RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31, 2009:
During the three-month period ended March 31, 2010 (the "2010 Period") revenues were $545,809 compared to revenues of $657,989 during the three-month period ended March 31, 2009 (the "2009 Period"). Our revenues decreased compared to the previous year as customers delayed spending in January and February on software development, infrastructure deployment and product purchases.
Cost of revenues was $440,436 for the 2010 Period compared to $415,488 for the 2009 Period. Cost of revenues represents primarily labor and labor-related costs in addition to overhead costs. Management made a concerted effort during the past 12 months to reduce our cost of revenues and increase our gross profit. Gross profit on these 2010 revenues amounted to $105,373 (19% gross profit percentage) compared to $242,501 (37% gross profit percentage) for the 2009 Period revenues. The reduced gross profit percentage resulted from our investment of consulting resources into our telepresence initiative that we believe will result in new business in the coming months.
Operating expenses were $262,864 during the 2010 Period compared to $301,235 during the 2009 Period. Selling, general and administrative operating expenses were lower in the 2010 Period due to the reduction in costs related to officers' salaries, rent and related expenses, travel and entertainment.
Loss from operations was $157,491 during the 2010 Period compared to $58,734 in the 2009 Period. We believe the increase in this loss to be a direct result of increasing our investment in telepresence to increase sales in combination with our cost cutting measures to increase operational efficiency.
Other income (expense) was $681,288 during the 2010 Period compared to ($2,006,101) in the 2009 Period. Other income (expense) is comprised primarily of derivative income (expense) and amortization of debt discount and deferred finance costs. Derivative income in the 2010 Period was $936,711 compared to derivative expense of $1,585,459 in the 2009 Period. The embedded conversion features associated with our convertible debentures are valued based on the number of shares that are indexed to that liability. Keeping the number of shares constant, the liability associated with the embedded conversion features increases as our share price increases and, likewise, decreases when our share price decreases. Derivative income (expense) displays the inverse relationship. The derivative income in the 2010 Period is the result of the decrease in our stock price on the measurement dates during the three month period ($0.08 at December 31, 2009 versus $0.028 at March 31, 2010). The derivative expense in the 2009 Period is the direct result of the increase in our stock price on the measurement dates during the three month period ($0.03 at December 31, 2008 versus $0.18 at March 31, 2009). An increase in the stock price resulted in an increased value of the embedded conversion feature (using the Monte Carlo calculator) which resulted in derivative expense. Interest expense for the three month 2010 Period is $277,381 compared to $420,642 for the three month 2009 Period. The decrease in interest expense is a direct result of the amortization of debt discount on the convertible debt. The debt discount was amortized using the effective interest method. Under this method, the amount of amortization increased exponentially as the underlying carrying value of the amortized debt increased. The debt discounts associated with the $2.8 million financing and the $600,000 financing finished amortizing in the fourth quarter of 2009.
Net income for the 2010 Period was $523,797 compared to net loss of $2,064,835 for the 2009 Period.
Basic weighted average shares outstanding were 6,894,901 during the 2010 Period compared to 2,929,176 in the 2009 Period. Fully diluted weighted average shares outstanding were 7,157,401 for the 2010 Period. There is no fully diluted calculation for the 2009 Period as the effect would have been anti-dilutive.
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2010, we had current assets of $169,689, current liabilities of $9,105,473, negative working capital of $8,935,784 and an accumulated deficit of $23,905,165.
We presently do not have any available credit, bank financing or other external sources of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding. We will still need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. If we do not obtain additional capital, we may cease operations.
However, even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
CONTRACTUAL OBLIGATIONS
The following table sets forth the contractual obligations of the Company as of
December 31, 2009:
Payments due by Period
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
Convertible debt, net $ 2,468,525 $ 2,468,525 $ - $ - $ -
Notes payable 357,732 357,732 - - -
Notes payable, related parties 408,229 408,229 - - -
Operating leases 68,751 27,482 41,269 - -
Long -term debt 989,100 989,100
Total $ 4,292,337 $ 4,251,068 $ 41,269 $ - $ -
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Form 10-K for the year ended December 31, 2009.
