UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-11668
INRAD, Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2003247
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
181 Legrand Avenue, Northvale, NJ 07647
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(Address of principal executive offices)
(Zip Code)
(201) 767-1910
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(Registrant's telephone number, including area code)
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(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Common shares of stock outstanding as of September 30, 2000:
4,878,078 shares
<PAGE>
INRAD, Inc.
INDEX
Page Number
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Part I. FINANCIAL INFORMATION...............................................1
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000,
(unaudited) and December 31, 1999...........................1
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2000 and 1999 (unaudited) ..2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 (unaudited) .......3
Notes to Consolidated Financial Statements..................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................5
Changes in Securities and Use of Proceeds...................7
Part II. OTHER INFORMATION..................................................8
Item 4. Results of Annual shareholder's Meeting.....................8
Item 6. Exhibits and Reports on Form 8-K............................8
Signatures ................................................................9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INRAD, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999*
----------- -----------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,901,085 $ 377,169
Accounts receivable, net 1,076,028 741,558
Inventories 2,028,664 1,336,285
Unbilled contract costs 532,596 460,713
Other current assets 67,450 91,970
----------- -----------
Total current assets 5,605,823 3,007,695
----------- -----------
Plant and equipment,
Plant and equipment at cost 6,176,914 5,543,244
Less: Accumulated depreciation
and amortization (5,090,408) (4,898,951)
----------- -----------
Total plant and equipment 1,086,506 644,293
Precious metals 307,265 306,396
Other assets 192,589 154,843
----------- -----------
Total assets $ 7,192,183 $ 4,113,227
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Current obligations under capital leases $ 112,129 $ 0
Accounts payable and accrued liabilities 985,285 603,458
Advances from customers 11,056 152,608
Other current liabilities 11,013 12,000
----------- -----------
Total current liabilities 1,119,482 768,066
Secured Convertible Promissory Notes 0 250,000
Subordinated Convertible Notes 0 100,000
Lease Commitments 261,232 0
----------- -----------
Total liabilities 1,380,714 1,118,066
----------- -----------
Shareholders' equity:
Preferred Stock, Series A: $1,000 par value; 500 shares issued and outstanding
At September 30, 2000 and December 31, 1999 500,000 500,000
Preferred Stock, Series B: no par value; 1,485 shares issued and outstanding
at September 30, 2000 and 0 shares issued and outstanding
at December 31, 1999 1,485,000 0
Common stock: $.01 par value; 4,882,678 shares issued at
September 30, 2000 and 4,100,678 shares issued at December 31, 1999 48,827 41,007
Capital in excess of par value 9,013,773 8,237,718
Accumulated deficit (5,221,181) (5,768,614)
----------- -----------
5,826,419 3,010,111
Less - Common stock in treasury,
at cost (4,600 shares at September 30, 2000 and
at December 31, 1999) (14,950) (14,950)
----------- -----------
Total shareholders' equity 5,811,468 2,995,161
----------- -----------
Total liabilities and shareholders' equity $ 7,192,183 $ 4,113,227
=========== ===========
</TABLE>
* Derived from Audited Financial Statements
See Notes to Consolidated Financial Statements.
1
<PAGE>
INRAD, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 1,736,144 $ 1,118,110 $ 4,317,305 $ 3,918,146
Contract R & D 226,137 234,039 841,092 798,242
----------- ----------- ----------- -----------
Total Revenue 1,962,281 1,352,149 5,158,397 4,716,388
----------- ----------- ----------- -----------
Cost and Expenses:
Cost of goods sold 730,067 827,401 2,182,054 2,900,527
Contract R & D expenses 316,281 214,962 855,202 779,138
Selling, general & administrative expenses 603,935 357,540 1,508,762 1,093,697
Internal R & D expenses 58,303 105,390 340,367 203,692
----------- ----------- ----------- -----------
Total Cost and Expenses 1,708,586 1,505,293 4,886,385 4,977,054
----------- ----------- ----------- -----------
Operating profit (loss) 253,695 (153,144) 272,012 (260,666)
Other income (expense):
Gain on sale of Tunable IR Laser 325,000 0 325,000 0
Interest expense (4,374) (7,713) (15,797) (26,188)
Interest & other income, net 8,738 1,157 16,218 3,595
----------- ----------- ----------- -----------
Net profit (loss) 583,059 (159,700) 597,433 (283,259)
Accumulated deficit, beginning of period (5,754,240) (5,913,962) (5,768,614) (5,790,403)
Preferred stock dividend on Series A (50,000) 0 (50,000) 0
----------- ----------- ----------- -----------
Accumulated deficit, end of period $(5,221,181) $(6,073,662) $(5,221,181) $(6,073,662)
----------- ----------- ----------- -----------
Net income (loss) per common share - basic 0.12 (0.04) 0.14 (0.07)
==== ===== ==== =====
Net income (loss) per common share - diluted 0.09 (0.04) 0.11 (0.07)
==== ===== ==== =====
Weighted average shares outstanding 4,878,078 4,100,678 4,254,153 4,100,678
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
INRAD, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended September 30
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $ 597,433 $ (283,259)
----------- -----------
Adjustments to reconcile net loss to cash
Provided (used in) by operating activities:
Depreciation and amortization 191,457 265,500
Changes in assets and liabilities:
Accounts receivable (334,470) (146,278)
Inventories (692,379) 217,600
Unbilled contract costs (72,423) (67,855)
Other current assets 24,520 (12,428)
Precious metals (869) (4,392)
Other assets (37,746) (2,538)
Accounts payable and accrued liabilities 493,956 93,038
Advances from customers (141,012) (138,110)
Other current liabilities (987) (8,000)
----------- -----------
Total adjustments (569,953) 196,537
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Net cash provided by (used in) operating activities 27,480 (86,722)
----------- -----------
Cash flows from investing activities:
Capital expenditures (372,441) (211,599)
----------- -----------
Net cash used in investing activities (372,441) (211,599)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 1,485,000 500,000
Proceeds from conversion of derivative securities 383,876 0
Principal payments of note payable - Bank 0 (107,500)
Principal payments of capital lease obligations 0 (6,471)
Net cash provided by financing activities 1,868,876 386,029
----------- -----------
Net increase in cash and cash equivalents 1,523,915 87,708
Cash and cash equivalents at beginning of period 377,169 208,028
----------- -----------
Cash and cash equivalents at end of period $ 1,901,084 $ 295,736
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
INRAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of INRAD,
Inc. (the "Company") reflect all adjustments, which are of a normal recurring
nature, and disclosures which, in the opinion of management, are necessary for a
fair statement of results for the interim periods. It is suggested that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements as of December 31, 1999 and 1998 and for the
years then ended and notes thereto included in the Company's report on Form
10-K, filed with the Securities and Exchange Commission.
Inventory Valuation
Inventories, as of September 30, 2000, are stated at the lower of cost or market
and include material, labor and factory overhead. Cost is determined by the
first-in, first-out ("FIFO") method. Interim inventories, as of September 30,
1999, as well as cost of goods sold were computed by using the gross profit
method of interim inventory valuation and applying an estimated gross profit
percentage based on the actual values for the preceding fiscal year.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. A
valuation allowance is established when deferred tax assets are not likely to be
realized.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share is computed using the weighted
average number of common shares outstanding. The potential dilutive effect of
securities which are common share equivalents, options, warrants, and
convertible preferred stock, have been excluded from the diluted computation,
for the period ended September 30, 1999, because their effect is antidilutive.
NOTE 2 - INVENTORIES AND COST OF GOODS SOLD
For the nine-month period ended September 30, 2000, the Company used 50.5% as
its cost of goods sold percentage. The percentage was calculated based on
pricing of an interim physical inventory, adjusted for lower of cost or market.
For the previous year, 1999, the actual cost of goods sold percentage was 68.9%.
The Company believes 50.5% better approximates the expected 2000 annual cost of
goods sold percentage based on estimated profitability of actual sales through
September 30, 2000 and the anticipated annual level of product shipments and
related costs.
The increase in gross margins is directly attributable to increased
manufacturing activity that is the result of unprecedented increases in both
orders, sales and backlog. The increases have been accomplished with without a
corresponding increase in manufacturing related costs. Fixed costs make up the
largest portion of overall manufacturing costs and therefore an increase in the
overall productivity result in higher gross margins.
For the nine-month period ended September 30, 1999, the Company used 74% as its
estimated cost of goods sold percentage.
4
<PAGE>
NOTE 3 - DEBT CONVERSION
Secured Convertible Promissory Note
On June 15, 2000 the secured convertible promissory note was converted into
200,000 shares of INRAD, Inc. common stock.
Subordinated Convertible Note
On March 15, 2000 the subordinated convertible note was converted into 80,000
shares of INRAD, Inc. common stock.
NOTE 4 - EXERCISE OF WARRANTS AND OPTIONS
On June 15, 2000 345,000 warrants were exercised and 345,000 shares of INRAD,
Inc. were issued for capital received of $314,375. In addition, $38,875 was
generated through the exercise of stock options, resulting in total proceeds
from conversions of $383,875.
NOTE 5 - PREFERRED STOCK
The company sold 1,485 shares of its Series B 10% Convertible Preferred Stock
for $1,485,000 during the month of September, 2000. This was a private
placement, with a limited number of accredited investors participating. The
original offering of 2000 shares is expected to be fully subscribed during the
remainder of the fiscal year. The Series B Preferred Stock is convertible into
Common Stock of the Company at the rate of $2.50 per share. Preferred holders of
shares issued in connection with the offering are entitled to cumulative
dividends that are payable in shares of the Company's Common Stock at the rate
of 10% per annum.
NOTE 5 - COMMITMENTS
There are in effect employment agreements with three officers of the Company.
Early termination of the agreements would result in a severance payment of
between six and twelve months of base compensation. The minimum aggregate
payouts under such contracts approximate $319,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information contains forward-looking statements, including
statements with respect to the revenues to be realized from existing backlog
orders and ability to generate sufficient cash flow in the future. The Company
wishes to insure that meaningful cautionary statements accompany any
forward-looking statements in order to comply with the terms of the safe harbor
provided by the Private Securities Reform Act of 1995. Actual results may vary
from these forward-looking statements due to the following factors: inability to
maintain customer relationships and/or add new customers; unforeseen overhead
expenses that may adversely affect financial results or other inability to
operate with a positive cash flow. Readers are further cautioned that the
Company's financial results can vary from quarter to quarter, and the financial
results reported for the first nine months may not necessarily be indicative of
future results. The foregoing is not intended to be an exhaustive list of all
factors, which could cause actual results to differ materially from those
expressed in forward-looking statements made by the Company. For more
information about the Company, please review the Company's most recent Form 10-K
filed with the Securities & Exchange Commission.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's unaudited consolidated financial statements presented elsewhere
herein. The discussion of results should not be construed to imply any
conclusion that such results will necessarily continue in the future.
5
<PAGE>
Net Product Sales
Product sales for the third quarter of 2000 were $1,736,140 vs. $1,118,110 for
the same period in 1999; up 55%. Product sales for the first nine months of 2000
were $4,317,305 vs. $3,918,146 in 1999; up 10%.
Product bookings for the quarter were $2,280,840 vs. $1,235,000 for the same
period last year; up 85%. Product bookings for the first nine months of 2000
were $5,647,840 vs. $3,822,000 for the same period last year; up 48%.
Orders for Crystals and components and OEM Custom Optics continued to rise
steadily, driven by strong demand from OEM customers in the Telecomm and
Semiconductor Equipment sectors. Orders from these photonics industry sectors
combined continued their 100%+ compound growth rate begun in 1999. Component
orders from industrial laser system manufacturers rose by 15%, reflecting
pick-up in market share from competitors. Increased orders in these areas more
than offset the decline in new orders for the Company's legacy laser system
accessories, the 5-050 Harmonic Generator for ultra-fast lasers and the AT-III
Autotracker for dye lasers. First year sales of the Company's new Autocorrelator
instruments were strong.
The book-to bill ratio for the first nine months of 2000 was 1.3 vs. 1.0 for the
first nine months of 1999.
Backlog at September 30, 2000 was $2,776,540 compared to $1,438,000 on December
31, 1999 and $1,149,000 on September 30, 1999.
Cost of Goods Sold
For the nine months ended September 30, 2000, the Company used 50.5% as its cost
of goods sold percentage, reflecting further improvement related to the overall
increase in business volume. For the previous year, 1999, the actual cost of
goods sold percentage was 68.9%. For the first nine months of last year, the
Company had used 74% as its estimated cost of goods sold percentage.
The Company believes 50.5% better approximates the expected 2000 annual cost of
goods sold percentage based upon interim physical inventories, profitability of
actual sales through September 30, 2000, and the anticipated annual level of
product shipments and related costs for the balance of the year.
Contract Research and Development
Contract research and development revenues were $841,092 for the nine months
ended September 30, 2000, compared to $798,242 for the nine months of last year.
Related contract research and development expenditures, including allocated
indirect costs, for the nine months ended September 30, 2000 were $855,202 vs.
$779,138 for the same period last year. Contract R&D revenues for the third
quarter were $226,137 vs. $234,000 for the same quarter one year ago.
The Company's backlog of contract R&D was $494,000 at September 30, 2000,
compared with $1,109,000 at December 31, 1999 and $905,000 at September 30,
1999.
A $63,237 add-on to an R&D contract was the only new booking in this category
during the first nine months of 2000. Contract R&D bookings during the first
nine months of 1999 were $475,000.
The Company expects to focus its future efforts on internal technology programs
closely aligned with it core business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $415,000 or 38%, for the
first nine months of 2000 compared with the same period in the prior year. Both
Selling and G&A expenses increased due to increases in personnel and related
expenses.
Internal Research and Development Expenses
Research and development expenditures for the quarter ended September 30, 2000
were $58,000 compared to $105,400 for the same quarter last year. IR&D
expenditures for the first nine months of this year were $340,000 vs. $203,700
for the same period last year.
6
<PAGE>
In August the Company sold its tunable mid-IR laser technology to an instrument
systems company, part of the Company's strategy to concentrate its resources on
its core business. This sale was responsible for curtailment of what had been a
large portion of IR&D expenditures in the prior year and the first half of this
year.
Operating Profit
Operating profit for the three months ended September 30, 2000 was $253,700,
compared with a loss of $(153,100) for the same period last year. Operating
income for the first nine months of 2000, was $272,000 vs. a loss of $(260,700)
for the first nine months of 1999.
Interest Expense
Interest expense was $15,800 and $26,200 for the nine months ended September 30,
2000 and September 30, 1999, respectively. Interest expense is less in 2000
because on March 15, 2000 a $100,000, 10% subordinated convertible note was
converted to common stock and a loan payable to Chase Manhattan Bank was paid in
full in September 1999. Also, in June 2000, a 7% $250,000 secured convertible
debenture was converted to common stock.
Net Income
Net income for the nine months ended September 30, 2000 was $597,400, or $0.14
per share basic and $0.11 fully diluted, vs. a loss of $(283,000) or ($0.07) per
share for the first nine months of last year. Year to date net income includes
the $325,000 proceeds (recorded as "Other Income") from the Company's sales of
its mid-infrared tunable laser technology to an instrument systems company,
reported in August.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter the company received $325,000 and an equity derivative for
the sale of its mid-infrared tunable laser technology. Also the company
generated positive cash flow from earnings of $27,478.
Capital expenditures, net of lease proceeds and including internal labor and
overhead charges, for the nine months ended September 30, 2000 and 1999 were
$372,000 and $212,000, respectively. The Company expects the rate of capital
expenditures to increase during the year. The increases are a direct result of
increases in production orders and are required to increase capacity and to
allow for greater product run rates. As a result, it is anticipated that
additional capital infusion will take place in the following quarter to fund
these capital requirements.
Changes in Securities and Use of Proceeds
The Company sold 1,485 shares of its Series B 10% Convertible Preferred Stock
for $1,485,000 during September, 2000. The major participant to date is an
institution that was also a shareholder prior to the offering. A limited amount
of accredited investors and certain members of senior management of the Company
also subscribed to the offering. It is anticipated that the initial $2,000,000
offering will be fully subscribed during the fourth quarter of 2000. The Series
B Preferred Stock is convertible into Common Stock of the Company at a rate of
$2.50 per share. The issuance of the Series B Preferred Stock was, and the
issuance of the underlying Common Stock, if converted, will be, exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as
not involving a public offering.
7
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. RESULTS OF ANNUAL SHAREHOLDERS' MEETING
The following proposals were submitted for shareholder approval at the annual
shareholders' meeting held August 14, 2000. All proposals were ratified by a
vote of a majority of the shareholders.
1. Election of five directors to serve until the next Annual Shareholders'
meeting.
2. Approval to increase the number of Common Shares authorized.
3. Approval of the INRAD, Inc. 2000 Equity Compensation program.
4. Approval to amend the INRAD, Inc. Key employee compensation program.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
11. An exhibit showing the computation of per-share earnings is omitted
because the computation can be clearly determined from the material
contained in this Quarterly Report on Form 10-Q.
27. Financial Data Schedule.
(B) Reports on Form 8-K:
None.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INRAD, Inc.
By: /s/ Thomas H. Lenagh
---------------------------------
Thomas H. Lenagh
Chairman of the Board
By: /s/ Daniel Lehrfeld
---------------------------------
Daniel Lehrfeld
President, Chief Executive Officer
By: /s/ William S. Miraglia
---------------------------------
William S. Miraglia
Chief Financial Officer
Date: November 13, 2000
9
