0001144204-12-045476.txt : 20120814 0001144204-12-045476.hdr.sgml : 20120814 20120814141158 ACCESSION NUMBER: 0001144204-12-045476 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20120630 FILED AS OF DATE: 20120814 DATE AS OF CHANGE: 20120814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Inrad Optics, Inc. CENTRAL INDEX KEY: 0000719494 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 222003247 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11668 FILM NUMBER: 121031712 BUSINESS ADDRESS: STREET 1: 181 LEGRAND AVE CITY: NORTHVALE STATE: NJ ZIP: 07647 BUSINESS PHONE: 2017671910 MAIL ADDRESS: STREET 1: 181 LEGRAND AVE CITY: NORTHVALE STATE: NJ ZIP: 07647 FORMER COMPANY: FORMER CONFORMED NAME: PHOTONIC PRODUCTS GROUP INC DATE OF NAME CHANGE: 20040421 FORMER COMPANY: FORMER CONFORMED NAME: INRAD INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INTERACTIVE RADIATION INC DATE OF NAME CHANGE: 19880804 10-Q 1 v319165_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2012

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-11668

	INRAD OPTICS, INC.
	(Exact name of registrant as specified in its charter)

New Jersey		22-2003247
(State or other jurisdiction of incorporation		(I.R.S. Employer
or organization)		Identification Number)

	181 Legrand Avenue, Northvale, NJ 07647
	(Address of principal executive offices)
	(Zip Code)

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


	(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 o

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). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the exchange Act. (Check one):

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

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

Yes ¨ No x

The number of shares of the registrant’s common stock outstanding, $0.01 par value, as of August 14, 2012 was 11,877,124

INRAD OPTICS, INC AND SUBSIDIARIES

INDEX

Part I.	CONDENSED FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements:	2

	Condensed consolidated balance sheets as of June 30, 2012 (unaudited) and December 31, 2011	2

	Condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (unaudited)	3

	Condensed consolidated statements of cash flows for the six months ended June 30, 2012 and 2011 (unaudited)	4

	Notes to condensed consolidated financial statements (unaudited)	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	14

Item 4.	Controls and Procedures	14

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	15

Item 1A.	Risk Factors	15

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15

Item 3.	Defaults upon Senior Securities	15

Item 4.	Mine Safety Disclosures	15

Item 5.	Other Information	15

Item 6.	Exhibits	15

Signatures		16

INRAD OPTICS, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2012			2011

Assets
Current assets:
Cash and cash equivalents	$	3,123,599		$	3,400,205
Accounts receivable (net of allowance for doubtful accounts of $15,000 in 2012 and 2011)		1,819,596			2,052,887
Inventories, net		3,322,809			2,909,520
Other current assets		120,758			185,298
Total current assets		8,386,762			8,547,910


Plant and equipment:
Plant and equipment, at cost		15,353,260			15,172,428
Less: Accumulated depreciation and amortization		(13,909,605	)		(13,629,311	)
Total plant and equipment		1,443,655			1,543,117

Precious Metals		474,960			474,960
Deferred Income Taxes		408,000			408,000
Goodwill		311,572			311,572
Intangible Assets, net		476,606			515,888
Other Assets		36,556			36,556

Total Assets	$	11,538,111		$	11,838,003

Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of other long term notes	$	9,800		$	9,800
Accounts payable and accrued liabilities		846,784			877,757
Customer advances		221,015			266,818
Total current liabilities		1,077,599			1,154,375

Related Party Convertible Notes Payable		2,500,000			2,500,000

Other Long Term Notes, net of current portion		320,789			325,633
Total liabilities		3,898,388			3,980,008

Commitments

Shareholders’ Equity:
Common stock: $.01 par value; 60,000,000 authorized shares; 11,881,724 shares issued at June 30, 2012 and 11,713,564 issued at December 31, 2011		118,819			117,137
Capital in excess of par value		17,982,602			17,720,514
Accumulated deficit		(10,446,748	)		(9,964,706	)
		7,654,673			7,872,945
Less - Common stock in treasury, at cost (4,600 shares)		(14,950	)		(14,950	)
Total shareholders’ equity		7,639,723			7,857,995

Total Liabilities and Shareholders’ Equity	$	11,538,111		$	11,838,003

See Notes to Condensed Consolidated Financial Statements (Unaudited)

INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011

Total revenue	$	2,880,448		$	3,221,234		$	5,721,129		$	6,462,668

Cost and expenses:
Cost of goods sold		2,312,614			2,437,174			4,413,339			4,806,071
Selling, general and administrative expenses		864,804			847,784			1,719,093			1,657,029
		3,177,418			3,284,958			6,132,432			6,463,100

Loss from operations		(296,970	)		(63,724	)		(411,303	)		(432	)

Other expense:
Interest expense—net		(36,113	)		(32,026	)		(70,739	)		(64,215	)
Gain on sale of plant and equipment		—			—			—			3,626
		(36,113	)		(32,026	)		(70,739	)		(60,589	)

Net loss before income taxes		(333,083	)		(95,750	)		(482,042	)		(61,021	)

Income tax (provision) benefit		—			—			—			—

Net loss	$	(333,083	)	$	(95,750	)	$	(482,042	)	$	(61,021	)

Net loss per common share—basic and diluted	$	(0.03	)	$	(0.01	)	$	(0.04	)	$	(0.01	)

Weighted average shares outstanding—basic and diluted		11,875,874			11,697,353			11,786,207			11,622,483

See Notes to Condensed Consolidated Financial Statements (Unaudited)

INRAD OPTICS, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	June 30,
	2012			2011
Cash flows from operating activities:
Net (loss)	$	(482,042	)	$	(61,021	)

Adjustments to reconcile net (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		319,576			435,616
401K common stock contribution		151,775			129,998
(Gain) on sale of plant and equipment		—			(3,626	)
Stock based compensation		106,646			73,498
Changes in operating assets and liabilities:
Accounts receivable		233,291			390,314
Inventories, net		(413,289	)		(256,325	)
Other current assets		64,540			(31,499	)
Other assets		—			2,736
Accounts payable and accrued liabilities		(30,973	)		(129,068	)
Customer advances		(45,803	)		102,869
Accrued Interest on Related Party Convertible Notes Payable		—			(600,000	)
Total adjustments and changes		385,763			114,513
Net cash (used in) provided by operating activities		(96,279	)		53,492

Cash flows from investing activities:
Capital expenditures		(180,832	)		(50,752	)
Purchase of precious metals		—			(105,443	)
Proceeds from sale of plant and equipment		—			6,000
Net cash (used in) investing activities		(180,832	)		(150,195	)

Cash flows from financing activities:
Redemption of restricted stock units		—			(370	)
Proceeds from exercise of stock options		5,349			19,000
Principal payments on notes payable-other		(4,844	)		(4,692	)
Net cash provided by financing activities		505			13,938

Net (decrease) in cash and cash equivalents		(276,606	)		(82,765	)

Cash and cash equivalents at beginning of period		3,400,205			4,365,045

Cash and cash equivalents at end of period	$	3,123,599		$	4,282,280

Supplemental Disclosure of Cash Flow Information:
Interest paid	$	82,000		$	682,000
Income taxes paid	$	5,000		$	—

See Notes to Condensed Consolidated Financial Statements (Unaudited)

INRAD OPTICS, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Inrad Optics, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.

The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.

Management Estimates

These unaudited condensed consolidated financial statements and related disclosures have been prepared in conformity with U.S. GAAP which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

Inventories

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

Inventories are comprised of the following and are shown net of inventory reserves:

	June 30, 2012		December 31, 2011
	(in thousands)
Raw materials	$	1,123	$	1,072
Work in process, including manufactured parts and components		1,239		984
Finished goods		961		854
	$	3,323	$	2,910

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 statements carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

For the three and six months ended June 30, 2012 and 2011, the Company did not record a current provision for either state or federal income tax due to the losses incurred for both income tax and financial reporting purposes or the availability of net operating loss carry-forwards to offset against federal and state income tax.

As of June 30, 2012, the Company has recognized a net deferred tax asset balance in the amount of $408,000, which is the portion of the total net deferred tax balance of $2,958,000 offset by a valuation allowance of $2,550,000, that the Company’s management is reasonably assured will be fully utilized 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 consistent with the plans and estimates that management uses to manage the underlying business. The net deferred tax asset as of June 30, 2012 will be maintained until management concludes that it is more likely than not that the remaining deferred tax assets will, or will not be realized. When sufficient positive evidence exists, the Company’s income tax expense will be reduced by the decrease in its valuation allowance. An increase or reversal of the Company’s valuation allowance could have a significant negative or positive impact on the Company’s future earnings.

Net (Loss) Income per Common Share

Basic net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options, stock grants and warrants using the average market prices during the period, including potential common shares issuable upon conversion of outstanding convertible notes, except if the effect on the per share amounts is anti-dilutive.

For the three and six months ended June 30, 2012, all common stock equivalents were excluded from the computation of diluted net loss per share because their effect is anti-dilutive. This included 31,111 and 51,034 common stock equivalents related to outstanding options and grants, in each respective period. In addition, there were 2,500,000 common shares and 1,875,000 warrants issuable upon conversion of outstanding related party convertible notes in each period which were anti-dilutive.

For the three and six months ended June 30, 2011, all common stock equivalents were excluded from the computation of diluted net loss per share because their effect is anti-dilutive. This included 132,205 and 103,864 common stock equivalents related to outstanding options and grants, in each respective period and 2,500,000 common stock options and 1,875,000 warrants issuable upon conversion of outstanding related party convertible notes in each period.

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 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.

Recently Adopted Accounting Standards

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles-Goodwill and Other – Testing Goodwill for Impairment (“ASU No. 2011-08”). ASU No. 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before automatically applying the two-step goodwill impairment test, which has been the required test since 2002. If an entity determines that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test to determine the amount, if any, of impaired goodwill. Otherwise, the two-step goodwill impairment test is not required. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The adoption of this guidance did not materially impact our Consolidated Financial Statements.

NOTE 2- EQUITY COMPENSATION PROGRAM AND STOCK BASED COMPENSATION

Stock Option Expense

The Company's results of operations for the three months ended June 30, 2012 and 2011 include stock-based compensation expense for stock option grants totaling $45,749 and $41,112, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations within cost of goods sold in the amount of $24,821 ($17,287 for 2011), and selling, general and administrative expenses in the amount of $20,928 ($23,825 for 2011).

The Company's results of operations for the six months ended June 30, 2012 and 2011 include stock-based compensation expense for stock option grants totaling $104,222 and $69,735, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations within cost of goods sold in the amount of $50,697 ($27,829 for 2011), and selling, general and administrative expenses in the amount of $53,525 ($41,906 for 2011).

As of June 30, 2012 and 2011, there were $278,006 and $308,133 of unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock options, which are expected to be recognized over a weighted average period of approximately 2.2 years and 2.5 years, respectively.

There were no stock options granted during the six months ended June 30, 2012. The following range of weighted-average assumptions were used to determine the fair value of stock option grants during the six months ended June 30, 2011:

	Six Months Ended
	June 30,
	2012			2011
Expected Dividend yield		—	%		0.00	%
Expected Volatility		—	%		100	%
Risk-free interest rate		—	%		3.4	%
Expected term		—			8 -10 years

Stock Option Activity

The following table represents stock options granted, exercised and forfeited during the six month period ended June 30, 2012:

Stock Options	Number of Options			Weighted Average Exercise Price per Option		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value

Outstanding at January 1, 2012		1,079,676		$	1.02		6.7	$	63,105
Granted		—			—
Exercised		(10,700	)		0.50
Expired/Forfeited		(136,153	)		1.06

Outstanding at June 30, 2012		932,823		$	1.02		7.5	$	—

Exercisable at June 30, 2012		533,423		$	1.05		6.1	$	—

The following table represents non-vested stock options granted, vested and forfeited for the six months ended June 30, 2012.

	Options			Weighted-Average Grant-Date Fair Value
Non-vested - January 1, 2012		501,590		$	0.92
Granted		—			—
Vested		(101,523	)	$	1.10
Forfeited		(667	)	$	0.89
Non-vested – June 30, 2012		399,400		$	0.88

The total fair value of options vested during the six months ended June 30, 2012 and 2011 was $111,662 and $110,035, respectively.

Restricted Stock Unit Awards

There were no grants of restricted stock units granted under the 2010 Equity Compensation Program during the six months ended June 30, 2012.

During the six months ended June 30, 2011 there were 15,000 restricted stock units granted under the 2010 Equity Compensation Program. These grants vest over a three year period at the rate of one-third per year, contingent on continued employment or service during the vesting period.

The Company's results of operations for the three months ended June 30, 2012 and 2011 include stock-based compensation expense for restricted stock unit grants totaling $1,212 and $2,488, respectively, and such amounts have been included in the accompanying Consolidated Statements of Operations within selling, general and administrative expenses.

The Company's results of operations for the six months ended June 30, 2012 and 2011 include stock-based compensation expense for restricted stock unit grants totaling $2,424 and $3,763, respectively, and such amounts have been included in the accompanying Consolidated Statements of Operations within selling, general and administrative expenses.

A summary of the Company’s non-vested restricted stock units at June 30, 2012 is presented below:

	Restricted Stock Units			Weighted-Average Grant-Date Fair Value
Non-vested - January 1, 2012		15,000		$	0.97
Granted		—			—
Vested		(5,000	)	$	0.97
Forfeited		—			—
Non-vested – June 30, 2012		10,000		$	0.97

NOTE 3- STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2012, the Company issued 152,460 common shares to the Inrad Optics 401k plan as a match to employee contributions for 2011.

In addition, 10,700 common shares were issued for proceeds of $5,349 in connection with the exercise of stock options during the six month period and an additional 5,000 common shares were issued on vesting of restricted stock awards.

NOTE 4- SUBSEQUENT EVENT

On July 27, 2012, the Company entered into a term loan agreement in the amount of $750,000 with Valley National Bank, Wayne, NJ. The loan is repayable in equal month installments over 5 years beginning in August 2012 and bears an interest rate of 4.35% annually. The loan is secured with a Note and a security interest in new equipment to be acquired by the Company.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Caution Regarding Forward Looking Statements

This Quarterly 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 Quarterly 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, projected or anticipated benefits of acquisitions made by the Company, 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 which may affect the Company’s results include, but are not limited to, the risks and uncertainties discussed in Items 1A, 7 and 7A of the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 30, 2012. 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.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 of the accompanying consolidated financial statements and further discussed in our annual financial statements included in our annual report on Form 10-K for the year ended December 31, 2011. In preparing our condensed consolidated financial statements, we made estimates and judgments that affect the results of our operations and the value of assets and liabilities we report. These include estimates used in evaluating goodwill and intangibles for impairment such as market multiples used in determining the fair value of reporting units, discount rates applicable in determining net present values of future cash flows, projections of future sales, earnings and cash flow and capital expenditures. It also includes estimates about the amount and timing of future taxable income in determining the Company’s valuation allowance for deferred income tax assets. Our actual results may differ from these estimates under different assumptions or conditions.

For additional information regarding our critical accounting policies and estimates, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report filed with the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2011.

Results of Operations

Inrad Optics, Inc.’s business falls into two main categories: Optical Components and Laser System Devices and Instrumentation.

The Optical Components segment of the business is 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 System 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 the manufactured crystal based devices and associated instrumentation. The majority of crystals, crystal components and laser devices manufactured are used in laser systems, defense EO systems, medical lasers and R&D applications by engineers within corporations, universities and national laboratories.

The Company operates manufacturing facilities in New Jersey and Florida.

Revenue

Sales for the three months ended June 30, 2012 were $2,880,000, a decrease of 10.6% compared with $3,221,000 for the three months ended June 30, 2011. Sales for the six months ended June 30, 2012 were $5,721,000, a decrease of 11.5% compared with $6,463,000 for the six months ended June 30, 2011. This was mainly due to a decrease in shipments to customers in the defense/aerospace market and process control & metrology markets. This was partially offset by an increase in shipments to customers in the laser systems market. The decline in sales to the defense market was spread across most of the Company’s existing customers.

Sales in the Optical Components category decreased 22.3% for the six months ended June 30, 2012 compared with the prior year. This was partially offset by sales of Laser Systems Devices and Instrumentation which increased 19.5% over the same period.

Sales to major customers, who represent more than 10% of period sales, were down as a percentage of total sales in the first six months of 2012 compared with the same period in 2011. This was due to lower sales to two large defense customers and one large commercial process control & metrology customer compared to the same period in the prior year.

The Company’s top five customers represented 43.4% of total sales in the six month period ended June 30, 2012, down from 58.8% in the same period in 2011.

Orders during the first six months of 2012 increased slightly to $6.3 million compared to $6.2 million in the first six months of 2011.

Order backlog increased to $5.6 million at June 30, 2012, up over a backlog of $5.0 million at December 31, 2011 and $5.1 million at June 30, 2011.

Cost of Goods Sold

For the three months ended June 30, 2012, cost of goods sold increased as a percentage of sales to 80.3% compared to 75.7% in 2011. For the six months ended June 30, 2012, cost of goods sold increased as a percentage of sales to 77.1% compared to 74.4% in the same period in 2011.

Cost of goods sold was $2,313,000 for the three months ended June 30, 2012 compared to $2,437,000 in the same quarter in 2011, a decrease of $124,000 or 5.1%. For the six months ended June 30, 2012, cost of goods sold decreased by $393,000 or 8.2% to $4,413,000 compared to $4,806,000 in the same period in 2011. The decrease was mainly attributable to the impact of lower sales activity.

Despite the overall decrease in cost of goods sold, manufacturing wages and salaries including related fringe benefits, increased by 6.4% and 4.1%, respectively, compared to last year, reflecting strategic additions to head-count this year.

Material costs decreased 6.2% and 11.7% during the quarter and six months ended June 30, 2012, respectively, compared with the same periods in 2011, mainly due to reduced sales this year.

Gross margin decreased for the three and six month period ended June 30, 2012 as a result of the factors discussed above. Gross margin in the second quarter of 2012 was $568,000 or 19.7% versus $784,000 or 24.3% in the same period in 2011. For the six months ended June 30, 2012, gross margin decreased to $1,308,000 or 22.9% compared with $1,657,000 or 25.6% in the comparable period in 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A” expenses) in the three months and six months ended June 30, 2012 were $865,000 or 30.0% of sales and $1,719,000 or 30.0% of sales, respectively, compared to $848,000 or 26.3% of sales and $1,657,000 or 25.6% of sales, respectively, for the same periods in 2011. The increase is mainly due to an increase in salaries and wages and other personnel related costs compared to the previous period. The balance of SG&A expenses were relatively unchanged on a period over period basis as the Company has continued to closely manage discretionary spending while making strategic investments where appropriate.

(Loss) from Operations

The Company had an operating loss of $297,000 in the three months ended June 30, 2012 compared with an operating loss of $64,000 in the three months ended June 30, 2011. For the six months ended June 30, 2012, the Company had an operating loss of $411,000 compared with an operating loss of $432 in the same period last year. The operating losses in 2012 primarily reflect the impact of lower sales levels on the Company’s relatively fixed cost structure.

Other Income and Expense

For the three months ended June 30, 2012, net interest expense was $36,000, up slightly from $32,000 in the same period in 2011. For the six months ended June 30, 2012, net interest expense was $71,000, up slightly from $61,000 in the same period in 2011.

Interest expense for the three and six months ended June 30, 2012 was $41,000 and $82,000, respectively, which was unchanged from the comparable periods in 2011. Interest income during the three months ended June 30, 2012 was $5,000 and $10,000, respectively, compared with $9,000 and $18,000, respectively, in the comparable periods in 2011, and results from lower average cash balances in interest bearing accounts over the comparable periods.

In the first quarter of 2011, the Company sold surplus equipment and recorded a gain of $4,000 on the sale.

Income Taxes

As of June 30, 2012, the Company has recognized a net deferred tax asset balance in the amount of $408,000, which is the portion of the total net deferred tax balance of $2,958,000 offset by a valuation allowance of $2,550,000, that the Company’s management is reasonably assured will be fully utilized 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 consistent with the plans and estimates that management uses to manage the underlying business. The net deferred tax asset, as of June 30, 2012 will be maintained until management concludes that it is more likely than not that the remaining deferred tax assets will or will not be realized. When sufficient positive evidence exists, the Company’s income tax expense will be reduced by the decrease in its valuation allowance. An increase or reversal of the Company’s valuation allowance could have a significant negative or positive impact on the Company’s future earnings.

Net (Loss)

For the three and six months ended June 30, 2012, the Company had a net loss of $333,000 and $482,000, respectively, compared to a net loss of $96,000 and $61,000, respectively, for the same periods in 2011.

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 the exercise of stock options. The Company’s major use of cash in the past two years has been for the payment of accrued and current interest on convertible debt, the servicing of long term debt and for capital expenditures.

As of June 30, 2012 and December 31, 2011, we had cash and cash equivalents of $3,124,000 and $3,400,000, respectively.

On July 27, 2012, the Company entered into a term loan agreement with Valley National Bank, Wayne, NJ, in the amount of $750,000. The loan is repayable in equal monthly installments over 5 years beginning in August 2012 and bears an interest rate of 4.35% annually. The loan is secured with a Note and a security interest in new equipment to be acquired by the Company. The proceeds are targeted for the acquisition of equipment which will enhance the Company’s thin film coating capabilities.

We believe that existing cash resources held by the Company and anticipated to be generated from future operating activities are sufficient to meet working capital requirements, anticipated capital expenditures, debt servicing payments and other contractual obligations over next twelve months.

On July 31, 2012, 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, 2015 from April 1, 2013. 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 and expire on April 1, 2018.

The accrued interest balance was paid in full as of December 31, 2011 and the Company paid current interest of $75,000 in the six months ended June 30, 2012. At a minimum, the Company expects to make interest payments in each remaining quarter of 2012 and in each quarter through the maturity date of the notes to satisfy the amounts of interest accruing in each quarter.

The following table summarizes net cash provided by (used in) operating, investing and financing activities for the six months ended June 30, 2012 and 2011:

	Six Months Ended
	June 30,
	2012			2011
	(In thousands)

Net cash (used in) provided by operating activities	$	(96	)	$	53
Net cash (used in) investing activities		(181	)		(150	)
Net cash provided by financing activities		-			14
Net (decrease) in cash and cash equivalents	$	(277	)	$	(83	)

Net cash used in operating activities was $96,000 for the six months ended June 30, 2012 compared to net cash provided by operating activities of $53,000 in the same period last year. The decrease in net cash from operating activities in the first six months of 2012 compared to 2011 resulted primarily from the higher net loss generated in the current period

In addition, working capital requirements in first six months of 2012 increased by approximately $216,000 compared with the same period in 2011. In particular, inventory levels increased by $413,000 at June 30, 2012 compared to an increase of $256,000 in the same period in 2011.

The increase in inventory levels is primarily attributable to the demand and timing of deliveries for orders placed in the current period. In addition, accounts receivable decreased by $233,000 at June 30, 2012 compared to a decrease of $390,000 in the same period in 2011 principally due to lower levels of accounts receivable during the six months ended June 30, 2012 as a result of lower sales levels during the period.

In the six months ended June 30, 2011, the Company paid $600,000 of accrued interest on convertible notes.

Non-cash items consist of depreciation and amortization, stock based compensation expense and the Company’s annual 401K matching stock contribution for the six months ended June 30, 2012 and 2011.

Net cash used in investing activities was $181,000 during the six months ended June 30, 2012 versus $150,000 last year. Capital expenditures for the six months ended June 30, 2012 and 2011 were $181,000 and $156,000, respectively. The expenditures in 2012 were primarily incurred to refurbish operating facilities in New Jersey and Florida and to purchase manufacturing equipment. In 2011, expenditures included $105,000 of custom specialized tools fabricated from precious metals to provide additional capacity for crystal growth.

Net cash provided by financing activities during the six months ended June 30, 2012 totaled $500 compared to $14,000 in the comparable period in 2011. This consisted primarily of proceeds from the exercise of stock options for $5,500 in 2012 and $19,000 in 2011, offset by principal payments on long term notes of $5,000 in each period, respectively.

Overall, the Company had a net decrease in cash and cash equivalents of $277,000 in the six months ended June 30, 2012 compared with a decrease of $83,000 in the corresponding period last year.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company and not required to provide the information required under this item.

ITEM 4. CONTROLS AND PROCEDURES

a. Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2012 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (2) is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

b. Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UNDER SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

4.1	Subordinated Convertible Promissory Note dated April 1, 2011 held by Clarex, Ltd.

4.2	Subordinated Convertible Promissory Note dated April 1, 2011 held by Welland, Ltd.
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.

31.1	Certificate of the Registrant’s Chief Executive Officer, Joseph J. Rutherford, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certificate of the Registrant’s Chief Financial Officer, William J. Foote, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certificate of the Registrant’s Chief Executive Officer, Joseph J. Rutherford, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certificate of the Registrant’s Chief Financial Officer, William J. Foote, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following financial information from Inrad Optics, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to the Condensed Consolidated Financial Statements.*

Users of this interactive data file are advised pursuant to Rule 406T of Regulations S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these Sections.

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 Optics, Inc.

	By:	/s/Joseph J. Rutherford
		Joseph J. Rutherford
		President and Chief Executive Officer

	By:	/s/ William J. Foote
		William J. Foote
		Chief Financial Officer,
		Secretary and Treasurer

Date: August 14, 2012

EX-4.1 2 v319165_ex4-1.htm EXHIBIT 4.1

Exhibit 4.1

THIS CONVERTIBLE PROMISSORY NOTE HAS BEEN, AND ANY SHARES ISSUED UPON CONVERSION PURSUANT TO THE TERMS HEREOF WILL BE, ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS CONVERTIBLE PROMISSORY NOTE, AND ANY SECURITIES ISSUED UPON CONVERSION PURSUANT TO THIS NOTE, HAVE NOT BEEN REGISTERED UNDER THE ACT OR ANY STATE SECURITIES LAW, AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF THE ACT OR THOSE LAWS OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE.

SUBORDINATED CONVERTIBLE PROMISSORY NOTE

THIS NOTE IS ISSUED IN SUBSTITUTION FOR, AND SUPERSEDES, THE ORIGINAL NOTE DATED OCTOBER 31, 2003 AND ALL NOTES SUBSEQUENTLY ISSUED TO EXTEND THE ORIGINAL TERM.

Principal Amount: $1,500,000

July 31, 2012

FOR VALUE RECEIVED, INRAD OPTICS, INC. (FORMERLY PHOTONIC PRODUCTS GROUP INC., AND INRAD, INC.), a New Jersey corporation (hereinafter called "Issuer"), hereby promises to pay to the order of CLAREX, LTD. and its successors and assigns (hereinafter called the "Holder"), at such address as the Holder may designate in writing to Issuer, the principal sum of ONE MILLION DOLLARS FIVE HUNDRED THOUSAND ($1,500,000) plus all accrued interest owing hereunder in lawful money of the United States of America on or before the Maturity Date (as defined below), unless this Convertible Promissory Note (the "Note") is converted by the Holder as set forth herein. For purposes of this Note, "Maturity Date" shall mean April 1, 2015.

Interest. Interest shall accrue on the unpaid principal amount of this Note at the rate of six percent (6%) per annum and shall be due and payable on the Maturity Date. Interest shall be computed on the basis of a 360 day year for the actual number of days elapsed.

Optional Prepayment; Order of Payments. Issuer may prepay this Note at any time, in whole or in part, without premium or penalty; provided, however, Issuer shall provide to the Holder written notice at least ten (10) business days prior to such prepayment. All payments made on account of this Note shall be applied first to the payment of any costs of enforcement then due hereunder, second to the payment of accrued and unpaid interest then due hereunder, and the remainder, if any, shall be applied to the unpaid principal balance of this Note.

Event of Default Defined; Acceleration of Maturity. If one or more of the following events ("Events of Default") shall have occurred:

a default in the payment of all or any part of the principal or interest due under this Note as and when the same shall become due and payable, at maturity, by declaration as permitted hereunder, upon acceleration or otherwise;

Issuer shall merge or consolidate with or into any other person or entity, sell, transfer, lease or otherwise dispose of all or any substantial portion of its assets or adopt a plan of liquidation or dissolution; provided, however, that Issuer shall have the right to merge with any other entity so long as Issuer shall be the surviving entity in any such merger;

Issuer shall have applied for or consented to the appointment of a custodian, receiver, trustee or liquidator, or other court-appointed fiduciary of all or a substantial part of its properties; or a custodian, receiver, trustee or liquidator or other court appointed fiduciary shall have been appointed with the consent of Issuer; or Issuer is generally not paying its debts as they become due or is insolvent, or has made a general assignment for the benefits of its creditors; or Issuer files a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with its creditors or seeking to take advantage of any insolvency law, or an answer admitting the material allegations of a petition in any bankruptcy, reorganization or insolvency proceeding or has taken action for the purpose of effecting any of the foregoing; or if, within sixty (60) days after the commencement of any proceeding against Issuer seeking any reorganization, rehabilitation, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the Federal bankruptcy code or similar order under future similar legislation, the appointment of any trustee, receiver, custodian, liquidator, or other court-appointed fiduciary of Issuer or of all or any substantial part of its properties, such order or appointment shall not have been vacated or stayed on appeal or if, within sixty (60) days after the expiration of any such stay, such order or appointment shall not have been vacated (all such events, collectively "Insolvency Events");

Then Holder, by notice in writing to Issuer (the "Acceleration Notice"), may declare the principal amount of this Note and all accrued but unpaid interest to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable; provided that if an Insolvency Event occurs, the principal amount of this Note and all accrued but unpaid interest shall become and be immediately due and payable without any declaration or other act on the part of the Holder.

Conversion. The Holder may, at any time prior to the earlier of the Maturity Date or the prepayment of this Note by Issuer, convert all or a portion of the principal and accrued interest then outstanding under this Note into one Unit for each dollar converted (or an aggregate of 1,500,000 Units, exclusive of accrued interest) with each Unit consisting of one fully paid and non-assessable shares of Issuer’s Common Stock (the "Common Stock") and one Warrants in the form of Exhibit A hereto to acquire 0.75 shares of Issuer’s Common Stock at a price of $1.35 up to April 1, 2018 (i.e. if this Note were converted in full, for principal amount other than accrued interest, the Holder would receive 1,500,000 shares of Common Stock and 1,125,000 Warrants). Such conversion shall be effected by the Holder by sending a written notice of conversion and this Note to Issuer for cancellation and issuance of the number of shares of Common Stock and Warrants into which this Note is being converted. In the event this Note is being converted in part, a replacement Note representing the unconverted portion of this Note shall be delivered to the Holder. Upon conversion of this Note, only whole shares of Common Stock shall be issued. Any remainder due hereunder which is insufficient to purchase a whole share of Common Stock shall be paid by Issuer in cash.

4.1 Subdivision or Combination of Common Stock. In case Issuer shall at any time subdivide (by any stock split, stock dividend or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and, conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

4.2 Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of Issuer (other than in connection with a merger or other reorganization in which Issuer is not the surviving entity) shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization or reclassification, lawful and adequate provisions shall be made whereby the Holder shall thereupon have the right to receive upon the conversion of this Note, upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore receivable upon the conversion of this Note, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the shares of Common Stock immediately theretofore receivable upon such conversion had such reorganization or reclassification not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights.

4.3 Notice of Adjustment. Upon any adjustment of the Conversion Price, then and in each such case Issuer shall give written notice thereof, by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, addressed to the Holder at the address of the Holder, as provided to Issuer, which notice shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method upon which such calculation is based.

4.4 Due Issuance of Shares Upon Conversion. Issuer covenants and agrees that all shares of Common Stock or any such other securities which may be issued upon any whole or partial conversion of this Note will, upon issuance, be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof.

4.5 Stock to be Reserved. Issuer will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon the conversion of this Note as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion hereof. Issuer will not take any action which results in any adjustment of the Conversion Price if the total number of shares of Common Stock issued and issuable after such action upon conversion of this Note would, when added to the number of shares of Common Stock then reserved for issuance, exceed the total number of shares of Common Stock then authorized by Issuer’s Certificate of Incorporation.

5. Subordination. The Issuer hereby agrees, and the Holder of this Note by its acceptance agrees, that the payment of the principal of and interest on the Note is hereby expressly made subordinate and junior in right of payment, to the extent set forth in the following paragraphs (a), (b) and (c), to the prior payment in full of all Senior Debt of the Issuer, whether such Senior Debt, except as provided in Section 5 below, is incurred prior to, on or after the date hereof:

(a) In the event of insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings relative to the Issuer or to any of the property of the Issuer, or in the event or any proceedings for voluntary liquidation, dissolution, or other winding-up of the Issuer, whether or not involving insolvency or bankruptcy, then the holders of Senior Debt shall be entitled to receive payment in full of all principal of and interest on all Senior Debt before the Holder of this Note shall be entitled to receive any payment on account of principal or interest on this Note, and to that end the holders of Senior Debt shall be entitled to receive for application in payment thereof any payment or distribution of any kind or character, whether in cash or property or securities, which may be payable or deliverable in any such proceedings in respect of this Note.

(b) In the event that this Note is declared due and payable prior to its stated maturity, by reason of the occurrence of an Event of Default hereunder (under circumstances when the provisions of the foregoing paragraph (a) shall not be applicable), then all principal of and interest on all Senior Debt outstanding at the time of such declaration shall first be paid in full, before any payment on account of principal or interest is made upon this Note.

(c) The Issuer may make payments and, subject to Section 1 of this Note, prepayments of the principal of and interest of this Note if, at the time of the payment and immediately after giving effect thereto, (i) there exists no default in any payment with respect to any Senior Debt and (ii) there shall not have occurred an event of default (other than a default in the payment of amounts due thereon) with respect to any Senior Debt, as defined in the instrument under which the same is outstanding, permitting the holders thereof to accelerate the maturity thereof, other than an event of default which shall have been cured or waived or shall have ceased to exist. Should the Holder of this Note, while there exists a default or an event of default as provided in the immediately preceding sentence, and after being notified by the holder of the Senior Debt of the default, receive any such payment, or should the Holder of this Note receive any distribution in bankruptcy, dissolution, or similar insolvency proceedings in regard to the Issuer, the Holder of the Note will hold such payment or distribution in trust for the holder of the Senior Debt and will pay over such amounts to such holder to apply to the Senior Debt until the same is paid in full.

The provisions of this Section 5 are for the purpose of defining the relative rights of the holders of Senior Debt and the Holder of the Note against the Issuer and its property. Nothing herein shall impair, as between the Issuer and the Holder of this Note, the obligation of the Issuer, which is unconditional and absolute, to pay to the Holder the principal and interest in accordance with the terms and the provisions hereof; nor shall anything herein prevent the Holder of this Note from exercising all remedies otherwise permitted by applicable law or hereunder upon default under this Note, subject to the rights, if any, under this Section 5 of holders of Senior Debt to receive cash, property, stock or obligation otherwise payable or deliverable to the Holder of this Note. The Issuer acknowledges and agrees that the rights of the Holder of this Note with respect to the Issuer’s cash, property, rights and other assets of any kind are senior and prior to the rights of any holder of capital stock of the Issuer arising from such capital stock.

(d) Definition. “Senior Debt” shall mean the principal of, interest on and, if applicable, any premium on (i) the debt of the Issuer outstanding as of the date hereof, (ii) additional indebtedness incurred by the Issuer after date hereof for money borrowed from a bank, savings and loan association trust Issuer, insurance Issuer or similar financial institution, (iii) purchase money secured debt, (iv) obligations of the Issuer as lessee under leases of real or personal property which are treated as capital lease obligations under generally accepted accounting principles, and (v) any deferrals, renewals, re-financings or extensions of any of the foregoing.

6. Miscellaneous.

6.1 Binding Effect; Assignability. This Note shall be binding upon Issuer, its successors and its assigns, and shall inure to the benefit of Holder, its successors and its assigns. This Note is transferable or assignable by the Holder or any transferee of the Holder only to an Affiliate or a partner, or an heir, administrator, executor or successor of the Holder; provided that such transfer or assignment is made in compliance with the Act and any applicable state and foreign securities laws.

6.2 Governing Law; Jurisdiction; Venue. This Note has been executed in and shall be governed by the laws of the State of New Jersey. Issuer irrevocably submits to the exclusive jurisdiction of the courts of the State of New Jersey which will be the exclusive jurisdiction for disputes arising under the Note and the United States District Court for the District of New Jersey for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Note.

IN WITNESS WHEREOF, Issuer has caused this Note to be signed in its name by its duly authorized officer and its corporate seal to be affixed hereto.

	INRAD OPTICS, INC.

		By:

		William J. Foote,
	Chief Financial Officer, Secretary and Treasurer

	Acknowledged and accepted on behalf of CLAREX, LTD

	By:			Date:

	By:			Date:

EX-4.2 3 v319165_ex4-2.htm EXHIBIT 4.2

Exhibit 4.2

SUBORDINATED CONVERTIBLE PROMISSORY NOTE

THIS NOTE IS ISSUED IN SUBSTITUTION FOR, AND SUPERSEDES, THE ORIGINAL NOTE DATED DECEMBER 31, 2002 AND ALL NOTES SUBSEQUENTLY ISSUED TO EXTEND THE ORIGINAL TERM.

Principal Amount: $1,000,000

July 31, 2012

FOR VALUE RECEIVED, INRAD OPTICS, INC. (FORMERLY PHOTONIC PRODUCTS GROUP INC., AND INRAD, INC.), a New Jersey corporation (hereinafter called "Issuer"), hereby promises to pay to the order of WELLAND, LTD. and its successors and assigns (hereinafter called the "Holder"), at such address as the Holder may designate in writing to Issuer, the principal sum of ONE MILLION ($1,000,000) plus all accrued interest owing hereunder in lawful money of the United States of America on or before the Maturity Date (as defined below), unless this Convertible Promissory Note (the "Note") is converted by the Holder as set forth herein. For purposes of this Note, "Maturity Date" shall mean April 1, 2015.

Event of Default Defined; Acceleration of Maturity. If one or more of the following events ("Events of Default") shall have occurred:

Conversion. The Holder may, at any time prior to the earlier of the Maturity Date or the prepayment of this Note by Issuer, convert all or a portion of the principal and accrued interest then outstanding under this Note into one Unit for each dollar converted (or an aggregate of 1,000,000 Units, exclusive of accrued interest) with each Unit consisting of one fully paid and non-assessable shares of Issuer’s Common Stock (the "Common Stock") and one Warrants in the form of Exhibit A hereto to acquire 0.75 shares of Issuer’s Common Stock at a price of $1.35 up to April 1, 2018 (i.e. if this Note were converted in full, for principal amount other than accrued interest, the Holder would receive 1,000,000 shares of Common Stock and 750,000 Warrants). Such conversion shall be effected by the Holder by sending a written notice of conversion and this Note to Issuer for cancellation and issuance of the number of shares of Common Stock and Warrants into which this Note is being converted. In the event this Note is being converted in part, a replacement Note representing the unconverted portion of this Note shall be delivered to the Holder. Upon conversion of this Note, only whole shares of Common Stock shall be issued. Any remainder due hereunder which is insufficient to purchase a whole share of Common Stock shall be paid by Issuer in cash.

6. Miscellaneous.

IN WITNESS WHEREOF, Issuer has caused this Note to be signed in its name by its duly authorized officer and its corporate seal to be affixed hereto.

	INRAD OPTICS, INC.

	By:
	William J. Foote,
	Chief Financial Officer, Secretary and Treasurer

	Acknowledged and accepted on behalf of WELLAND, LTD

	By:			Date:

	By:			Date:

EX-31.1 4 v319165_ex31-1.htm EXHIBIT 31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph J. Rutherford certify that:

I have reviewed the quarterly report on Form 10-Q of Inrad Optics, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d -15(f)) for the registrants and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function(s):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 14, 2012		/s/ Joseph J. Rutherford
	President and Chief Executive Officer

A signed original of this written statement required by Section 302 has been provided to Inrad Optics, Inc. and will be retained by Inrad Optics, Inc. and furnished to the Securities Exchange Commission or its staff upon request.

EX-31.2 5 v319165_ex31-2.htm EXHIBIT 31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William J. Foote certify that:

I have reviewed the quarterly report on Form 10-Q of Inrad Optics, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 14, 2012	/s/ William J. Foote

	Chief Financial Officer,

	Secretary and Treasurer

EX-32.1 6 v319165_ex32-1.htm EXHIBIT 32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Inrad Optics, Inc. on Form 10-Q for the period ended June 30, 2012 filed with the Securities and Exchange Commission (the “Report”), I, Joseph J. Rutherford, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.

Dated: August 14, 2012

		/s/ Joseph J. Rutherford

	President and Chief Executive Officer

This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and has not been filed as part of the Report or as a separate disclosure document.

A signed original of this written statement required by Section 906 has been provided to Inrad Optics, Inc. and will be retained by Inrad Optics, Inc. and furnished to the Securities Exchange Commission or its staff upon request.

EX-32.2 7 v319165_ex32-2.htm EXHIBIT 32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Inrad Optics, Inc. on Form 10-Q for the period ended June 30, 2012 filed with the Securities and Exchange Commission (the “Report”), I, William J. Foote, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)

Dated: August 14, 2012

		/s/ William J. Foote

	Chief Financial Officer,

	Secretary and Treasurer

This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and has not been filed as part of the Report or as a separate disclosure document.