The Company reported net loss of
The Company's goal is to increase sales and generate cash flow from operations on a consistent basis. The Company uses a formal financial review and budgeting process as a tool for improvement that has aided expense reduction and internal performance. The Company's business plans require improving the results of its operations in future periods.
The Company believes the capital resources available under its factoring line of credit, cash from additional related party and third-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 of the Company. Although the Company has no assurances, the Company believes that related parties, who have previously provided working capital, and third parties 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.
Note 3. Summary of Significant Accounting Policies
There are several accounting policies that the Company believes are significant
to the presentation of its 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 financial statements for
the year ended
Reclassifications - The Company reclassifies amounts in its financial statements to comply with recently adopted accounting pronouncements.
Fair Value of Financial Instruments - The carrying amounts reported in the balance sheets 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.
Revenue -
The Company's total revenue recognized from contracts from customers was
comprised of three major services: Managed support services, Cybersecurity
projects and software and Other IT consulting services. The categories depict
how the nature, amount, timing and uncertainty of revenue and cash flows are
affected by economic factors. There were no material unsatisfied performance
obligations at
Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Managed support services$1,199,546 $1,265,253 $2,341,308 $2,494,000 Cybersecurity projects and software 452,815 372,245 1,099,648 682,853 Other IT consulting services 51,000 141,150 162,000 289,589 Total sales$1,703,361 $1,778,648 $3,602,956 $3,466,442 Managed support services
Managed support services consist of revenue primarily from our subcontracts for
services to its end clients, principally a major establishment of the
? We generate revenue primarily from these subcontracts through fixed price service and support agreements. Revenues are earned and billed weekly and are generally paid within 45 days. The revenues are recognized at time of service.
Cybersecurity projects and software
Cybersecurity projects and software revenue includes the selling of licenses of Nodeware® and third-party software, principally Webroot™ as well as performing cybersecurity assessments and testing.
? Nodeware® and Webroot™ software offerings consist of fees generated from the use of the respective software by our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Substantially all customers are billed in the month of the service and is cancellable upon notice per the respective agreements. Substantially all payments are electronically billed, and the billed amounts are paid to the Company instantaneously via an online payment platform. If payments are made in advance, revenues related to the term associated with our software licenses is recognized ratably over the contractual period.
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? Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our standalone selling price.
? Cybersecurity assessments and testing services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For substantially all these contracts, revenue is recognized when the specific performance obligation is satisfied. If the contract has multiple performance obligations, the revenue is recognized when the performance obligations are satisfied. Depending on the nature of the service, the amounts recognized are based on an allocation of the transaction price to each performance obligation based on a relative standalone selling price of the products sold.
? In substantially all agreements, a 50% to 75% down payment is required before work is initiated. Down payments received are deferred until revenue is recognized. Upon completion of performance obligation of service, payment terms are 30 days.
Other IT consulting services
Other IT consulting services consists of services such as project management and general IT consulting services.
? We generate revenue via fixed price service agreements. These are based on periodic billings of a fixed dollar amount for recurring services of a similar nature performed according to the contractual arrangements with clients. The revenues are recognized at time of service.
Based on historical experience, the Company believes that collection is reasonably assured.
During the three and six months ended
Capitalization of Software for Resale - The Company capitalizes the software
development costs for software to be sold, leased, or otherwise marketed.
Capitalization begins upon the establishment of technological feasibility of a
new product or enhancements to an existing product, which is generally the
completion of a working prototype that has been certified as having no critical
bugs and is a release candidate. Costs incurred after the enhancement has
reached technological feasibility and before it is released in the market are
capitalized and are primarily labor costs related to coding and testing.
Amortization begins once the software is ready for its intended use, generally
based on the pattern in which the economic benefits will be consumed. Costs
associated with major upgrade releases begin amortization in the month after
release. The amortization period is three years. As of
Leases - In
December June 30, 2020 31, 2019 Description Classification Right of Use Asset - Lease, net Other assets (non-current)$158,664 $195,441 Operating Lease liability - Short-term Current liabilities 77,267 74,373 Operating Lease liability - Long-term Other long-term liabilities 83,340 122,605
Note 4. Sale of Certain Accounts Receivable
The Company has available a financing line with a financial institution (the Purchaser), which enables the Company to sell accounts receivable 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 and fees of the transaction and less any anticipated future loss in the value of the retained asset.
The retained amount is 10% of the total accounts receivable invoice sold to the
Purchaser. The fee is charged at prime plus 3.6% (effective rate of 6.85% at
The financing line provides the Company the ability to finance up to
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
Note 5: Debt Obligations
Three debt obligations became due on
8
On
Note 6. 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 for the three months ended:
Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Numerator for basic and diluted net income (loss) per share: Net loss$(72,825) $(35,861) $(78,887) $(825) Basic and diluted net loss per share$.00 $.00 $.00 $.00 Weighted average common shares outstanding Basic and diluted shares 29,061,883 29,061,883 29,061,883 29,061,883 Anti-dilutive shares excluded from net loss per share calculation 32,910,942 30,738,588 32,910,942 30,738,588
Certain common shares issuable under stock options and convertible notes payable have been omitted from the diluted net income (loss) per share calculation because their inclusion is considered anti-dilutive because the exercise prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.
Note 7. Stock Option Plans and Agreements
The Company has approved stock options plans and agreements covering up to an aggregate of 12,520,000 shares of common stock. Such options may be designated at the time of grant as either incentive stock options or nonqualified stock options. Stock based compensation consists of charges for stock option awards to employees, directors and consultants.
On
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. 575,000 options were granted for the six
months ended
Risk-free interest rate 0.26%-1.40% Expected dividend yield 0% Expected stock price volatility 100% 2.75-3.01 years Expected life of options
The Company recorded expense for options issued to employees and independent
service providers of
At
A summary of all stock option activity for the three months endedJune 30, 2020 follows: Weighted Number of Average Aggregate Options Exercise Remaining Intrinsic Outstanding Price Contractual Value Term
Outstanding at
Granted 575,000 .06 Forfeited (25,000) .05 Expired (335,000) .15 Outstanding at June 30, 2020 11,125,500$.05 3.7 years$507,600 At June 30, 2020 - Vested or expected to vest 11,125,500$.05 3.7 years$507,600 Exercisable 10,525,500$.05 3.7 years$485,600 9
Note 8. Related Party Accounts Receivable and Accrued Interest Payable
Included in accrued interest payable is amounts due to related parties of
Note 9. Subsequent Events
Subsequent to
In
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements, the accuracy of which involves risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons including, but not limited to, those discussed under the heading "Forward Looking Statements" above and elsewhere in this report. We disclaim any obligation to update information contained in any forward-looking statements.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption. It has already disrupted global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19 and its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally.
The change in the economic environment is starting to have, and will continue to have, an adverse economic impact on our small and mid-size business customers and potential customers. We have seen, and continue to see, affected businesses freeze and furlough headcount, terminate employees, partially or completely shut down business operations, and business failures. Impacted businesses may also face liquidity issues, reduced budgets, or an inability to pay for our services or the same level of our services. In the second quarter of 2020, our revenue growth rate slowed, new sales growth lowered and potential customers delayed decisions to purchase.
During the first six months of 2020, our managed support services, cybersecurity projects and software license revenues were minimally impacted by the impact of the COVID-19 pandemic on our customers' operational priorities. We are also continuing to adapt our operations to meet the challenges of this uncertain and rapidly evolving situation, including establishing remote working arrangements for our employees, limiting non-essential business travel, and transitioning towards virtual sales and marketing events. These types of sales and marketing expenses decreased during the first half of 2020, and we expect these expenses will be lower compared to prior year periods due to the ongoing impact of the COVID-19 pandemic on travel and in-person marketing events. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition.
Business
Headquartered in
?
focus on key security services (virtual CISO, compliance review and assessment, incident response, penetration testing, and vulnerability assessments) to solve and simplify security for small and medium sized enterprises (SMEs), government agencies, and certain large commercial enterprises. We act as the security layer to both internal IT and third-party IT (MSPs, VARs, MSSPs) organizations. We work with both our channel partners and direct customers to provide these services;
?
developed and brought to market our patent pending, automated vulnerability
management solution through our OEM business, Nodeware®, which we sell through
distribution and channel partners. We are also a master distributor for other
security solutions such as Webroot, a cloud-based endpoint security platform
solution, where we market to and provide support for over 300 reseller partners
across
?
provide level 2 technical and security support across the application layer and physical and virtual infrastructure including software-based managed services supporting enterprise and federal government customers through our partnership with Perspecta; and
?
are an Enterprise Level sales and professional services partner with VMware selling virtualization licenses and solutions and providing virtualization services support to commercial and government customers.
Business Strategy
Our strategy is to build our business by designing, developing, and marketing cybersecurity-based services, products and solutions that address the evolving landscape in cybersecurity for our channel and customers. We have patent pending technology in the market and we continue to develop other additional products and solutions that can be added to our channel of domestic and international partners and distributors. Our products and solutions are designed to simplify the security needs in customer and partner environments, with a focus on the mid-tier Enterprise market and below. We enable our partners by providing recurring revenue-based business models for both recurring services and through our automated and continuous security solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions. Our ability to differentiate ourselves in the market at a time when competition and consolidation in these markets is on the rise has proven successful due to our increased cybersecurity engagements.
Our cybersecurity business is comprised of three components: managed security services, product development and deployment, and integration of third-party security solutions into our security offerings to our channel and customers. We provide cybersecurity services and technical consulting resources to support both our channel partners and end customers. For example, we sell our proprietary product, Nodeware, through both our direct partners and through other 3rd party partner distribution and agents so they can either sell it as a standalone solution or part of other technical services they provide to their customers. This enables the channel partner to develop a base of recurring revenue. We also provide our cybersecurity services through our channel partners as a cybersecurity overlay to the technical services they already provide.
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Our goal is to maintain our base of opportunities in our VMware business in both the public and commercial sector. Opportunistically, we will continue to identify license and services engagements as they arise.
We are working to expand our managed services business with our prime partner, Perspecta, and the current federal enterprise customer and its customers.
Results of Operations
Comparison of the Three Months Ended
The following table compares our statements of operations data for the three
months ended
Three Months Ended June 30, 2020 vs. 2019 As a % of As a % of Amount of % Increase 2020 Sales 2019 Sales Change (Decrease) Sales$1,703,361 100.0%$1,778,648 100.0 %$(75,287) (4.2) % Cost of sales 1,024,775 60.2 1,132,040 63.6 (107,265) (9.5) Gross profit 678,586 39.8 646,608 36.4 31,978 4.9 General and administrative 402,226 23.6 346,403 19.5 55,823 16.1 Selling 299,224 17.6 257,354 14.5 41,870 16.3 Total costs and expenses 701,450 41.2 603,757 33.9 97,693 16.2 Operating income (loss) (22,864) (1.3) 42,851 2.4 (65,715) (153.4) Other Income 2,912 0.2 0 0.0 2,912 Interest expense (52,873) (3.1) (78,712) (4.4) (25,839) (32.8) Net loss$(72,825) (4.3)%$(35,861) (2.0) %$(36,964) (103.1) % Net loss per share - basic and diluted$.00 $.00 $.00 Six Months Ended June 30, 2020 vs. 2019 As a % of As a % of Amount of % Increase 2020 Sales 2019 Sales Change (Decrease) Sales$3,602,956 100.0%$3,466,442 100.0 %$136,514 3.9 % Cost of sales 2,147,841 59.6 2,189,210 63.2 (41,369) (1.9) Gross profit 1,455,115 40.4 1,277,232 36.8 177,883 13.9 General and administrative 776,756 21.6 624,008 18.0 152,748 24.5 Selling 645,925 17.9 510,659 14.7 135,266 26.5 Total costs and expenses 1,422,681 39.5 1,134,667 32.7 288,014 25.4 Operating income 32,434 0.9 142,565 4.1 (110,131) 77.2 Other Income 2,912 0.1 0 0.0 2,912 Interest expense (114,233) (3.2) (143,390) (4.1) (29,157) (20.3) Net loss$(78,887) (2.2)%$(825) (0.0) %$(78,062) (9,462.1) % Net loss per share - basic and diluted$.00 $.00 $.00 Sales
Our managed support service sales comprised approximately 65% of our sales in 2020 and approximately 72% in 2019. Our cybersecurity projects and software sales, primarily to SMEs, were approximately 31% of our total sales as compared to approximately 20% for 2019.
Sales of virtualization subcontract projects have continued to decrease since
2015 because VMware has continued to assign fewer projects to us. Our
virtualization subcontract project sales decrease of approximately 63% from 2019
to 2020 was more than offset by sales growth of approximately 61% from our
cybersecurity projects and software business during the six months ended
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Cost of Sales and Gross Profit
Cost of sales principally represents the cost of employee services related to
our
Our gross profit improved by
General and Administrative Expenses
General and administrative expenses include corporate overhead such as compensation and benefits for executive, administrative and finance personnel, rent, insurance, professional fees, travel, and office expenses. General and administrative expenses increased due primarily to personnel increases and increases to professional fees for legal and accounting services.
Selling Expenses
The increase in selling expenses is due to the hiring of salespeople throughout
2019 to sell our cybersecurity services and software and associated commissions
due to the increased sales. The increase in selling expenses from the hiring of
new personnel was offset by approximately
Operating Income (Loss)
The decrease in our operating income from the previous year is principally
attributable to the growth of our sales team and the associated costs as well as
professional fees incurred for the three and six months ended
Interest Expense
The decrease in interest expense is principally attributable to the decrease in interest rates over the last year as well as the reduced need for factoring due to the receipt of the Payroll Protection Plan loan ("PPP Loan").
Net Loss
The decrease is attributable to the items discussed above for the three and six
months ended
Liquidity and Capital Resources
At
During 2020, until we received the PPP Loan, we financed our business activities
principally through cash flows provided by operations and sales with recourse of
our accounts receivable. Our primary source of liquidity is cash provided by
collections of accounts receivable and our factoring line of credit. We maintain
an accounts receivable financing line of credit with 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
On
At
We have
We also have current maturities of our long-term debt to related parties of
approximately
We plan to renegotiate the terms of the various notes payable, seek funds to repay the notes or use a combination of both alternatives. We cannot provide assurance that we will be able to repay current notes payable or obtain extensions of maturity dates for long-term notes payable when they mature or that we will be able to repay or otherwise refinance the notes at their scheduled maturities.
We have a LOC Agreement which was entered into on
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We cannot provide assurance that we will be able to repay current notes payable or obtain extensions of maturity dates for long-term notes payable when they mature or that we will be able to repay or otherwise refinance the notes at their scheduled maturities.
We have long-term obligations to third parties of
We have an unsecured line of credit financing agreement with our Chief Operating
Officer. It provides for working capital of up to
We have a note payable agreement for up to
The following table sets forth our cash flow information for the periods presented: Six Months EndedJune 30, 2020 2019
Net cash used by operating activities
$389,381 $(9,420)
Cash Flows Used by Operating Activities
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. We bill our clients
weekly or monthly after services are performed as well as collect down payments
depending on the contract terms. Our net loss of
We market Webroot and Nodeware to our IT channel partners who resell to their customers. We continue to make investments in expanding our sales of cyber security and Nodeware licenses to a growing channel and direct commercial customers. Due to the time of investment in cultivating relationships with our channel partners and end customers needed to generate these new sales, we do not expect to realize a return from our sales and marketing efforts for one or more quarters. As a result, we may continue to experience operating 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.
Cash Flows Used by Investing Activities
Cash used by investing activities was
Cash Flows Provided by Financing Activities
Cash provided by financing activities was
Credit Resources
We received approximately
We believe the capital resources available currently as well as under our factoring line of credit, cash from additional related party and third-party loans and cash generated by improving the results of our operations provide sources to fund our ongoing operations and to support our internal growth. Although we have no assurances, we believe that related parties, who have previously provided working capital, and third parties will continue to provide working capital loans on similar terms, as in the past, as may be necessary to fund our on-going in the future, however, substantial doubt about our ability to continue as a going concern has not been alleviated. 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 its sales growth.
We plan to evaluate alternatives which may include renegotiating the terms of our notes, seeking conversion of the notes to shares of common stock and seeking funds to repay our notes. We continue to evaluate repayment of our notes payable based on our cash flow.
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