Results of Operations
Comparison of Three and Six Month Periods ended June 30, 2014 and 2013
The following tables compare our statements of operations data for the three and six months ended June 30, 2014 and 2013. The trends suggested by this table are not indicative of future operating results.
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Three Months Ended June 30,
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2014 vs. 2013
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|
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As a % of
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As a % of
|
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Amount of
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% Increase
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2014
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|
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Sales
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2013
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|
|
Sales
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Change
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(Decrease)
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|
|
|
|
|
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Sales
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$
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2,127,571
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|
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100.0
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%
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|
$
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2,150,745
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|
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100.0
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%
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$
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(23,174
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)
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(1.1
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)
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Cost of sales
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1,627,489
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76.5
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1,599,952
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74.4
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27,537
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1.7
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Gross profit
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500,082
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23.5
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|
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550,793
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25.6
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(50,711
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)
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(9.2
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)
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General and administrative
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312,681
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14.7
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245,827
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11.4
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66,854
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27.2
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Selling
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235,852
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11.1
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206,168
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9.6
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29,684
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14.4
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Total costs and expenses
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548,533
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25.8
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451,995
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21.0
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96,538
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21.4
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Operating (loss) income
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(48,451
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)
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(2.3
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)
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98,798
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4.6
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(147,249
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)
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(149.0
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)
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Loss on equity investment
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|
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(21,000
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)
|
|
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(1.0
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)
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(5,000
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)
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|
|
(.2
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)
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(16,000
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)
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320.0
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Interest expense
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|
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(75,110
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)
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(3.5
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)
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(78,516
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)
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(3.7
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)
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3,406
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|
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(4.3
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)
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Net (loss) income
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$
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(144,561
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)
|
|
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(6.8
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) %
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$
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15,282
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|
|
|
.7
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%
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$
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(159,843
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)
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|
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(1,046.0
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)
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net (loss) income per share - basic and diluted
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|
$
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(.01
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)
|
|
|
|
|
|
$
|
.00
|
|
|
|
|
|
|
$
|
(.01
|
)
|
|
|
|
|
|
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Six Months Ended June 30,
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2014 vs. 2013
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As a % of
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As a % of
|
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|
Amount of
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% Increase
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|
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2014
|
|
|
Sales
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2013
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|
Sales
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Change
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(Decrease)
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|
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|
|
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Sales
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$
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4,141,988
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|
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100.0
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%
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|
$
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4,250,704
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|
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|
100.0
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%
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|
$
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(108,716
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)
|
|
|
(2.6
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)
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Cost of sales
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|
3,133,656
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|
|
|
75.7
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|
|
|
3,101,801
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|
|
|
73.0
|
|
|
|
31,855
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|
|
|
1.0
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|
Gross profit
|
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|
1,008,332
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|
|
|
24.3
|
|
|
|
1,148,903
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|
|
27.0
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|
|
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(140,571
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)
|
|
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(12.2
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)
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General and administrative
|
|
|
637,902
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|
|
|
15.4
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|
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|
465,683
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|
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11.0
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|
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|
172,219
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|
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|
37.0
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Selling
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|
479,869
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|
|
|
11.6
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|
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|
487,245
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|
|
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11.5
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|
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(7,376
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)
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(1.5
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)
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Total costs and expenses
|
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|
1,117,771
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|
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|
27.0
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|
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952,928
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|
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22.4
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164,843
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17.3
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Operating (loss) income
|
|
|
(109,439
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)
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|
|
(2.6
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)
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|
195,975
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|
|
|
4.6
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|
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(305,414
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)
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|
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(155.8
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)
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Loss on equity investment
|
|
|
(36,000
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)
|
|
|
(.9
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)
|
|
|
(5,000
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)
|
|
|
(.2
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)
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|
|
(31,000
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)
|
|
|
620.0
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|
Interest expense
|
|
|
(158,397
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)
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|
(3.8
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)
|
|
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(154,929
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)
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(3.6
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)
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(3,468
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)
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|
2.2
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|
Net (loss) income
|
|
$
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(303,836
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)
|
|
|
(7.3
|
) %
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|
$
|
36,046
|
|
|
|
.8
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%
|
|
$
|
(339,882
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)
|
|
|
(942.9
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)
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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Net (loss) income per share - basic and diluted
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|
$
|
(.01
|
)
|
|
|
|
|
|
$
|
.00
|
|
|
|
|
|
|
$
|
(.01
|
)
|
|
|
|
|
Sales
Sales for the six months ended June 30, 2014 were $4,141,988 a decrease of $108,716 or 2.6% as compared to sales for the six months ended June 30, 2013 of $4,250,704. Sales for the three months ended June 30, 2014 were $2,127,571, a decrease of $23,174 or 1.1% as compared to sales for the three months ended June 30, 2013 of $2,150,745.
Sales of virtualization projects improved starting in the second quarter of 2013 but slowed again in the first quarter of 2014 in comparison to the virtualization project sales for each calendar quarter during the nine months ended December 31, 2013. We believe that the decrease is mainly attributable to a temporary reduction in the demand for virtualization projects during the first quarter of 2014. Sales also declined in 2014 as a long-term commercial project neared completion. Beginning in March 2014, we began to close new contracts and expect future sales from security assessments and related projects, which originated from sales programs that we established in the fourth quarter of 2013.
One of our priorities is to increase sales. Accordingly, beginning in December 2013, we hired several additional sales personnel in an effort to increase commercial and U.S. Government agency sales. Due to the lengthy lead times typically needed to generate new sales in these areas, we do not expect to realize a return from the addition of the new sales personnel for multiple quarters. As a result, we may experience net losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows and incremental borrowings, as needed.
Sales improved by 5.6% or $113,144 to $2,127,571 for the three months ended June 30, 2014 compared to sales of $2,014,427 for the three months ended March 31, 2014 indicating that our sales efforts are beginning to produce results.
We have several contract vehicles that enable us to deliver a broad range of our services and solutions to the U.S. Government. In September 2013, the Department of Homeland Security Eagle II (DHS) awarded contracts to prime contractors. We are a subcontractor and teaming member with certain of these prime contractors and accordingly, we believe that we will have new opportunities to generate sales to DHS. The acquisition of these contract vehicles allows 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 future operating losses unless 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.
Cost of Services and Gross Profit
Cost of services represents the cost of employee services and related to our sales.
Cost of services for the six months ended June 30, 2014 was $3,133,656 or 75.7% of sales as compared to $3,101,801 or 73.0% of sales for the six months ended June 30, 2013. Gross profit was $1,008,332 or 24.3% of sales for the six months ended June 30, 2014 compared to $1,148,903 or 27.0% of sales for the six months ended June 30, 2013.
Cost of services for the three months ended June 30, 2014 was $1,627,489 or 76.5% of sales as compared to $1,599,952 or 74.4% of sales for the three months ended June 30, 2013. Gross profit was $500,082 or 23.5% of sales for the three months ended June 30, 2014 compared to $550,793 or 25.6% of sales for the three months ended June 30, 2013.
The
increase
in cost of services and decrease in gross profit were primarily attributable to a decrease in gross profit margins on certain projects
and decreased utilization of our virtualization engineers due to the lower dollar volume of project sales.
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, 2014 increased by $172,219 or 37.0% from $465,683 for the six months ended June 30, 2013 to $637,902 for the six months ended June 30, 2014. As a percentage of sales, general and administrative expenses were 15.4% for the six months ended June 30, 2014 and 11.0% for the six months ended June 30, 2013.
General and administrative expenses for the three months ended June 30, 2014 were $312,681 which was an increase of $66,854 or 27.2% as compared to $245,827 for the three months ended June 30, 2013. As a percentage of sales, general and administrative expense was 14.7% for the three months ended June 30, 2014 and 11.4% for the three months ended June 30, 2013.
The increase in general and administrative expenses for the six months ended June 30, 2014 was principally a result of an increase of $41,570 in stock options expense from grants made in 2014, increases in professional fees associated with implementing a new shareholder investor relations and communications program, and the addition of an employee to manage the planned expansion of our Commercial Division within the small and medium sized businesses (SMB) space.
Selling Expenses
For the six months ended June 30, 2014, we incurred selling expenses of $479,869 compared to $487,245 for the six months ended June 30, 2013, a decrease of $7,376 or 1.5%. For the three months ended June 30, 2014, we incurred selling expenses of $235,852 as compared to $206,168 for the three months ended June 30, 2013, an increase of $29,684 or 14.4%.
For the six months ended June 30, 2014, the decrease is due to various minor changes in expense items from period to period and a decrease in stock options expense of $13,912. During December 2013 and January 2014, we hired several additional sales personnel in an effort to increase commercial and U.S. Government agency sales, however, we eliminated certain sales positions in the third and fourth quarters of 2013, which offset a substantial portion of the expenses associated with these new personnel.
Operating (Loss) Income
For the six months ended June 30, 2014 our operating loss was $109,439 compared to operating income of $195,975 for the six months ended June 30, 2013, a decrease of $305,414. The decrease is attributable to a decrease in our gross profit of $140,571, an increase in our general and administrative expenses of $172,219, and a decrease in our selling expenses of $7,376 during the six months ended June 30, 2014.
For the three months ended June 30, 2014 our operating loss was $48,451 compared to operating income of $98,798 for the three months ended June 30, 2013, a decrease of $147,249. The decrease is attributable to a decrease in our gross profit of $50,711, an increase in our general and administrative expenses of $66,854 and an increase in our selling expenses of $29,684 during the three months ended June 30, 2014.
Loss on Equity Investment
During 2013, we acquired 270,000 shares of Series A Convertible Preferred Stock of Sudo.me Corporation (goSudo) for $270,000 pursuant to the terms and conditions of a preferred stock purchase agreement. As a result, at June 30, 2014, we own approximately 8.5% of the total outstanding shares of goSudo. goSudo's web site is http://mysudo.me (the information contained in goSudo’s website shall not be considered a part of this Report). Our management exercises significant influence over the operating and financial policies of goSudo. The investment was written down by $36,000 and $5,000 during the six months ended June 30, 2014 and 2013, respectively, based on our interest in the net loss of goSudo for the same period. For the three months ended June 30, 2014 and 2013, the investment was written down by $21,000 and $5,000, respectively. The investment has a carrying value of $211,000 at June 30, 2014 ($247,000 – December 31, 2013).
Interest Expense
Interest expense includes interest on indebtedness and fees for financing accounts receivable invoices. Interest expense was $158,397 for the six months ended June 30, 2014, an increase of $3,468 from interest expense of $154,929 for the six months ended June 30, 2013. Interest expense was $75,110 for the three months ended June 30, 2014, a decrease of $3,406 from interest expense of $78,516 for the three months ended June 30, 2013.
The changes principally result from changes in average balances of accounts receivable financed in 2014.
Net (Loss) Income
For the six months ended June 30, 2014,
we recorded a net loss of $303,836 or $.01 per share compared to a net income of $36,046 or $.00 per share for the six months ended June 30, 2013
.
For the three months ended June 30, 2014,
we recorded a net loss of $144,561 or $.01 per share compared net income of $15,282 or $.00 per share for the three months ended June 30, 2013
.
Other Trends
During the past several years, the United States and worldwide capital and credit markets experienced significant price volatility 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. 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, 2014, we had cash of $61,902 available for our primary liquidity needs for working capital needs and planned capital asset expenditures. Our primary source of liquidity is cash provided by collections of accounts receivable and our factoring line of credit. At June 30, 2014, we had approximately $148,000 of availability under this line.
At June 30, 2014, we had a working capital deficit of approximately $1,483,000 and a current ratio of .28. This increase in the working capital deficit from $936,000 at December 31, 2013 is principally due to the scheduled maturity of a note payable of $265,000 on January 1, 2015 and a balloon payment of $78,000 due to the Pension Benefit Guaranty Corporation ( PBGC) on March 15, 2015. We plan to renegotiate the terms of the $265,000 note payable or seek funds to repay this note. We plan to seek funds, including additional loans from related parties, to pay the balloon payment to the PBGC if we do not generate sufficient cash flow from operations. Our objective is to improve our working capital position through profitable operations. During 2014, we financed our business activities principally through cash flows provided by operations and sales with recourse of our accounts receivable.
The following table sets forth our sources and uses of cash for the periods presented:
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Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Net cash provided (used) by operating activities
|
|
$
|
74,236
|
|
|
$
|
(8,401
|
)
|
Net cash used by investing activities
|
|
|
(18,789
|
)
|
|
|
(8,127
|
)
|
Net cash used by financing activities
|
|
|
(10,492
|
)
|
|
|
(19,565
|
)
|
Net increase (decrease) in cash
|
|
$
|
44,955
|
|
|
$
|
(36,093
|
)
|
Cash Flows from Operating Activities
During the six months ended June 30, 2014, cash provided by operations was $74,236 compared with cash used by operations of $8,401 for the six months ended June 30, 2013.
For the six months ended June 30, 2014, our net loss of $303,836, non-cash expenses of $123,730, a decrease in accounts receivable of $120,545 and an increase in current liabilities of $144,722 in aggregate resulted in cash flows from our operating activities. For the six months ended June 30, 2013, our net income of $36,046, non-cash expenses of $65,350 and an increase in current liabilities of $28,815 were principally offset by an increase in accounts receivable of $145,250.
Beginning in December 2013, we hired several additional sales personnel in an effort to increase commercial and U.S. Government agency sales. Due to the lengthy lead times typically needed to generate new sales in these areas, we do not expect to realize a return from the addition of the new sales personnel for one or more quarters. As a result, we may experience net losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows and incremental borrowings, as needed.
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.
Cash Flows from Investing Activities
Cash used by investing activities for the six months ended June 30, 2014 was $18,789 compared with $8,127 for the
six
months ended June 30, 2013. Cash used in investing activities included capital expenditures for computer hardware and software. In 2014, we relocated our offices to more efficient space in the same office park and incurred costs for cabling our computer networks and the work stations for our newly hired sales personnel of $8,650.
Cash Flows from Financing Activities
For the six months ended June 30, 2014, cash used by financing activities was $10,492 for principal payments on notes payable-banks and other. During 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.
We anticipate that we will use approximately $94,800 during the next twelve months for amounts due to banks and the PBGC. We continue to evaluate repayment of other notes payable based on our cash flow.
Credit Resources
We maintain an accounts receivable financing line of credit from an
independent financial institution
that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain costs and expenses. At June 30, 2014, we had financing availability, based on eligible accounts receivable, of approximately $148,000 under this line. We pay fees based on the length of time that the invoice remains unpaid.
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 will be sufficient to fund our ongoing operations and to support the internal growth we expect to achieve for at least the next 12 months. However, if we do not continue to improve the results of our operations in future periods, we expect that additional working capital will be required to fund our business. 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 growth from acquisitions of other businesses and assets, if any, and our longer-term internal growth through one or more of the following sources: cash from collections of accounts receivable; additional borrowing from related parties; issuance of equity; use of our existing accounts receivable credit facility; or a refinancing of our accounts receivable credit facility.
In April 2014, we completed a revised financing agreement with our primary financial institution that provides for a decrease in our financing fees and costs in future periods. In addition, the retained amount was revised from 20% to 15% of the total accounts receivable invoice sold to the Purchaser.