See Notes to Condensed Consolidated Financial Statements (Unaudited)

PHOTONIC PRODUCTS GROUP, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

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

 

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 Rule 10-01 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, 2009.

 

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

 

These unaudited condensed 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 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:

 

 

For the three and sixnine months ended JuneSeptember 30, 2010, the Company did not record a current provision for either state tax or federal alternative minimum tax due to the losses incurred for both income tax and financial reporting purposes.

 

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.  Deferred tax liabilities and assets 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.

 

At JuneSeptember 30, 2010, the Company had a total net deferred tax asset balance of $3,233,000,$3,141,000, an increase of $376,000$284,000 from December 31, 2009.  The Company has increased the valuation allowance to $2,825,000$2,733,000 to fully offset the current period increase in the deferred tax asset.

 

As of JuneSeptember 30, 2010, the Company has recognized a portion of the net deferred tax assets in the amount of $408,000 which the Company’s management is reasonably assured will be fully utilized in future periods.  The Company believes that the current year’s losses were caused by the currentrecent economic conditions that are not expected to recur in extended future periods.conditions.  In evaluating the Company’s ability to recover deferred tax assets in future periods, management considers the available positive and negative factors, including the Company’s recent operating results, the existence of cumulative losses and near term forecasts of future taxable income that is consistent with the plans and estimates that management is using to manage the underlying business.  The Company’s valuation allowance as of JuneSeptember 30, 2010 will be maintained until management concludes that it is more likely than not that the remaining deferred tax assets will be realized.  When sufficient positive evidence exists, the Company’s income tax expense willmay be reduced by thea 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.

 

ForIn the three and six months ended June 30,third quarter of 2009, due to the negative impact of the economic recession on the Company’s profitability, the Company recorded a current taxre-evaluated the likelihood that the benefit of $27,000deferred tax assets would be realized in future periods and a net current tax liability of $26,000, respectively.  In addition,accordingly, the Company reducedincreased its deferred tax assetestimate of the valuation allowance and recognized a deferred tax benefit of $129,000 and $418,000, for the three and six months ended June 30, 2009.  This resulted in a total net benefit of $156,000 for the three months ended June 30, 2009 and $392,000 for the six months ended June 30, 2009 after offsetting the tax benefit against the deferred tax liability.assets and recorded a deferred tax provision in the amount of $392,000.  This offset the net tax benefit recorded in the first six months of 2009 and reduced the net deferred tax asset to $408,000.

 

 

The Company computes and presents net (loss) income per common share in accordance with FASB ASC Topic 260, “Earnings Per Share”.  Basic (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 (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.

 

 

 

The Company accounts for stock-based compensation pursuant to FASB ASC Topic 505, “Share-Based Payment,” which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value.

 

 

 

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and timing of the transfers.  Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using Level 3 fair value measurements (significant observable inputs).  This guidance is effective for the Company on or after January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which does not become effective until fiscal years beginning after December 15, 2010.  Adoption of this new guidance is for disclosure purposes only and did not have a material effect on our consolidated financial position, results of operations or cash flows.

 

 

 

 

The Company's results of operations for the three months ended JuneSeptember 30, 2010 and 2009 include stock-based compensation expense for stock option grants totaling $29,766 and $22,881,$14,905, respectively.  Such amounts have been included in the accompanying Consolidated Statements of Operations within cost of goods sold in the amount of $10,830 ($1,8292,162 for 2009), and selling, general and administrative expenses in the amount of $18,936 ($21,05212,743 for 2009).

 

The Company’s results of operations for the sixnine months ended JuneSeptember 30, 2010 and 2009 include stock-based compensation expense for stock option grants totaling $59,532$89,298 and $35,366,$50,275, respectively.  Such amounts have been included in the accompanying Consolidated Statements of Operations within cost of goods sold in the amount of $21,660$32,490 ($3,2696,098 for 2009), and selling, general and administrative expenses in the amount of $37,872$56,808 ($32,09944,177 for 2009).

 

As of JuneSeptember 30, 2010 and 2009, there were $248,640$230,138 and $133,563$118,658 of unrecognized compensation costs, net of estimated forfeitures, related to non-vested stock options, which are expected to be recognized over a weighted average period of approximately 2.52.3 years and 2.75 years, respectively.

 

The following range of weighted-average assumptions were used to determine the fair value of stock option grants during the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively:

 

 

For the sixnine months ended JuneSeptember 30, 2010, there were 5,00010,000 options granted with a weighted average estimated fair value of $1.00 and a weighted average exercise price of $1.00 which was equal to the closing market price on the date of the grant.grants.  The options have a term of 10 years and vest ratably over the first three years following the grant date.

 

The following table represents stock options granted, exercised, and forfeited during the sixnine month period ended JuneSeptember 30, 2010:

 

The following table represents non-vested stock options granted, vested and forfeited for the sixnine months ended JuneSeptember 30, 2010.

 

The total fair value of options vested during the sixnine months ended JuneSeptember 30, 2010 and 2009 was $60,000 and $49,000, respectively.

 

 

There were no grants of restricted stock units under this plan during the sixnine months ended JuneSeptember 30, 2010 and 2009.

 

Restricted stock unit awards generally vest over a three year period contingent on continued employment or service over the vesting period.

 

The Company's results of operations for the three months ended JuneSeptember 30, 2010 and 2009 include stock-based compensation expense for restricted stock unit grants totaling $11,613 and $16,112,$8,938, respectively.  Such amounts have been included in the accompanying Consolidated Statements of Operations within cost of goods sold in the amount of $1,335 ($1,3361,333 for 2009), and selling, general and administrative expenses in the amount of $10,278 ($14,7767,605 for 2009).

 

The Company’s results of operations for the sixnine months ended JuneSeptember 30, 2010 and 2009 include stock-based compensation expense for restricted stock unit grants totaling $20,553$32,166 and $27,220,$36,158, respectively.  Such amounts have been included in the accompanying Consolidated Statements of Operations within cost of goods sold in the amount of $2,670$4,005 ($2,6694,002 for 2009), and selling, general and administrative expenses in the amount of $17,883$28,161 ($24,55132,156 for 2009).

 

A summary of the Company’s non-vested restricted stock units at JuneSeptember 30, 2010 is presented below:

 

NOTE 3- STOCKHOLDERS’ EQUITY

 

During the sixnine months ended JuneSeptember 30, 2010, the Company issued 103,403 common shares to the PPGI 401k401(k) plan as a match to employee contributions made during 2009.  In addition, 10,000 common shares were issued for proceeds of $8,500 in connection with a stock option exercise and 4,5795,906 shares of common stock were issued, net of vested shares tendered to cover withholding taxes, on the vesting of employee stock grants during the sixnine months ended JuneSeptember 30, 2010.

 

 

 

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 Annual Report may not occur.  Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of the Company’s plans or strategies, 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”“anticipate”, “will”“believe”, “continue”, “estimate”, “expect”, “believe”“may”, “anticipate”“intend”, “plan:, “project”,  “plan”, “intend”, “estimate”, and “continue”“will”, 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, 2009, as filed with the Securities and Exchange Commission on March 31, 2010.  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.

 

 

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, 2009.  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, 2009.

 

 

Photonic Products Group, Inc.’s business includes two general product categories: Optical Components (including standard and custom optical components and assemblies, crystals and crystal components), and Laser Accessories (including wavelength conversion instruments that employ nonlinear or electro-optical crystals to perform the function of wavelength conversion, or optical switching, and optical Q-switches). Its optical components product lines and services are brought to market through three brands: INRAD, Laser Optics and MRC Optics (“MRC”).  Laser accessories are manufactured and sold by INRAD.  The Company operates manufacturing facilities in Florida and New Jersey.

 

 

Sales for the three months ended JuneSeptember 30, 2010 were $2,164,000$2,479,000 compared with $2,620,000$2,665,000 in the secondthird quarter of 2009, down 17.4%7.0%.  Sales for the sixnine months ended JuneSeptember 30, 2010 were $4,973,000$7,451,000 compared with sales of $5,436,000$8,100,000 for the sixnine months ended JuneSeptember 30, 2009, down 8.5%8.0%.

 

Overall, the Company’s sales continue to reflect reduced spending by the defense/aerospace customers we serve and the lingering effects of the economic recession on many of our commercial customers.

 

Sales of custom optical components in the secondthird quarter and year to date declined by approximately 29.5%8.4% and 19.5%15.9%, respectively, compared to the same periods in 2009, reflecting lower sales activity of this product segment across all three business brands.  Offsetting this, sales of laser accessories in the secondthird quarter and year to date increased by 36.2%4.3% and 40.4%26.4%, respectively, compared to the same periods in the prior year, as demand for our laser systems and related components increased.

 

The Company’s sales base has been historically comprised of a small number of large volume accounts.  Sales volumes for each account tend to fluctuate from quarter to quarter as orders are scheduled for delivery.  In order to diversify our customer base and mitigate the impact of these customers,fluctuations, the Company’s sales and marketing efforts continuehave been expanded to focus on developingdevelop new markets and products and adding new customers to its existing base.products.  The Company’s efforts in this area will take some time to achieve significant results but to-date progress has been shown with several new accounts, international as well asand domestic having been added to our customer base.accounts.

Product backlog was $5.6 million at September 30, 2010 compared to backlog of $4.3 million at September 30, 2009.

 

 

For the three months ended JuneSeptember 30, 2010, cost of goods sold was $1,909,000$1,984,000 or 88.2%80.0% of sales compared to $2,201,000$2,058,000 or 84.0%77.2% of sales, for the same period last year.  For the sixnine months ended JuneSeptember 30, 2010, cost of goods sold was $4,176,000$6,160,000 or 84.0%82.7% of sales compared to $4,635,000$6,693,000 or 85.3%82.6% for the sixnine months ended JuneSeptember 30, 2009.

 

In the three and sixnine months ended JuneSeptember 30, 2010, manufacturing wages and salaries and related fringe benefits fell by 6.2%8.0% and 11.7%10.5% compared with the same period in 2009 mainly as a result of the Company’s work force reductions that were initiated at the end of the first quarter of 2009, as well as, additional staff reductions in the second quarterand third quarters of 2009.

 

Material costs, as a percentage of sales, increased slightly due to the shift in product sales mix in the first sixnine months of 2010 compared to 2009 although the purchase price of many components and supplies remained relatively stable year over year.

 

Gross margin in the secondthird quarter of 2010 was $256,000$495,000 or 11.8%20.0%, compared with $419,000$607,000 or 16.0%22.8% in the comparable period of 2009, reflecting the factors discussed above.  For the sixnine months ended JuneSeptember 30, 2010, the gross margin was $796,000$1,291,000 or 16.0%17.3%, compared with $801,000$1,407,000 or 14.7%17.4% for the sixnine months ended JuneSeptember 30, 2009.

 

 

Selling, general and administrative expenses (“SG&A” expenses) in the three months ended JuneSeptember 30, 2010 were $870,000$742,000 or 40.2%29.9% of sales compared to $880,000$747,000 or 33.6%28.0% of sales for the three months ended JuneSeptember 30, 2009.  Despite the slight decrease in the dollar amount of SG&A expenses, the expenses increased as a percentage of sales as the sales decline outpaced the expense savings during the current quarter compared to the same quarter in the prior year.

 

For the sixnine months ended JuneSeptember 30, 2010, SG&A expenses were $1,650,000$2,391,000 or 33.2%32.1% of sales compared to $1,787,000$2,533,000 or 32.9%31.3% for the sixnine months ended JuneSeptember 30, 2009.  This represents a decrease of $137,000$142,000 or 7.7%5.6% which is comprised mainly of a decrease in SG&A salaries and wages and fringe benefits expense of $90,000$93,000 reflecting personnel reductions implemented in the first quarter of 2009 and additional reductions in the second quarter of 2009.

 

 

The Company had an operating loss of $614,000$247,000 in the three months ended JuneSeptember 30, 2010 compared with an operating loss of $461,000 inand $1,100,000 for the nine months ended September 30, 2010.  During the three months ended JuneSeptember 30, 2009, primarily reflecting the decrease in sales.  ForCompany recorded a non-cash charge for the six months ended June 30, 2010,impairment of goodwill of $1,558,000.  Excluding the charge for goodwill impairment, the Company had an operating loss of $853,000$140,000 for the three months ended September 30, 2019 and $1,126,000 for the nine months ended September 30, 2019.  Despite an 8% reduction in sales in the nine months ended 2010 compared with anto the same period last year, the Company’s operating loss of $986,000 which was an improvement of $133,000 despite the decreasepositively affected by savings in sales,manufacturing and SG&A salaries, wages and fringe benefits, as discussed above.above, and was slightly less than the comparable period last year.

 

 

For the three months ended JuneSeptember 30, 2010, net interest expense was $35,000, a slight increase from $32,000 in the same period last year.  For the sixnine months ended JuneSeptember 30 2010, net interest expense was $70,000, up from net interest expense of $65,000$105,000, versus $97,000 in the comparable period last year.  The increase was primarily the result of a decrease in offsetting interest earned, as lower bank interest rates were slightly offset by higher cash balances periodsin 2010 compared to last the secondthird quarter and sixnine months ended JuneSeptember 30, 2009.

 

 

For the three and sixnine months ended JuneSeptember 30, 2010, the Company did not record a provision for current state tax or federal alternative minimum tax as the Company incurred a loss for both income tax and financial reporting purposes.

 

ForIn the three months ended JuneSeptember 30, 2009, the Company recorded a netre-evaluated the likelihood that the benefit of its deferred tax benefitassets would be realized in future periods and accordingly, the Company increased its estimate of $156,000, comprised ofthe valuation allowance against the deferred tax assets and recorded a deferred tax benefitprovision of $129,000 resulting from the reduction to its deferred tax asset valuation and a current tax benefit of $27,000.$392,000.

 

For the sixnine months ended JuneSeptember 30, 2009, the Company recordeddid not record a net deferredprovision for current state or federal alternative minimum tax benefit of $392,000, comprised of a deferred tax benefit of $418,000 resulting from the reduction to its deferred tax asset valuation offset by a net current tax liability of $26,000 after offsetting the tax benefit against the tax liability.

 

 

The Company had a net loss of $649,000$282,000 and $923,000,$1,205,000, respectively, for the three and sixnine months ended JuneSeptember 30, 2010 compared with a net loss of $337,000$2,122,000 and $651,000$2,774,000 for the three and sixnine months ended JuneSeptember 30, 2009.  The increase2009, which included a non-cash charge of $1,558,000 for goodwill impairment.  Excluding the non-cash charge for goodwill in 2009, the net loss primarily reflect thelosses incurred in 2010 improved despite lower sales volumes netmainly as a result of the positive effect of lower manufacturing labor costs on profit margins and the impact of SG&A cost reductions, as discussed above.  Additionally, the Company recorded a net income tax benefit of $156,000 and $392,000 in the three and six months ended June 30, 2009, which favorably impacted the net loss in those periods.

 

 

 

The following table summarizes the net cash provided and used by operating, investing and financing activities for the sixnine months ended JuneSeptember 30, 2010 and 2009:

 

Net cash flow provided by operating activities was $455,000$297,000 for the sixnine months ended JuneSeptember 30, 2010, compared with net cash flow provided by operating activities of $485,000$451,000 in the same period last year.  The slight decrease in operating cash flows was primarily due to several factors, but primarily resulted from the improvementchanges in the Company’s net loss of $923,000 in 2010 compared to a loss of $1,043,000 before the deferred tax benefit of $392,000 recorded in the comparable period last year, and improved working capital levels related to lower reductions in accounts payable and customer advances, offset by lower reductions in inventory and accounts receivable levels and an increase in inventories, as compared to the comparable period last year.

 

In the sixnine months ended JuneSeptember 30, 2010, accounts payable balances increased which provided $183,000$596,000 of cash flow in 2010 compared to a decrease in accounts payable balances in the comparable period in 2009 which was a use of cash in the amount of $458,000.$425,000.  The increase in 2010 primarily reflects an increase in purchasing activity required as a result of an increase in bookings while the decrease in 2009 primarily reflected the decrease in purchasing activity in 2009 due to a decline in sales volume in 2009 compared to 2008.

 

Inventory levels decreasedincreased by $136,000$336,000 to $2,130,000$2,602,000 at JuneSeptember 30, 2010 compared to a decrease of $279,000$292,000 in the sixnine month period ended JuneSeptember 30, 2009.  The decreaseincrease in inventory iswas primarily attributablerelated to higher production levels required to meet the timing of bookings and the overall declineincrease an increase in booking levels during 2010 and 2009.

 

In the first sixnine months of 2010, reductions in accounts receivable provided $590,000$443,000 of cash flow.  Accounts receivable balances fell from $1,928,000 at December 31, 2009 to $1,338,000$1,485,000 at JuneSeptember 30, 2010.  While accounts receivable balances did continue to decrease in 2010, they did not decrease at the same rate as compared to the $1,322,000$1,094,000 decrease in accounts receivable in the comparable period in 2009.  The decrease in 2009 was primarily the result of the decline in sales volume in 2009 compared to 2008.

 

Customer advances decreased by $227,000$232,000 to $119,000$114,000 in the first sixnine months of 2010.  Customer advances vary with the timing of orders received from customers.  In the comparable period in 2009, customer advances decreased by $335,000$341,000 to $122,000.$346,000.

 

A Subordinated Convertible Promissory Note for $1,000,000, bearing an interest rate of 6% per annum and issued to Clarex Limited is due on April 1, 2011.  Interest accrues yearly and along with principal may be converted into common stock, (and/or securities convertible into common shares).  The note is convertible into 1,000,000 units consisting of 1,000,000 shares of common stock and warrants which allow the holder, at their option, to acquire an additional 750,000 shares of common stock at a price of $1.35 per share.  The warrants have an expiration date of April 1, 2014.

 

A second Subordinated Convertible Promissory Note for $1,500,000, bearing an interest rate of 6% per annum also matures on April 1, 2011.  Interest accrues yearly and along with principal may be converted into common stock, and/or securities convertible into common stock.  The note is convertible into 1,500,000 units consisting of 1,500,000 shares of common stock and warrants to acquire 1,125,000 additional shares of common stock at a price of $1.35 per share up to April 1, 2014.2014, at the option of the holder.  The holder of the note is a major shareholder of the Company.

 

The total amount of $2,500,000 in Subordinated Convertible Promissory Notes due on April 1, 2011 have been reclassified from long term debt to current liabilities on the balance sheet at JuneSeptember 30, 2010.

 

Capital expenditures for the sixnine months ended JuneSeptember 30, 2010 were $65,000, up$124,000, down from $48,000$139,000 last year.  Management continued its review program for planned capital expenditures to identify and defer expenditures, where practical, to minimize the impact on the Company’s cash flows over the balance of the year.  In the sixnine months ended JuneSeptember 30, 2009, the Company redeemed $800,000 of certificates of deposit, and purchased precious metal manufacturing tools for $53,000 offset by the receipt of $16,000 for similar precious metal tools that were sold as part of the purchase.

 

Net cash provided by financing activities during the first sixnine months of 2010 totaled $4,000$1,000 and consisted of principal payments of $4,000$6,000 on other long term notes offset by the proceeds from the exercise of stock options in the amount of $8,000.$7,000.  In the first sixnine months of 2009, net cash used inprovided by financing activities was $16,000$7,000 and consisted of principal payments of $132,000$134,000 on other long term notes, offset by the proceeds from the exercise of stock options and warrants in the amount of $116,000.$141,000.

 

The Company had a net increase in cash and cash equivalents of $394,000$174,000 in the sixnine months ended JuneSeptember 30, 2010 compared with an increase of $1,184,000$1,082,000 in the corresponding period last year.

 

Cash and cash equivalents at JuneSeptember 30, 2010 were $4,463,000.  At$4,243,000 compared to $4,069,000 at December 31, 2009, the Company had $4,069,000 in cash and cash equivalents.2009.