Item 1. Financial Statements
INFINITE GROUP, INC.
Consolidated
Balance Sheets
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
(Unaudited)
|
|
|
2012
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
20,065
|
|
|
$
|
56,158
|
|
Accounts receivable, net of allowance of $70,000
|
|
|
646,405
|
|
|
|
585,322
|
|
Prepaid expenses and other current assets
|
|
|
17,489
|
|
|
|
22,127
|
|
Total current assets
|
|
|
683,959
|
|
|
|
663,607
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
36,755
|
|
|
|
38,062
|
|
|
|
|
|
|
|
|
|
|
Investment in equity securities
|
|
|
95,000
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Deposits and other assets
|
|
|
2,318
|
|
|
|
4,318
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
818,032
|
|
|
$
|
705,987
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
359,167
|
|
|
$
|
281,017
|
|
Accrued payroll
|
|
|
357,812
|
|
|
|
356,164
|
|
Accrued interest payable
|
|
|
430,434
|
|
|
|
408,799
|
|
Accrued retirement
|
|
|
197,692
|
|
|
|
220,783
|
|
Accrued expenses – other
|
|
|
26,321
|
|
|
|
60,015
|
|
Current maturities
of long-term obligations-banks and other
|
|
|
20,796
|
|
|
|
22,867
|
|
Notes payable
|
|
|
30,000
|
|
|
|
30,000
|
|
Notes payable-related parties
|
|
|
142,000
|
|
|
|
149,000
|
|
Total current liabilities
|
|
|
1,564,222
|
|
|
|
1,528,645
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations:
|
|
|
|
|
|
|
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
Banks and other
|
|
|
1,534,099
|
|
|
|
1,544,593
|
|
Related parties
|
|
|
501,324
|
|
|
|
501,324
|
|
Total liabilities
|
|
|
3,599,645
|
|
|
|
3,574,562
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficiency:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 60,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
25,961,883 shares issued and outstanding
|
|
|
25,961
|
|
|
|
25,961
|
|
Additional paid-in capital
|
|
|
30,215,319
|
|
|
|
30,164,403
|
|
Accumulated deficit
|
|
|
(33,022,893
|
)
|
|
|
(33,058,939
|
)
|
Total stockholders’ deficiency
|
|
|
(2,781,613
|
)
|
|
|
(2,868,575
|
)
|
Total liabilities and stockholders’ deficiency
|
|
$
|
818,032
|
|
|
$
|
705,987
|
|
See notes to unaudited consolidated financial statements.
INFINITE GROUP, INC.
Consolidated
Statements of Operations (Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,150,745
|
|
|
$
|
2,115,812
|
|
|
$
|
4,250,704
|
|
|
$
|
4,646,668
|
|
Cost of services
|
|
|
1,599,952
|
|
|
|
1,554,321
|
|
|
|
3,101,801
|
|
|
|
3,448,859
|
|
Gross profit
|
|
|
550,793
|
|
|
|
561,491
|
|
|
|
1,148,903
|
|
|
|
1,197,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
245,827
|
|
|
|
251,612
|
|
|
|
465,683
|
|
|
|
664,313
|
|
Defined benefit pension plan
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(480,000
|
)
|
Selling
|
|
|
206,168
|
|
|
|
280,866
|
|
|
|
487,245
|
|
|
|
568,378
|
|
Total costs and expenses
|
|
|
451,995
|
|
|
|
532,478
|
|
|
|
952,928
|
|
|
|
752,691
|
|
Operating income
|
|
|
98,798
|
|
|
|
29,013
|
|
|
|
195,975
|
|
|
|
445,118
|
|
Loss on equity investment
|
|
|
(5,000
|
)
|
|
|
0
|
|
|
|
(5,000
|
)
|
|
|
0
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
(11,645
|
)
|
|
|
(13,108
|
)
|
|
|
(23,270
|
)
|
|
|
(26,710
|
)
|
Other
|
|
|
(66,871
|
)
|
|
|
(65,651
|
)
|
|
|
(131,659
|
)
|
|
|
(133,152
|
)
|
Total interest expense
|
|
|
(78,516
|
)
|
|
|
(78,759
|
)
|
|
|
(154,929
|
)
|
|
|
(159,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,282
|
|
|
$
|
(49,746
|
)
|
|
$
|
36,046
|
|
|
$
|
285,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic and diluted
|
|
$
|
.00
|
|
|
$
|
(.00
|
)
|
|
$
|
.00
|
|
|
$
|
.01
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
Diluted
|
|
|
27,088,524
|
|
|
|
25,961,883
|
|
|
|
27,145,185
|
|
|
|
26,831,690
|
|
See notes to unaudited consolidated financial statements.
INFINITE
GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
36,046
|
|
|
$
|
285,256
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
50,916
|
|
|
|
39,261
|
|
Depreciation
|
|
|
9,434
|
|
|
|
18,322
|
|
Loss on equity investment
|
|
|
5,000
|
|
|
|
0
|
|
Reduction of accrued retirement and pension
|
|
|
0
|
|
|
|
(480,000
|
)
|
Decrease (increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(145,250
|
)
|
|
|
259,565
|
|
Other assets
|
|
|
6,638
|
|
|
|
(850
|
)
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
62,317
|
|
|
|
(182,356
|
)
|
Accrued expenses
|
|
|
(10,411
|
)
|
|
|
52,622
|
|
Accrued retirement
|
|
|
(23,091
|
)
|
|
|
23,293
|
|
Net cash (used) provided by operating activities
|
|
|
(8,401
|
)
|
|
|
15,113
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(8,127
|
)
|
|
|
(8,184
|
)
|
Net cash used by investing activities
|
|
|
(8,127
|
)
|
|
|
(8,184
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of notes payable-banks and other
|
|
|
(12,565
|
)
|
|
|
(16,281
|
)
|
Repayments of note payable-related parties
|
|
|
(7,000
|
)
|
|
|
(24,000
|
)
|
Net cash used by financing activities
|
|
|
(19,565
|
)
|
|
|
(40,281
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(36,093
|
)
|
|
|
(33,352
|
)
|
Cash - beginning of period
|
|
|
56,158
|
|
|
|
36,894
|
|
Cash - end of period
|
|
$
|
20,065
|
|
|
$
|
3,542
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
133,535
|
|
|
$
|
162,774
|
|
Income taxes
|
|
$
|
0
|
|
|
$
|
0
|
|
See notes to unaudited
consolidated financial statements.
INFINITE GROUP, INC.
Notes to Consolidated Financial Statements
–
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated
financial statements of Infinite Group, Inc. (“Infinite Group, Inc.” or the “Company”) included herein
have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S.)
("GAAP") for interim financial information and with instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments
are of a normal recurring nature. The December 31, 2012 balance sheet has been derived from the audited financial statements at
that date, but does not include all disclosures required by GAAP. The accompanying unaudited consolidated financial statements
should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the U.S. Securities and Exchange
Commission (SEC). Results of consolidated income for the three and six months ended June 30, 2013 are not necessarily indicative
of the operating results that may be expected for the year ending December 31, 2013. The unaudited consolidated financial statements
herein include the accounts of the Company and its wholly owned subsidiaries. The subsidiaries are inactive. All material inter-company
accounts and transactions have been eliminated.
Note 2. Summary of Significant Accounting Policies
There are several accounting policies that
the Company believes are significant to the presentation of its consolidated financial statements. These policies require management
to make complex or subjective judgments about matters that are inherently uncertain. Note 3 to the Company’s audited consolidated
financial statements for the year ended December 31, 2012 presents a summary of significant accounting policies as included in
the Company's Annual Report on Form 10-K as filed with the SEC.
Fair Value of Financial Instruments
The carrying amounts reported in the balance
sheet for cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate short-term
maturity of these financial instruments. The carrying value of notes payable and convertible notes payable approximates the fair
value based on rates currently available from financial institutions and various lenders.
Equity Investments
The Company accounts
for investments in equity securities of other entities, including variable interest entities that are not consolidated, under the
cost method of accounting if investments in voting equity interests of the investee are less than 20%. The equity method
of accounting is used if the Company’s investment in voting stock is greater than or equal to 20% but less than a majority. In
considering the accounting method for investments less than 20%, the Company also considers other factors such as its ability to
exercise significant influence over operating and financial policies of the investee. If certain factors are present,
the Company could account for investments for which it has less than a 20% ownership under the equity method of accounting.
Note 3. Investment in Equity Securities
On May 7, 2013, the Company purchased 100,000
shares of the authorized but unissued shares of Series A Convertible Preferred Stock (“Series A stock”), $.001 par
value, of Sudo.me Corporation (Sudo) for an aggregate purchase price of $100,000 pursuant to the terms and conditions of a preferred
stock purchase agreement. Sudo is a customer of the Company. As a result, the Company owns approximately 3.8% of the total outstanding
shares of Sudo. Sudo's web site is http://mysudo.me. The source of funds for the purchase consisted of accounts receivable of $84,167
due from Sudo and cash of $15,833. At June 30, 2013, the cash was not paid and was included in accrued expenses - other. Accordingly,
this transaction is considered non-cash investing activity of $100,000. The investment is accounted for using the equity method
since Company management
exercises significant influence over the operating and financial policies of
Sudo.
During 2012 and 2013, certain officers and directors of the Company made loans to Sudo and converted loans to Series
A stock.
In addition, one Company employee is one of three members of the board of directors of Sudo
and one Company employee is an officer of Sudo. As a result of the foregoing, the Company is deemed to have significant influence
upon Sudo's policy and operating decisions. The investment
was written down by $5,000 through June 30, 2013 to $95,000 based
on the Company's interest in the net loss of Sudo from May 7, 2013 through June 30, 2013.
The Series A stock votes together with
all other classes of stock as a single class on all actions to be taken by the stockholders. Series A stock dividends accrue at
the rate of $.10 per year on each share from the date of issuance. Each share entitles the holder to such number of votes per share
as shall equal the number of shares of common stock into which each share of Series A stock is then convertible. At the option
of the holder, each share and accrued and unpaid dividends are convertible into shares of common stock at a rate of the quotient
of (i) preferred shares plus unpaid dividends divided by (ii) the number of preferred shares. Shares of Series A stock are automatically
converted to shares of common stock upon a firm commitment underwritten public offering of common stock yielding gross proceeds
of at least $10 million at a minimum price of $3 per share.
Financial information for Sudo as of and
for the six months ended June 30, 2013 includes total assets of $8,368, total liabilities of $206,662, and net loss of $455,860.
Note 4. Stock Option Plans
The Company has approved stock options
plans and agreements covering up to an aggregate of 9,763,833 shares of common stock. Plan options may be designated at the time
of grant as either incentive stock options or nonqualified stock options. Stock based compensation includes expense charges related
to all stock-based awards to employees, directors and consultants. Such awards consist of stock options.
The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for the six months
ended June 30, 2013 and 2012.
|
|
2013
|
|
2012
|
Risk-free interest rate
|
|
.34% - .92%
|
|
.92% - 1.10%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected stock price volatility
|
|
75%
|
|
75%
|
Expected life of options
|
|
3.25 - 5.75 years
|
|
5.75 years
|
The Company recorded expense for options
issued to employees and independent service providers of $14,517 and $19,189 for the three months ended June 30, 2013 and 2012,
respectively, and $50,916 and $39,261 for the six months ended June 30, 2013 and 2012, respectively.
The following is a summary of all stock option activity for
the six months ended June 30, 2013.
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted-Average
Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
6,884,500
|
|
|
$
|
.20
|
|
|
|
|
|
|
|
Options granted
|
|
|
1,825,000
|
|
|
$
|
.15
|
|
|
|
|
|
|
|
Options expired
|
|
|
(123,333
|
)
|
|
$
|
.13
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(686,667
|
)
|
|
$
|
.07
|
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
|
7,899,500
|
|
|
$
|
.20
|
|
|
5.3
years
|
|
$
|
232,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2013
|
|
|
5,746,833
|
|
|
$
|
.22
|
|
|
5.0 years
|
|
$
|
178,000
|
|
The weighted average fair value of options
granted during the six months ended June 30, 2013 was approximately $.08 ($.09 during the six months ended June 30, 2012). No options
were exercised during the six months ended June 30, 2013 and 2012.
At June 30, 2013, there was approximately
$32,000 of unrecognized compensation cost related to non-vested options. This cost is expected to be recognized over a weighted
average period of approximately two years. The total fair value of shares that vested during the six months ended June 30, 2013
was approximately $16,000.
During the six months ended June 30, 2013,
the Company issued 1,675,000 common stock options to independent consultants with an average exercise price of $.155 per share.
At issuance, 225,000 options immediately vested. The balance of the options vest based on each independent consultant meeting specific
sales performance criteria.
Note 5. Earnings Per
Share
Basic
earnings per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings
per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which,
in the Company’s case, comprise shares issuable under convertible notes payable and stock options. The treasury stock method
is used to calculate dilutive shares, which reduces the gross number of dilutive shares by the number of shares purchasable from
the proceeds of the options and warrants assumed to be exercised. In a loss period, the calculation for basic and diluted earnings
per share is considered to be the same, as the impact of potential common shares is anti-dilutive.
The following
table sets forth the computation of basic and diluted net income (loss) per share.
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
Numerator for basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,282
|
|
|
$
|
(49,746
|
)
|
|
$
|
36,046
|
|
|
$
|
285,256
|
|
Denominator for basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
Basic net income (loss) per share
|
|
$
|
.00
|
|
|
$
|
(.00
|
)
|
|
$
|
.00
|
|
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,282
|
|
|
$
|
(49,746
|
)
|
|
$
|
36,046
|
|
|
$
|
285,256
|
|
Denominator for diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
|
|
25,961,883
|
|
Effect of dilutive securities - common stock options
|
|
|
1,126,641
|
|
|
|
0
|
|
|
|
1,183,302
|
|
|
|
869,807
|
|
Shares used in computing diluted net income per share
|
|
|
27,088,524
|
|
|
|
25,961,883
|
|
|
|
27,145,185
|
|
|
|
26,831,690
|
|
Diluted net income (loss) per share
|
|
$
|
.00
|
|
|
$
|
(.00
|
)
|
|
$
|
.00
|
|
|
$
|
.01
|
|
Anti-dilutive shares excluded from net income per share calculation
|
|
|
23,362,469
|
|
|
|
0
|
|
|
|
23,087,469
|
|
|
|
25,968,906
|
|
Certain common shares issuable under stock
options and convertible notes payable have been omitted from the diluted net income per share calculation because their inclusion
is considered anti-dilutive because the exercise prices were greater than the average market price of the common shares or their
inclusion would have been anti-dilutive.
Note 6. Sale of Certain
Accounts Receivable
The Company has available a financing line
with a financial institution (the Purchaser) which enables the Company to sell selected accounts receivable invoices to the Purchaser
with full recourse against the Company.
Pursuant to the provisions of FASB ASC
860, the Company reflects the transactions as a sale of assets and establishes an accounts receivable from the Purchaser for the
retained amount less the costs of the transaction and less any anticipated future loss in the value of the retained asset. The
retained amount is generally equal to 20% of the total accounts receivable invoice sold to the Purchaser. The fee for the first
30 days is 1% and additional fees are charged against the average daily balance of net outstanding funds at the prime rate, which
was 3.25% per annum as of June 30, 2013 and 2012. The estimated future loss reserve for each receivable included in the estimated
value of the retained asset is based on the payment history of the accounts receivable customer and is included in the allowance
for doubtful accounts, if any. As collateral, the Company granted the Purchaser a first priority interest in accounts receivable
and a blanket lien, which may be junior to other creditors, on all other assets.
The financing line provides the Company
the ability to finance up to $2,000,000 of selected accounts receivable invoices, which includes a sublimit for one of the Company’s
customers of $1,500,000. During the six months ended June 30, 2013, the Company sold approximately $3,898,000 ($4,114,000 - 2012)
of its accounts receivable to the Purchaser. As of June 30, 2013, approximately $867,000 ($1,003,000 - 2012) of these receivables
remained outstanding. Additionally, as of June 30, 2013, the Company had approximately $267,000 available under the financing line
with the financial institution ($300,000 – 2012). After deducting estimated fees and advances from the Purchaser, the net
receivable from the Purchaser amounted to $163,436 at June 30, 2013 ($187,865 - 2012), and is included in accounts receivable in
the accompanying balance sheets.
There were no gains or losses on the sale
of the accounts receivable because all were collected. The cost associated with the financing line totaled approximately $88,300
for the six months ended June 30, 2013 ($85,500 - 2012). These financing line fees are classified on the statements of operations
as interest expense.
Note
7.
Notes Payable – Related Parties
During the six months ended June 30, 2013,
the Company repaid $7,000 of a note payable to a related party ($24,000 - 2012). Included in accrued interest payable is accrued
interest payable to related parties of $338,423 at June 30, 2013 ($317,287 - December 31, 2012).
Note 8. Employee Pension Plan
On March 30, 2012, the Company received
the decision of United States Tax Court entered on March 27, 2012 (the "Decision") wherein the Court determined that
the Company did not have any liability for taxes, excise taxes or penalties for the taxable years 2006 or 2007 related to the Osley
& Whitney, Inc. Retirement Plan (O&W Plan). As a result, during the three months ended March 31, 2012, the Company recorded
a reduction of $480,000 in obligations previously accrued and reflected related to excise taxes, including late fees and interest
on unfunded O&W Plan contributions.
Note 9. Management
Plans – Capital Resources
The Company reported operating income of
$195,975 and $445,118 and net income of $36,046 and $285,256 for the six months ended June 30, 2013 and 2012, respectively. During
2012, the Company recorded a reduction of $480,000 in obligations previously accrued and reflected related to excise taxes, including
late fees and interest, on unfunded O&W Plan contributions.
The Company's primary source of liquidity
is cash provided by collections of accounts receivable and its factoring line of credit. At June 30, 2013, the Company had approximately
$267,000 of availability under this line. During the six months ended June 30, 2013, the Company financed its business activities
through sales with recourse of its accounts receivable.
The Company believes the capital resources
available under its factoring line of credit, cash from additional related party loans and cash generated by improving the results
of its operations provide sources to fund its ongoing operations and to support the internal growth the Company expects to achieve
for at least the next 12 months. However, if the Company does not continue to maintain or improve the results of its operations
in future periods, the Company expects that additional working capital will be required to fund its business. Although the Company
has no assurances, the Company believes that related parties, who have previously provided working capital, will continue to provide
working capital loans on similar terms, as in the past, as may be necessary to fund its on-going operations for at least the next
12 months.
If the Company experiences significant
growth in its sales, the Company believes that this may require it to increase its financing line, finance additional accounts
receivable, or obtain additional working capital from other sources to support its sales growth. There is no assurance that in
the event the Company needs additional funds that adequate additional working capital will be available or, if available, will
be offered on acceptable terms.
************
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
IT Consulting
Headquartered in Pittsford, New York, we
provide IT solutions that are intended to deliver measurable results to small and medium sized businesses (SMBs), government agencies,
and large commercial enterprises. We provide:
|
·
|
managed services that include managing leading edge operations and implementing complex programs
in advanced server management;
|
|
·
|
desktop and server monitoring and remediation;
|
|
·
|
help desk and call center services;
|
|
·
|
third party data storage;
|
|
·
|
backup and disaster recovery solutions; and
|
We provide cloud computing solutions that
include public and private cloud architectures along with hybrid scalable cloud hosting, server virtualization and desktop virtualization
solutions. In addition, we provide IT solutions that address mobility, information security and unified communications. We focus
on aligning business processes with technology for delivery of solutions meeting our clients’ needs and providing expert
management services to the lifecycle of technology-based projects.
We provide support to professional service
organizations of software companies that need additional skilled resources when implementing solutions. Our technical support personnel
maintain leading edge certifications and qualifications in the respective software applications. We provide on and off-site client
support to meet our clients' needs. We have several contract vehicles that enable us to deliver a broad range of our services and
solutions to the U.S., state and local governments. We have entered into various subcontract agreements with prime contractors
to the U.S., state and local governments and commercial customers.
Results of Operations
Comparison
of Three and Six Month Periods ended June 30, 2013 and 2012
The following tables compare our statements
of operations data for the three and six months ended June 30, 2013 and 2012. The trends suggested by this table are not indicative
of future operating results.
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 vs. 2012
|
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
Amount of
|
|
|
% Increase
|
|
|
|
2013
|
|
|
Sales
|
|
|
2012
|
|
|
Sales
|
|
|
Change
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,150,745
|
|
|
|
100.0
|
%
|
|
$
|
2,115,812
|
|
|
|
100.0
|
%
|
|
$
|
34,933
|
|
|
|
1.7
|
%
|
Cost of sales
|
|
|
1,599,952
|
|
|
|
74.4
|
|
|
|
1,554,321
|
|
|
|
73.5
|
|
|
|
45,631
|
|
|
|
2.9
|
|
Gross profit
|
|
|
550,793
|
|
|
|
25.6
|
|
|
|
561,491
|
|
|
|
26.5
|
|
|
|
(10,698
|
)
|
|
|
(1.9
|
)
|
General and administrative
|
|
|
245,827
|
|
|
|
11.4
|
|
|
|
251,612
|
|
|
|
11.9
|
|
|
|
(5,785
|
)
|
|
|
(2.3
|
)
|
Selling
|
|
|
206,168
|
|
|
|
9.6
|
|
|
|
280,866
|
|
|
|
13.3
|
|
|
|
(74,698
|
)
|
|
|
(26.6
|
)
|
Total costs and expenses
|
|
|
451,995
|
|
|
|
21.0
|
|
|
|
532,478
|
|
|
|
25.2
|
|
|
|
(80,483
|
)
|
|
|
(15.1
|
)
|
Operating income
|
|
|
98,798
|
|
|
|
4.6
|
|
|
|
29,013
|
|
|
|
1.4
|
|
|
|
69,785
|
|
|
|
240.5
|
|
Loss on equity investment
|
|
|
(5,000
|
)
|
|
|
(.2
|
)
|
|
|
-
|
|
|
|
.0
|
|
|
|
(5,000
|
)
|
|
|
|
|
Interest expense
|
|
|
(78,516
|
)
|
|
|
(3.7
|
)
|
|
|
(78,759
|
)
|
|
|
(3.7
|
)
|
|
|
243
|
|
|
|
(0.3
|
)
|
Net income (loss)
|
|
$
|
15,282
|
|
|
|
.7
|
%
|
|
$
|
(49,746
|
)
|
|
|
(2.4
|
)%
|
|
$
|
65,028
|
|
|
|
130.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic and diluted
|
|
$
|
.00
|
|
|
|
|
|
|
$
|
(.00
|
)
|
|
|
|
|
|
$
|
.00
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 vs. 2012
|
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
Amount of
|
|
|
% Increase
|
|
|
|
2013
|
|
|
Sales
|
|
|
2012
|
|
|
Sales
|
|
|
Change
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
4,250,704
|
|
|
|
100.0
|
%
|
|
$
|
4,646,668
|
|
|
|
100.0
|
%
|
|
$
|
(395,964
|
)
|
|
|
(8.5
|
)%
|
Cost of sales
|
|
|
3,101,801
|
|
|
|
73.0
|
|
|
|
3,448,859
|
|
|
|
74.2
|
|
|
|
(347,058
|
)
|
|
|
(10.1
|
)
|
Gross profit
|
|
|
1,148,903
|
|
|
|
27.0
|
|
|
|
1,197,809
|
|
|
|
25.8
|
|
|
|
(48,906
|
)
|
|
|
(4.1
|
)
|
General and administrative
|
|
|
465,683
|
|
|
|
11.0
|
|
|
|
664,313
|
|
|
|
14.3
|
|
|
|
(198,630
|
)
|
|
|
(29.9
|
)
|
Selling
|
|
|
487,245
|
|
|
|
11.5
|
|
|
|
568,378
|
|
|
|
12.2
|
|
|
|
(81,133
|
)
|
|
|
(14.3
|
)
|
Defined benefit pension plan
|
|
|
-
|
|
|
|
.0
|
|
|
|
(480,000
|
)
|
|
|
(10.3
|
)
|
|
|
480,000
|
|
|
|
(100.0
|
)
|
Total costs and expenses
|
|
|
952,928
|
|
|
|
22.4
|
|
|
|
752,691
|
|
|
|
16.2
|
|
|
|
200,237
|
|
|
|
26.6
|
|
Operating income
|
|
|
195,975
|
|
|
|
4.6
|
|
|
|
445,118
|
|
|
|
9.6
|
|
|
|
(249,143
|
)
|
|
|
(56.0
|
)
|
Loss on equity investment
|
|
|
(5,000
|
)
|
|
|
(.1
|
)
|
|
|
-
|
|
|
|
.0
|
|
|
|
(5,000
|
)
|
|
|
|
|
Interest expense
|
|
|
(154,929
|
)
|
|
|
(3.6
|
)
|
|
|
(159,862
|
)
|
|
|
(3.4
|
)
|
|
|
4,933
|
|
|
|
(3.1
|
)
|
Net income
|
|
$
|
36,046
|
|
|
|
.8
|
%
|
|
$
|
285,256
|
|
|
|
6.1
|
%
|
|
$
|
(249,210
|
)
|
|
|
(87.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic and diluted
|
|
$
|
.00
|
|
|
|
|
|
|
$
|
.01
|
|
|
|
|
|
|
$
|
(.01
|
)
|
|
|
|
|
Sales
Sales for the six months ended June 30,
2013 were $4,250,704 a decrease of $395,964 or 8.5% as compared to sales for the six months ended June 30, 2012 of $4,646,668.
Sales for the three months ended June 30, 2013 were $2,150,745, an increase of $34,933 or 1.7% as compared to sales for the three
months ended June 30, 2012 of $2,115,812.
During the six months ended June 30, 2012,
we completed certain projects under subcontracts to the U.S. Government which were not replaced by other new U.S. Government projects.
These sales reductions were not fully offset by sales increases that we realized with other clients. We experienced a more significant
slowdown of new U.S. Government projects especially during the fourth quarter of 2012, which continued into the first quarter of
2013. During the three months ended June 30, 2013, these slowdowns began to reverse and we began to realize new virtualization
project sales. We continue to pursue opportunities to develop additional sales from new and existing target markets, such as investing
marketing resources in the commercial segment.
We have several contract vehicles that
enable us to deliver a broad range of our services and solutions to the U.S. Government. These contract vehicles allow us additional
opportunities to bid on new projects. Although we believe we have opportunities for sales growth with government and commercial
clients, the lengthy procurement processes may result in operating losses or reduced operating income until sales increase to support
our infrastructure. We understand that the U.S. Government has expressed its intention to reduce its budgets related to technical
services contracts in the coming years, which may impact our ability to increase our sales to certain U.S. Government agencies.
We believe we are positioned to take
advantage of the growing marketplace for cloud related IT managed services and solutions. Since 2004, we have operated
our managed services practice using remote systems using cloud computing. We are a provider and innovator in IT
management through the cloud. We believe government and commercial clients will continue to pursue the operational and
economic advantages of cloud IT management on a larger scale. Given our experience and expertise from building cloud
environments to operating complex IT data centers through the cloud, we continue to position ourselves as a provider of
choice for cloud computing users.
Cost of Services and Gross Profit
Cost
of services represents the cost of employee services related to our sales.
Cost of services for the six months ended June 30, 2013 was $3,101,801 or 73.0% of sales as compared to $3,448,859 or 74.2% of
sales for the six months ended June 30, 2012. Gross profit was $1,148,903 or 27.0% of sales for the six months ended June 30, 2013
compared to $1,197,809 or 25.8% of sales for the six months ended June 30, 2012.
For
the six months ended June 30, 2013, the decrease
in the cost of services and gross profit were primarily attributable to
the 8.5% decrease in sales and a decrease in gross profit margins on certain projects
which
was offset in part by improved utilization of our personnel.
Cost
of services for the three months ended June 30, 2013 was $1,599,952 or 74.4% of sales as compared to $1,554,321 or 73.5% of sales
for the three months ended June 30, 2012. Gross profit was $550,793 or 25.6% of sales for the three months ended June 30, 2013
compared to $561,491 or 26.5% of sales for the three months ended June 30, 2012.
General and Administrative Expenses
General and administrative expenses include
corporate overhead such as compensation and benefits for administrative and finance personnel, rent, insurance, professional fees,
travel, and office expenses. General and administrative expenses for the six months ended June 30, 2013 decreased by $198,630 or
29.9% from $664,313 for the six months ended June 30, 2012 to $465,683 for the six months ended June 30, 2013. As a percentage
of sales, general and administrative expenses were 11.0% for the six months ended June 30, 2013 and 14.3% for the six months ended
June 30, 2012.
General and administrative expenses for
the three months ended June 30, 2013 were $245,827 which was a decrease of $5,785 or 2.3% as compared to $251,612 for the three
months ended June 30, 2012. As a percentage of sales, general and administrative expense was 11.4% for the three months ended June
30, 2013 and 11.9% for the three months ended June 30, 2012.
The decrease
in general and administrative expenses in 2013 was a result of expenses incurred in 2012 which did not reoccur in 2013. During
2012, we incurred expenses for variable compensation relating to certain performance measures that were met, consulting services,
web site updates, and updating our business strategies.
Selling Expenses
For the six months ended June 30, 2013
we incurred selling expenses of $487,245 compared to $568,378 for the six months ended June 30, 2012, a decrease of $81,133 or
14.3%. For the three months ended June 30, 2013, we incurred selling expenses of $206,168 as compared to $280,866 for the three
months ended June 30, 2012, a decrease of $74,698 or 26.6%.
This decrease is primarily attributable
to the reduction of business development compensation and benefits expenses due to a change in personnel staffing.
Defined Benefit
Pension Plan Expenses
On March 30, 2012, we
received a decision of United States Tax Court entered on March 27, 2012 (the "Decision") wherein the Court determined
that we did not have any liability for taxes, excise taxes or penalties for the taxable years 2006 or 2007 related to the Osley
& Whitney, Inc. Retirement Plan (O&W Plan). As a result, in 2012, we recorded a reduction of $480,000 in obligations previously
accrued and reflected related to excise taxes, including late fees and interest, on unfunded O&W Plan contributions. Since
the Pension Benefit Guaranty Corporation (PBGC) terminated the O&W Plan as of November 30, 2001 and as a result of the Decision,
we have no further obligations to the O&W Plan, the PBGC and the Treasury other than those stated in the Settlement Agreement
with the PBGC which are reflected in the accompanying consolidated financial statements.
Operating Income
For
the six months ended June 30, 2013 our operating income was $195,975 compared to operating income of $445,118 for the six months
ended June 30, 2012, a decrease of $249,143.
Operating expenses in 2012 include a reduction of $480,000 in O&W Plan
obligations previously accrued, as discussed above.
General and administrative
and selling expenses decreased $279,763 during the six months ended June 30, 2013 which was offset by a decrease in gross profit
of $48,906.
For the three months ended June 30, 2013
our operating income was $98,798 compared to operating income of $29,013 for the three months ended June 30, 2012, an improvement
of $69,785. This is principally attributable a reduction in operating expenses of $80,483, which was offset by a decrease in gross
profit of $10,698.
Included in the above results are non-cash
expenses and a reduction in O&W Plan related liabilities for the three and six months ended June 30, 2013 and 2012 summarized
as follows.
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Stock-based compensation
|
|
$
|
14,517
|
|
|
$
|
19,189
|
|
|
$
|
50,916
|
|
|
$
|
39,261
|
|
Depreciation
|
|
|
4,843
|
|
|
|
6,201
|
|
|
|
9,434
|
|
|
|
18,322
|
|
Loss on equity investment
|
|
|
5,000
|
|
|
|
0
|
|
|
|
5,000
|
|
|
|
0
|
|
Reduction in O&W Plan related liabilities
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(480,000
|
)
|
|
|
$
|
24,360
|
|
|
$
|
25,390
|
|
|
$
|
65,350
|
|
|
$
|
(422,417
|
)
|
Loss on Equity Investment
On May 7, 2013, we purchased 100,000 shares
of Series A Convertible Preferred Stock of Sudo.me Corporation (Sudo) for an aggregate purchase price of $100,000 pursuant to the
terms and conditions of a preferred stock purchase agreement. As a result, we own approximately 3.8% of the total outstanding shares
of Sudo. Sudo's web site is http://mysudo.me. The source of funds consisted of accounts receivable of $84,167 due from Sudo and
cash of $15,833, which was included in accrued expenses - other at June 30, 2013. Our management
exercises
significant influence over the operating and financial policies of Sudo. The investment
was written down by $5,000 through
June 30, 2013 to $95,000 based on the Company's interest in the net loss of Sudo from May 7, 2013 through June 30, 2013.
Interest Expense
Interest
expense includes interest on indebtedness and fees for financing accounts receivable invoices. Interest expense was $154,929 for
the six months ended June 30, 2013, a decrease of $4,933 from interest expense of $159,862 for the six months ended June 30, 2012.
Interest expense was $78,516 for the three months ended June 30, 2013, a decrease of $243 from interest expense of $78,759 for
the three months ended June 30, 2012.
The decrease results from amortizing principal balances on our notes payable during
2013 and a small decrease in average balances of accounts receivable financed in 2013.
Net Income (Loss)
For the six months ended June 30, 2013,
we recorded net income of $36,046 or $.00 per share compared to a net income of $285,256 or $.01 per share for the six months
ended June 30, 2012
.
For the three months ended June 30, 2013,
we recorded net income of $15,282 or $.00 per share
compared to a net loss of $49,746 or $.00 per share for the three months ended June 30, 2012
.
Other Trends
The recessionary economy that we have continued
to experience since 2009 has impacted certain portions of our business and our growth opportunities as certain projects are deferred
pending funding or improved economic conditions. In addition, the U.S. Government trend toward in-sourcing has impacted certain
areas of our business. Subsequent to the 2012 elections, there continues to be uncertainty in the U.S. Government market which
negatively impacts our business strategy. Certain of our prime contractors expect their customers to be negatively impacted by
“sequestration” or the automatic U.S. Government spending cuts due to the lack of an approved federal budget for the
2013 fiscal year by February 28, 2013. As a result, we believe that the volume of our subcontract sales may be negatively impacted.
Since 2009, the United States and worldwide
capital and credit markets experienced significant price volatility, dislocations and liquidity disruptions, which have caused
market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These
circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive,
and in some cases have resulted in the unavailability of financing. Continued uncertainty in the capital and credit markets may
negatively impact our business, including our ability to access additional financing at reasonable terms or to refinance our credit
at improved terms, which may negatively affect our ability to make future acquisitions or expansions of our business. A prolonged
downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require
us to adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital. The
disruptions in the financial markets may have a material adverse effect on the market value of our common stock and other adverse
effects on our business.
Liquidity and Capital Resources
At
June 30, 2013, we had cash of approximately $20,000 available for our working capital needs and planned capital asset expenditures.
We attempt to minimize our cash balance in order to minimize use of our financing line.
Our
primary liquidity needs are the financing of working capital and capital expenditures.
Our primary source of liquidity is
cash provided by collections of accounts receivable and our factoring line of credit.
At
June 30, 2013, we had a working capital deficit of approximately $0.9 million and a current ratio of .44. Our objective is to improve
our working capital position through profitable operations.
During 2013 and 2012, we financed our business activities through
sales with recourse of our accounts receivable.
Our goal is to increase sales and generate
cash flow from operations. We believe the capital resources available under our factoring line of credit, cash from additional
related party loans and cash generated by improving the results of our operations provide sources to fund our ongoing operations
and to support the internal growth we expect to achieve for at least the next 12 months. If we do not continue to maintain or improve
the results of our operations in future periods, we expect that additional working capital will be required to fund our business.
Although we have no assurances, we believe that related parties, who have previously provided working capital to us will continue
to provide working capital loans to us on similar terms, as in the past, as may be necessary to fund our on-going operations for
at least the next 12 months. If we experience significant growth in our sales, we believe that this may require us to increase
our financing line, finance additional accounts receivable, or obtain additional working capital from other sources to support
our sales growth. There is no assurance that in the event we need additional funds that adequate additional working capital will
be available or, if available, will be offered on acceptable terms.
We anticipate financing our external growth
if we were to make business acquisitions and our longer-term internal growth through one or more of the following sources: cash
from collections of accounts receivable; additional borrowing; issuance of equity; use of our existing revolving credit facility;
or a refinancing of our accounts receivable credit facility.
The following table sets forth our sources and uses of cash
for the periods presented:
|
|
Six Months Ended
June
30,
|
|
|
|
2013
|
|
|
2012
|
|
Net cash provided (used) by operating activities
|
|
$
|
(8,401
|
)
|
|
$
|
15,113
|
|
Net cash used by investing activities
|
|
|
(8,127
|
)
|
|
|
(8,184
|
)
|
Net cash used by financing activities
|
|
|
(19,565
|
)
|
|
|
(40,281
|
)
|
Net decrease in cash
|
|
$
|
(36,093
|
)
|
|
$
|
(33,252
|
)
|
Cash Flows from
Operating Activities
During
the six months ended June 30, 2013, cash used by operations was $8,401 compared with cash provided by operations of $15,113 for
the six months ended June 30, 2012. Our operating cash flow is primarily affected by the overall profitability of our contracts,
our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments by using
cash generated by operations and financing our accounts receivable. We bill our clients weekly or monthly after services are performed,
depending on the contract terms.
Our net income of $36,046, non-cash expenses of $65,350 for the six months ended June 30,
2013 and an increase in accounts payable and accrued expenses of $51,906 were principally offset by an increase in accounts receivable
of $145,250. Our net income of $285,256, non-cash expenses of $57,583 for the six months ended June 30, 2012 and a decrease in
accounts receivable of $259,565 were offset principally by a decrease in accounts payable and accrued expenses of $129,734 and
a reduction in accrued retirement and pension obligation of $456,707.
Cash Flows from
Investing Activities
Cash
used by investing activities for the six months ended June 30, 2013 was $8,127 compared with $8,184 for the
six
months ended June 30, 2012. Cash used in investing activities was primarily for capital expenditures for computer hardware and
software.
Cash Flows from
Financing Activities
For
the six months ended June 30, 2013, cash used by financing activities was $12,565 for principal payments on notes payable-banks
and other and $7,000 on notes payable to related parties. During the six months ended June 30, 2012, cash used by financing activities
was $16,281 for principal payments on notes payable-banks and other and $24,000 on notes payable to related parties.
We
anticipate that we will use approximately $20,800 through the next twelve months for funding existing contractual requirements
of current maturities of long-term debt obligations due to banks and the PBGC. We continue to evaluate repayment of other notes
payable based on our cash flow.
Credit Resources
We
have secured an accounts receivable financing line of credit from an
independent finance institution
that
allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount
of $2 million, including a sublimit for one major client of $1.5 million. This provides us with the cash needed to finance certain
costs and expenses. At June 30, 2013, we had financing availability, based on eligible accounts receivable, of approximately $267,000
under this line. We pay fees based on the length of time that the invoice remains unpaid.