues, and the top three customers accounted for 32.4% of revenues. These three customers each represented approximately 14.0%, 10.3% and 8.1% of sales, respectively. 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.

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:

Long-lived assets, including goodwill and other intangible assets, may be measured at fair value if such assets are held for sale or if there is a determination that the asset is impaired. Managements’ determination of fair value, although highly subjective, is based on the best information available, including internal projections of future earnings and cash flows discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets, broker quotes and independent appraisals, as appropriate.

r.            New Accounting Guidance

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“ASU”) which supersedes virtually all existing revenue recognition guidance under U.S. GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised 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. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016 and prohibits early adoption. The update allows for the use of either the retrospective or modified retrospective approach of adoption. Management is currently evaluating the available transition methods and the potential impact of adoption on the Company's Financial Statements.

In April 2014, the FASB issued an ASU that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or, will have, a major effect on an entity’s operations and financial results. The new standard will be effective for annual periods beginning on or after December 15, 2014 with early adoption permitted and will be effective for the Company beginning in the first quarter of fiscal year 2016. The adoption of this standard is not expected to have a significant impact on the Company’s Financial Statements.

2.          Inventories, net

Inventories are comprised of the following and are shown net of inventory reserves of approximately $1,783,000 for 2014 and $1,666,000 for 2013:

3.          Plant and Equipment

Plant and equipment are comprised of the following:

Depreciation expense recorded by the Company totaled approximately $535,000, $508,000 and $571,000 for 2014, 2013 and 2012, respectively. Plant and equipment with a net book value of $13,305 and $5,040 was disposed of in 2014 and 2013, respectively.

At December 31, 2012, the Company had an outstanding commitment to purchase new equipment for $825,000. In 2012, the Company made a down-payment of $500,000 on the equipment. In March of 2013, an additional installment payment of $242,500 was made upon delivery of the equipment to the Company’s Northvale location. The balance of the purchase price of $82,500 was paid in the second quarter of 2013 when the equipment was placed in service. The full amount of the asset is included in Machinery and Equipment at December 31, 2014 and 2013.

The Company evaluates its property and equipment and intangible assets with finite lives for impairment when events or circumstances indicate and impairment may exist. Based on this evaluation, the Company concluded that, at December 31, 2014, its long-lived assets were not impaired.

4.          Goodwill

The carrying value of goodwill was approximately $312,000 at December 31, 2014 and 2013.

The following table summarizes goodwill balances at December 31, 2014 and 2013 and changes in the carrying amount of goodwill during the year ended December 31, 2014:

There were no changes in the carrying amount of goodwill during the years ended December 31, 2013 and 2012, respectively.

The Company tests for impairment of goodwill in December of each year. The testing for goodwill impairment initially involves an assessment of qualitative factors. This assessment serves as the basis for determining whether it is more likely than not, which is defined as greater than 50%, that the fair value of the reporting unit is less than its carrying amount, including goodwill. In assessing the qualitative factors, the Company considers factors such as economic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events that may affect the reporting unit. During 2014, the Company experienced a decline in sales and profitability and the economic and industry conditions remained uncertain. This factor was considered as part of the Company’s overall assessment.

If after assessing the totality of events and circumstances involving the reporting unit it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then it is not necessary to perform the more detailed two-step process. If the assessment determines that it is more likely than not that the fair value of the reporting unit is less that its carrying amount an additional two-step process is followed for testing impairment of the goodwill. The first step compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired as of the measurement date. Otherwise, if the carrying value exceeds the fair value, a second step must be followed to determine the level of impairment. In establishing the fair value of the reporting unit, the Company uses both a market based approach and an income based approach as part of its valuation methodology. Since quoted market prices in an active market are not separately available for the Company’s reporting units the market based method estimates the fair value of the reporting unit utilizing an industry multiple of projected earnings before interest taxes, depreciation and amortization (“EBITDA”). Due to the small capitalization value of the Company, the low trading volume of its stock and the niche market served by its products, the application of available industry comparables in establishing fair value requires a high degree of management judgment, and the actual fair value that could be realized could differ from those used to evaluate the impairment of goodwill. The income approach determines fair value based on the estimated discounted cash flows that each reporting unit is expected to generate in the future. For each method, the sensitivity of key assumptions are tested by using a range of estimates and the results of each method are corroborated as part of management’s determination of fair value.

The second step of the testing process, if necessary, involves calculating the fair value of the individual assets and liabilities of the reporting unit and measuring the implied fair value of the goodwill against its carrying value to determine whether an adjustment to the carrying value of goodwill is required. This process also has inherent risks and uncertainties and requires significant management judgment.

Upon completion of the first step, the Company concluded that it was more likely than not that the carrying value of the reporting unit exceeded its fair value and a step-two analysis was required. The step-two analysis resulted in the Company recording an impairment charge against the full carrying value of goodwill of the related reporting unit in the amount of $312,000.

The Company also evaluated its property and equipment and intangible assets for impairment. Based on the results of the tests performed, management concluded that that an impairment of its long-lived assets is not required at December 31, 2014.

5.          Intangible Assets

Intangible assets include acquired intangible assets with finite lives, consisting principally of non-contractual customer relationships, completed technology and trademarks. Intangible assets with finite lives are amortized on a straight-line basis over the assets’ estimated useful life up to 14 years. The Company evaluates whether events or circumstances have occurred indicating the carrying amount of intangible assets may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the associated undiscounted future cash flows compared to the related carrying amount of assets to determine if an impairment loss should be recognized. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

Amortization expense was approximately $79,000 for each of the years ended December 31, 2014, 2013 and 2012, respectively. Aggregate amortization for the next five years is expected to be approximately $280,000, accumulating at the rate of $79,000 per year. The weighted average remaining life of the Company’s intangible assets is approximately 3.5 years.

The following schedule details the Company’s intangible asset balance by major asset class.

6.          Related Party Transactions

On July 29, 2014, 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, 2017 from April 1, 2015. 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, 2018 to April 1, 2020.

The Company paid $112,500, 150,000 and $150,000 for interest on the notes in 2014, 2013 and 2012, respectively. Accrued interest of $37,500 is included in Accounts payable and accrued liabilities as of December 31, 2014. The accrued interest was paid in January, 2015. The Company expects to continue to make quarterly interest payments of $37,500 through the maturity dates of the notes.

7.          Other Long Term Notes

On July 26, 2012, the Company entered into a term loan agreement in the amount of $750,000 with Valley National Bank, Wayne, NJ. The loan is payable in equal month installments over five years beginning in August 2012 and bears an interest rate of 4.35% annually. The loan is secured with a security interest in new equipment, which the Company placed in service in 2013.

The Company also has a note payable to the U.S. Small Business Administration which bears interest at the rate of 4.0% and is due in 2032.

Other Long Term Notes consist of the following:

Other Long Term Notes mature as follows:

8.          Accounts Payable and Accrued Liabilities

Accounts payable and accrued expenses are comprised of the following:

9.          Income Taxes

The Company’s income tax provision consists of the following: