INFINITE GROUP INC 10-K, filed Mar 30, 2020
INFINITE GROUP INC (IMCI)
10-K
2020-03-30
For: 2019-12-31
View Original
Added on
April 06, 2026
About this 10-K
INFINITE GROUP INC filed this 10-K on March 30, 2020, covering the fiscal year ended December 31, 2019.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Commission File Number 0-21816
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Infinite Group, Inc.
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175 Sully’s Trail, Suite 202
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Pittsford, NY 14534
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(585) 385-0610
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A Delaware Corporation
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IRS
Employer Identification Number: 52-1490422
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Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.001 Par Value
Common stock is quoted on the OTC Bulletin Board under the trading
symbol IMCI
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
☐ No ☒
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
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Large
Accelerated filer ☐
Non-accelerated
filer ☐
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Accelerated filer
☐
Smaller
reporting company ☒
Emerging growth
company ☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the common stock of the registrant
held by non-affiliates of the registrant (based upon the closing
price on the Over the Counter Bulletin Board of $.02 on June 30,
2019 the last business day of the registrant’s most recently
completed second fiscal quarter) was approximately
$580,000.
As of March 24, 2020, 29,061,883 shares of the registrant's common
stock, $.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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INFINITE GROUP, INC.
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Form 10-K
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TABLE OF CONTENTS
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PART I
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Page
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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7
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Item
1B.
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Unresolved
Staff Comments
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16
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Item
2.
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Properties
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16
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Item
3.
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Legal
Proceedings
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16
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Item
4.
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Mine
Safety Disclosures
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16
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PART II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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16
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Item
6.
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Selected
Financial Data
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17
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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20
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Item
8.
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Financial
Statements and Supplementary Data
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20
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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20
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Item
9A.
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Controls
and Procedures
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21
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Item
9B.
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Other
Information
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21
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PART III.
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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21
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Item
11.
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Executive
Compensation
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22
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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23
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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25
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Item
14.
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Principal
Accountant Fees and Services
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26
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PART IV.
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Item
15.
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Exhibits
and Financial Statement Schedules
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27
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Signatures
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29
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FORWARD LOOKING STATEMENT INFORMATION
Certain
statements made in this Annual Report on Form 10-K are
“forward-looking statements” regarding the plans and
objectives of management for future operations and market trends
and expectations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by
such forward-looking statements. The forward-looking statements
included herein are based on current expectations that involve
numerous risks and uncertainties. Our plans and objectives are
based, in part, on assumptions involving the expansion of our
business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive
and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which
are beyond our control. Although we believe that our assumptions
underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, there can be
no assurance that the forward-looking statements included in this
report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as
a representation by us or any other person that our objectives and
plans will be achieved. We undertake no obligation to revise or
update publicly any forward-looking statements for any reason.
Factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements
include, but are not limited to, the factors set forth herein under
the headings “Business,” “Risk Factors” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations”. The terms
“we”, “our”, “us”, or any
derivative thereof, as used herein refer to Infinite Group, Inc., a
Delaware corporation.
2
PART I
Item 1. Business
Headquartered
in Pittsford, New York, Infinite Group, Inc. (IGI) is --- a
developer of cybersecurity software and a provider of cybersecurity
consulting services to commercial businesses and government
organizations that was built from our foundation of managed IT and
virtualization services. As part of these offerings
we:
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focus on key
cybersecurity services (virtual CISO, compliance review and
assessment, incident response, penetration testing, managed
detection and response 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 cybersecurity 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;
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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
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 North
America;
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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
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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 including
the New York State and Local Government and Education (SLED)
entities and the New York State Office of General Services (NYS
OGS).
Business Overview
As of
December 31, 2019, we had 59 full-time employees. We possess
certifications with our business and technology partners and our
personnel maintain numerous security and technical certifications
and qualifications. Our professionals are located at our
headquarters in Pittsford, New York and in Colorado, Florida,
Idaho, New Jersey, Maryland, North Carolina, South Carolina,
Georgia, Texas, and Virginia.
We had
sales of approximately $7.1 million in 2019 and approximately $6.4
million in 2018. We generated operating income of approximately
$329,000 in 2019 as compared to approximately $210,000 in 2018. We
had net income of approximately $48,000 in 2019 and $37,000 in
2018. We recorded other income of $83,250 in 2018 from the
write-off of a note payable. We derived approximately 80% of our
sales in 2019 and 77% in 2018 from contracts as either a prime
contractor or a subcontractor with the remainder coming from our
software business.
During
2019, we derived approximately 60% of our sales from one prime
contractor, Perspecta (spun off from
DXC Technology Company in 2018), including sales under
subcontracts for services to its end clients, principally a major
establishment of the U.S. Government (the U.S. Government Entity)
for which we manage one of the nation’s largest physical and
virtual Microsoft Windows environments. During 2018, the percentage
was approximately 70%. We have been providing this service to the
U.S. Government Entity under a long-standing subcontract, which has
been renewed annually since 2004. Our team of application and
virtual infrastructure security experts supports approximately
5,000 physical and virtual servers and 250,000 client workstations
from facilities in Maryland and Colorado. Operating 24 hours per
day and seven days per week, we consistently meet or exceed the
requirements of our service level agreements. We refer to this as
our Advanced Server Management (ASM) team.
During 2019, we continued to grow our team of cybersecurity sales
and technical consultants with the continued objective of
accelerating sales growth. We continue to drive development of our
cybersecurity business through growing and developing channel
marketing, programs, and relationships for Nodeware and
cybersecurity consulting. We believe our channel presence through
entities including large distribution and master agents have
created significant opportunities in both of these areas. This has
further reinforced our commitment to this business strategy and our
decision to leverage third party channels to bring new business and
customers and drive growth of our existing relationships to IGI
resulting in improved operating income.
We have become less reliant on sales of U.S. Federal Government
virtualization projects as an Original Equipment Manufacturer (OEM)
subcontractor as our cybersecurity consulting business has grown.
Through our legacy VMware business, we have an umbrella NYS OGS
Contract through our partnership with VMware. We provide
cloud computing solutions that include public and private cloud
architectures along with hybrid scalable cloud hosting, server
virtualization and desktop virtualization solutions for the
government and SME markets. During
2019 and 2018, under this agreement we sold and delivered
virtualization software licenses and project credits to New York
State of approximately $265,000 and $510,000, respectively. Since
these are agent sales and are reported net of cost of sales, we
recorded sales of $27,589 for 2019 and $22,065 for
2018.
We
provide subcontracted professional services to a select set of OEMs
and commercial entities that need additional skilled resources and
executive oversight when architecting and implementing solutions.
Sales to our principal client, VMware, Inc., consisted of sales
under subcontracts for services to their end clients. During 2019,
we provided professional services to these clients and earned 7.7%
of our sales.
3
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.
We are
working to expand our managed services business with our prime
partner, Perspecta, and the current federal enterprise customer and
its customers.
The
following sections define specific components of our business
strategy.
Nodeware
We
launched Nodeware version 1 commercially in November 2016. Nodeware
is an agentless automated vulnerability management and monitoring
solution that is designed to enhance security by proactively
identifying, monitoring, and addressing potential vulnerabilities
on networks, creating a safeguard against malicious intent to
exploit known problems in a customer’s network with
simplicity and affordability. Customers have the option to purchase
Nodeware licenses to accommodate the varying network needs of their
organizations. Nodeware provides a value-based solution designed
for SMEs with single or multiple subnets.
Nodeware
assesses vulnerabilities in a computer network using scanning
technology to capture a comprehensive view of the security exposure
of a network infrastructure. Users receive alerts and view network
information through a proprietary, web enabled dashboard.
Continuous and automated internal scanning and external on demand
scanning are components of this offering.
Nodeware
2.0 was released to the market during 2017 providing the same
solution with a set of new features, such as credentialed and
uncredentialed vulnerability scanning. Nodeware scans the
customer’s system through domain credentials without
requiring an agent, providing a more comprehensive view of customer
vulnerabilities. This level of access often results in the
discovery of more missing patches or vulnerabilities that can then
be addressed by following instructions available within the
Nodeware interface.
Our
most current version of Nodeware was released in early 2019. The
upgrades made to this release include a next generation of the
platform. The new platform’s features include integration of
a new, cutting-edge scanning engine, a new reporting engine to
easily access reports within the Dashboard, allowing users to
securely archive every report and retrieve them instantly and
greater technology enhancements around device identification and
fingerprinting. Another new feature added to Nodeware was on-demand
report generation, which enables IGI’s channel partners to
easily pull reports for customers and run reports simultaneously
for better cybersecurity management.
Nodeware creates an opportunity for resellers, including managed
service providers, managed security service providers,
distributors, and value-added resellers. We sell Nodeware in the
commercial sector through channel partners and agents. In 2019, we
continued to expand our channel of resellers.
We believe that our intellectual property is an asset that may
contribute to the growth and profitability of our business. We rely
on a combination of patent- and confidentiality procedures and
contractual provisions to establish and protect our intellectual
property rights in the United States and abroad. In May
2016, we filed a provisional patent application for our proprietary
product, Nodeware. The U.S. patent
system permits the filing of provisional and non-provisional patent
applications. A non-provisional patent application is examined by
the United States Patent and Trademark Office (USPTO) and
can mature into a patent once the USPTO determines that the claimed
invention meets the standards for patentability. In May 2017, we
filed a utility patent application for Nodeware which is currently
under review. Additional intellectual property will be evaluated on
a regular basis to determine its viability for patent
application.
Technology and Product Development
Our
goal is to position our products and solutions to enable vertical
integration with other solutions. We have a technology and product
development strategy aligned with our business strategy. We
continue to seek to identify other technical partners in the
cybersecurity market to integrate Nodeware in to; through either
API or full stack integration.
4
Cybersecurity Services
We
provide cybersecurity consulting services that include incident
response, security awareness training, risk management, IT
governance and compliance, security assessment services,
penetration testing, managed detection and response (MDR) and
virtual Chief Information Security Officer (vCISO) offerings to
channel partners and direct customers across different vertical
markets (banking, healthcare, manufacturing, etc.) in North
America. Our cybersecurity projects use and leverage different
technology platforms and processes such as Nodeware to create a
living document that a customer can use to go forward on a path of
continuous improvement for its overall IT security. We support both
internal and external IT organizations with our cybersecurity
overlay that allows us to stay agnostic in the process, especially
for compliance while enabling the IT organization to address the
issues discovered. We validate overall network security with the
goal of maintaining the integrity of confidential client
information, preserving the continuity of services, and minimizing
potential data damage from attempted threats and incidents. We
continue to enhance our Cybersecurity services when opportunities
materialize and as the market evolves.
Government Contract Vehicles and Agreements
A government contract vehicle is a mechanism for conducting
business with government entities which helps to significantly
reduce such entities’ lead time for procuring products or
services and lowers agency acquisition costs associated with
managing complex bid procedures. We believe that possessing contract vehicles will
facilitate sales growth if we are successful at bidding and winning
business within task orders generated under these vehicles.
However, the amount of sales that we may generate is not
determinable until a specific project award is
made.
Federal Supply Schedule Contract. In 2003, we were awarded a
Federal Supply Schedule Contract by the U.S. General Services
Administration (GSA) for IT consulting services (Schedule 70). Our
Schedule 70 contract was extended through December 2023. Having a
Schedule 70 allows us to compete for and secure prime contracts
with all executive agencies of the U.S. Government, as well as
other national and international organizations. Our Schedule 70
contract encompasses 95 different labor categories and in 2018
Nodeware was also added. We have used our Schedule 70 as a basis
for pricing our current and proposed work.
New York State and Local Government and Education (SLED).
In 2016, we began working with VMware
when it established a contract with NYS. VMware designated us as
one of a select group of partners that is authorized to sell VMware
licenses to SLED customers throughout New York State under their
2016 New York State Information Technology Service (ITS)
Manufacturer Umbrella Contract. Beginning in 2017, we also have a
similar contract with HPE under the NYS OGS contract that further
enables us to bring solutions to SLED customers. These contracts
continued in 2019.
The Quilt. The Quilt is the
non-profit national coalition of 36 of our country’s most
advanced regional research and education organizations.
Participants in The Quilt provide advanced network services and
applications to over 250 universities and thousands of other
educational institutions. Based on The Quilt participants’
combined experiences in operations and development of leading-edge
technologies, The Quilt aims to influence the national agenda on
information technology infrastructure, with emphasis on networking
for research and education. Through this coalition, The Quilt
promotes delivery of networking services at lower cost, higher
performance and greater reliability and security. Carahsoft is a
master government aggregator and distributor for the
industry’s leading and emerging IT manufacturers. We have an
agreement with Carahsoft to place orders against Carahsoft’s
Quilt contract for VMware products and support services for a
period of one year, renewable annually.
Partner Agreements
SYNNEX distribution agreement. In 2019, we signed a
distribution agreement with SYNNEX Corporation (NYSE: SNX), a
leading business process services company, to bring Nodeware and
IGI’s full suite of cybersecurity services to the SYNNEX
reseller channel in the U.S. and Canada. SYNNEX resellers offer IGI
services and Nodeware to their customer base, helping them to
improve their security posture and reduce their cyber
risk.
Staples to sell Nodeware. In 2019, we also signed a
distribution agreement with Staples Inc. to sell its
Nodeware™ vulnerability management solution through the
Staples Business to Business(“B2B”) solutions division.
The entire Staples customer base will now have access to this
solution.
Staples to sell Cybersecurity services. In 2020, we added
our portfolio of cybersecurity services to the distribution
agreement with Staples Inc. through the Staples B2B solutions
division.
VMware Enterprise Solution Provider and Consulting
Subcontractor. Since 2007, we have been an approved VMware
Authorized Consultant (VAC) by VMware, Inc. VMware is recognized as
the industry leader in virtualization technology. As a VAC, we are
trained and certified to deliver consulting services and solutions
leveraging VMware technology. We implement offsite data storage,
server virtualization, virtual desktop infrastructure, and public,
private or hybrid cloud solutions. Since 2015, we have been a
VMware Enterprise Level Solution Provider (ESP) where we still have
the benefits of an architect, integration, and service partner
along with the ability to sell VMware licenses. We have several
solution specializations and are registered with the U.S. Federal
and Education Specializations and SLED within VMware. We have
completed over 700 projects around the globe and in market sectors
including U.S. Government, state governments, education, and
commercial corporations.
Certifications
Our
technical support personnel maintain leading edge certifications
and qualifications in the respective software applications. These
certifications are examples of our concerted effort to grow and
expand our virtualization practice. We believe that our
virtualization experience and expertise with VMware will offer
opportunities to increase sales, particularly in the cloud
computing market.
5
CISSP® - Certified Information Systems Security
Professionals. The CISSP certification is a credential for those
with technical and managerial competence, skills, experience, and
credibility to design, engineer, implement, and manage overall
information security programs to protect organizations from
increasingly sophisticated attacks. It is a globally recognized
standard of achievement. Certain of our employees in our cyber
security group have this certification.
GCIH - GIAC Certified Incident Handler. The GCIH
certification is a credential for incident handlers who manage
security incidents by understanding common attack techniques,
vectors and tools as well as defending against and/or responding to
such attacks when they occur. The GCIH certification focuses on
detecting, responding, and resolving computer security incidents
including:
●
the incident
reporting process;
●
malicious
applications and network activity;
●
common attack
techniques that compromise hosts;
●
system and network
vulnerabilities; and
●
continuous process
improvement and the root causes of incidents.
Certain
of our employees in our cyber security group have this
certification.
CEH – Certified Ethical Hacker. The Certified Ethical
Hacker (CEH) program is a comprehensive ethical hacking
certification to help information security professionals grasp the
fundamentals of ethical hacking. The certification serves to assist
our consultants to systematically attempt to inspect network
infrastructures with the consent of its owner to find security
vulnerabilities which a malicious hacker could potentially exploit.
The course helps assess the security posture of an organization by
identifying vulnerabilities in the network and system
infrastructure to determine if unauthorized access is possible.
Certain of our employees in our cyber security group have this
certification.
Microsoft Gold Certified Partner. We are part of
Microsoft's Accredited Online Cloud Services program. We have been
certified in sales, pricing and technical delivery of Office 365
which combines the familiar Office desktop suite with cloud-based
versions of the next-generation communications and collaboration
services: Exchange Online, SharePoint Online and Lync Online. These
services are providing real world benefits to our clients while
allowing us to offer clear guidelines for transitioning new users
to hybrid-cloud-based solutions. We received certification for
Windows Intune which provides complete remote desktop support
capabilities enhancing our overall goal of providing complete
solutions for virtualization and cloud-based Software as a Service
(SaaS). What once required expensive hardware and time-consuming
deployments can now be delivered seamlessly, including web
conferencing, collaboration, document management, messaging,
customer relationship management and productive office web
applications all with lower total cost of ownership and quicker
return on investment. We believe our Microsoft competencies assist
our business development personnel when presenting solutions that,
if accepted, will increase our sales.
Perspecta Inc. Global Procurement Master Terms Agreement.
We are a member of a select group of
suppliers that enables Perspecta Inc. (spun off from DXC Technology
Company in 2018) to purchase products and services from us under a
global procurement master agreement and as specified in a statement
of work for each project. This relationship continues to evolve and
is something that is responsible for our long-term relationship
with the Federal customer mentioned previously. Perspecta has many
tools and resources to help us generate new sales streams, and
improve our mutual profitability, while at the same time adding
unique value for our joint clients. The program comprises practical
tools and services that we anticipate will help us in the key areas
of marketing and selling our solutions, optimizing the technology,
and collaborating with other organizations within our industry to
generate more revenue. Our global procurement master agreement with
Perspecta runs to January 2021.
Competition
As we
increase our focus in cybersecurity services and product
development, we face competition from several different vendors in
this evolving market. We compete with other IT professional
services firms, Managed Security Services Providers (MSSPs), and
cybersecurity product and software developers operating in the
Federal Government, state and local government and commercial
marketplace. We obtain a portion of our business based on proposals
submitted in response to requests from potential and current
clients, who typically also receive proposals from other firms. We
face competition in the commercial markets from other IT service
providers, MSSPs, and software development companies, large and
small. Many of our larger competitors, in general, have
substantially greater capital resources, research and development
staffs, sales, and marketing resources, facilities, and
experience.
Company Information Available on the Internet
We maintain a website at https://IGIus.com.
Through a link to the Investor
Relations section of our website, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the Exchange Act), are available, free of charge, as soon as
reasonably practicable after we electronically file such material
with or furnish it to the Securities and Exchange Commission (SEC).
We also maintain a web site for our cybersecurity product,
Nodeware, and related services at https://www.nodeware.com.
The content of our websites shall not be deemed part of this
report.
Employees
As of December 31, 2019, we have 59 full-time employees, including
40 in information technology services, three in executive
management, three in accounting, finance and administration, three
in software development and ten in marketing and sales. We are not
subject to any collective bargaining agreements and we believe that
relations with our employees and independent contractors are good.
We believe that we are currently staffed at an appropriate level to
administratively implement and carry out our business plan for the
next 12 months. However, we expect to add positions in sales,
technical support, marketing and cybersecurity consulting to meet
growing demands.
Our
ability to develop and market our services, and to establish and
maintain a competitive position in our businesses will depend, in
large part, upon our ability to attract and retain qualified
technical, marketing and managerial personnel, of which there can
be no assurance.
6
General Information
We were
incorporated under the laws of the state of Delaware on October 14,
1986. Our principal corporate headquarters are located at 175
Sully’s Trail, Suite 202, Pittsford, NY 14534. Our business
is in the field of delivering cybersecurity services, licensing and
selling our cybersecurity solutions, including Nodeware, and
distributing third party software licenses.
Item 1A. Risk Factors
In
addition to the other information provided in our reports, you
should consider the following factors carefully in evaluating our
business and us. Additional risks and uncertainties not presently
known to us, which we currently deem immaterial or that are similar
to those faced by other companies in our industry or business in
general, such as competitive conditions, may also impair our
business operations. If any of the following risks occur, our
business, financial condition, or results of operations could be
materially adversely affected.
Risks Related to our Industry
The IT cybersecurity services industry is highly competitive, and
we may not be able to compete effectively.
We
operate in a highly competitive industry that includes many
participants. We believe that we currently compete principally with
other IT professional services firms, technology vendors and the
internal information systems groups of our clients. Many of the
companies that provide services in our markets have significantly
greater financial, technical and marketing resources than we do.
Our marketplace continues to experience rapid changes in its
competitive landscape. Some of our competitors have sought access
to public and private capital and others have merged or
consolidated with better-capitalized partners. These changes may
create more or larger and better-capitalized competitors with
enhanced abilities to compete for market share generally and our
clients specifically, in some cases, through significant economic
incentives to clients to secure contracts. These competitors may
also be better able to compete for skilled professionals by
offering them large compensation incentives. One or more of our
competitors may develop and implement methodologies that result in
superior productivity and price reductions without adversely
affecting the competitors' profit margins. In addition, there are
relatively few barriers to entry into our markets and we have
faced, and expect to continue to face, competition from new
entrants into our markets. As a result, we may be unable to
continue to compete successfully with our existing or any new
competitors.
If we fail to meet our contractual obligations to our clients, our
ability to compete for future work and our financial condition may
be adversely affected.
If we
fail to meet our contractual obligations, we could be subject to
legal liability, which could adversely affect our business,
operating results and financial condition. The provisions we
typically include in our contracts which are designed to limit our
exposure to legal claims relating to our services may not protect
us or may not be enforceable under some circumstances or under the
laws of some jurisdictions. It is possible, because of the nature
of our business, that we may be exposed to legal claims in the
future. We have errors and omissions insurance with coverage limits
of $1 million, subject to a $100,000 deductible payable by us. The
policy limits may not be adequate to provide protection against all
potential liabilities. As a consulting firm, we depend on our
relationships with our clients and our reputation for high-quality
services to retain and attract clients and employees. As a result,
claims made against us may damage our reputation, which in turn,
could impact our ability to compete for new business.
Our sales may suffer if our patent application for the technology
used by our product, Nodeware, is not approved.
In May
2016, we filed a provisional patent application for our proprietary
product, Nodeware, to protect the
technology that we developed and applied. In May 2017, we
filed a utility patent application for Nodeware. Our patent
application is ready for examination by the U.S. patent application
examiner. We may not have the full protection until it is
fully approved. This may provide an opportunity for our competitors
to develop similar products and technologies and directly compete with us. This may harm our
sales and our ability to earn a return on our investments in this
technology.
Our gross margin from our contracts will suffer if we are not able
to maintain our pricing and utilization rates and control our
costs.
Our
gross profit margin is largely a function of the rates we charge
for our IT Services and the utilization rate, or chargeability, of
our employees. Accordingly, if we are not able to maintain the
rates we charge for our services or an appropriate utilization rate
for our employees, we will not be able to sustain our gross profit
margin and earn a sufficient amount to fund our operating expenses.
The rates we charge for our IT Services are affected by several
factors, including:
●
our clients'
perception of our ability to add value through our
services;
●
competition;
●
introduction of new
services or products by us or our competitors;
●
pricing policies of
our competitors; and
●
general economic
conditions.
Our
utilization rates are also affected by several factors, including:
seasonal trends, primarily because of holidays, vacations, and
slowdowns by our clients, which may have a more significant effect
in the fourth quarter; our ability to transition employees from
completed engagements to new engagements; our ability to forecast
demand for our services and thereby maintain an appropriately
balanced and sized workforce; and our ability to manage employee
turnover.
7
We have
implemented cost-management programs to manage our costs, including
personnel costs, support and other overhead costs. Some of our
costs, like office rents, are fixed in the short term, which limits
our ability to reduce costs in periods of declining sales. Our
current and future cost-management initiatives may not be
sufficient to maintain our margins as our level of sales
varies.
We sell our product, Nodeware, to
various customers, and we are therefore subject to risks
associated with our sales and operations.
Our potential growth in certain markets could be adversely affected
by:
●
trade regulations
and procedures and actions affecting pricing and marketing of
products, including policies adopted by countries that may champion
or otherwise favor domestic companies and technologies over foreign
competitors;
●
changes in the
international, national or local regulatory and legal environments;
and
●
import, export or
other business licensing requirements or requirements relating to
foreign software licenses, which could increase our cost of doing
business in certain jurisdictions, prevent us from delivering our
product to certain countries or markets.
These
and other factors could harm our ability to generate future revenue
and impact our business, results of operations and financial
condition.
We may be unable to protect our intellectual property adequately,
which could harm our business, financial condition, and results of
operations.
We
believe that our intellectual property is an asset that may
contribute to the growth and profitability of our business. We rely
on a combination of patent and confidentiality procedures and
contractual provisions to establish and protect our intellectual
property rights in the United States and abroad. The efforts we
have taken to protect our intellectual property may not be
sufficient or effective, and no patents may ultimately issue from
any patent applications we have made or may make. Any U.S. or other
patents issued to us may not be sufficiently broad to protect our
proprietary technology or be enforceable at all. We may not be
effective in policing unauthorized use of our intellectual
property. Further, the laws of certain countries do not protect
proprietary rights to the same extent as the laws of the United
States. Therefore, in certain jurisdictions we may be unable to
protect our proprietary technology adequately against unauthorized
third party copying or use. If we do detect violations, litigation
may be necessary to enforce our intellectual property rights. Any
enforcement efforts we undertake, including litigation, could be
time consuming and expensive. It could divert management’s
attention and may result in a court determining that our
intellectual property rights are unenforceable. If we are not
successful in cost effectively protecting our intellectual property
rights, our business, financial condition, and results of
operations could be harmed.
If we or our channel partners fail to properly complete
cybersecurity assessments and other projects for customers, the
customers may assert that we have contributed to cybersecurity
issues that they may incur and seek recourse from us.
We perform cybersecurity assessments and other projects for our
customers. We issue reports that state the results of our work. If
a customer encounters a cybersecurity issue, it may assert that we
did not identify and suggest remediation for the
issue.
Our channel partners use Nodeware in cybersecurity projects. Our
channel partners may incur the same risks that we incur in
completing cybersecurity projects using Nodeware.
For any
security breaches against customers that use our Nodeware scanner
or services, breaches against those customers may result in
customers and the public believing that Nodeware or our services
failed. Our customers may look to our competitors for alternatives
to Nodeware and our services. Real or perceived security breaches
of our customers’ networks could cause disruption or damage
to their networks or other negative consequences and could result
in negative publicity to us, damage to our reputation, declining
sales, increased expenses and customer relations issues. Any real
or perceived defects in our product and services, or failure of our
product and services to detect a vulnerability could result
in:
●
a loss of existing
or potential customers or channel partners;
●
delayed or lost
revenue and harm to our financial condition and results of
operations;
●
a delay in
attaining, or the failure to attain, market
acceptance;
●
an increase in
warranty claims, or an increase in the cost of servicing warranty
claims, either of which would adversely affect our gross margins;
and
●
litigation,
regulatory inquiries, or investigations that may be costly and
further harm our reputation.
These
and other factors could harm our results of operations and
financial condition.
We depend on third party vendors and incur risks associated with
cloud-based technologies and our product,
Nodeware.
We
store certain information in a cloud-based environment with third
party vendors. We are dependent on them to maintain a high level of
security to protect our information and may incur adverse
consequence if each vendor does not provide sufficient
security.
8
If we cannot continue to produce quality products and services, our
reputation, business, and financial performance may
suffer.
In
operating our business, we must address quality issues associated
with our product, services, and solutions, including defects in
engineering, design and manufacturing processes and unsatisfactory
performance under service contracts, including defects in
third-party components used in our product and unsatisfactory
performance or even malicious acts by third party contractors or
their employees. To address quality issues, we test our product to
determine the causes of problems and to develop and implement
appropriate solutions. However, the product, services, and
solutions that we offer may be complex, and our testing and quality
control efforts may not be effective in controlling or detecting
all quality issues, particularly with respect to faulty components
manufactured by third parties. If we are unable to determine the
cause, find an appropriate solution to address quality issues with
our product, we may delay shipment to customers, which could delay
revenue recognition and receipt of customer payment and could
adversely affect our revenue, cash flows and profitability. After
products are delivered, quality issues may require us to repair or
replace such products. Addressing quality issues can be expensive
and may result in additional repair, replacement and other costs,
adversely affecting our financial performance. If our customers are
dissatisfied with our services or solutions, our results of
operations could be adversely affected, and we could face possible
claims if we fail to meet our customers' expectations. In addition,
quality issues can impair our relationships with our customers
which could adversely affect our results of
operations.
System security risks, data protection breaches, cyberattacks, and
systems integration issues could disrupt our internal operations or
IT services provided to customers, and any such disruption could
reduce our revenue, increase our expenses, damage our
reputation.
We sell
cybersecurity services, third-party software as well as our
internally developed software, Nodeware. As a result, we have
been and will be a target of cyber-attacks designed to impede the
performance of our products, penetrate our network security or the
security of our cloud platform or our internal systems, or that of
our customers, misappropriate proprietary information and/or cause
interruptions to our services. For example, because Nodeware is a
network vulnerability management tool, a successful cyber-attack on
us may be perceived as a victory for the cyber attacker, thereby
increasing the likelihood that we may be a target of more
cyber-attacks, even absent financial motives. Further, if our
systems are breached as a result of third-party action, employee
error or misconduct, attackers could learn critical information
about how our primary product operates to help protect our
customers’ IT infrastructures from cyber risk, thereby making
our customers more vulnerable to cyber-attacks. In addition, if
actual or perceived breaches of our network security occur, they
could adversely affect the market perception of our Nodeware
product, negatively affecting our reputation, and may expose us to
the loss of our proprietary information or information belonging to
our customers, investigations or litigation and possible liability,
including injunctive relief and monetary damages. Such security
breaches could also divert the efforts of our technical and
management personnel. In addition, such security breaches could
impair our ability to operate our business and provide products to
our customers. If this happens, our reputation could be harmed, our
revenue could decline, and our business could suffer. We
monitor our network continuously with our Nodeware product as well
as other cybersecurity software.
We are
not aware of or identified an incident leading to a breach of our
internal or external facing systems. We have implemented
several proactive policies and procedures to mitigate any internal
incidents from outside forces. This includes deploying additional
monitoring software, phishing training, creating an internal
incident response team, and additional awareness through internal
communications around typical attempts that outside forces use.
While we have seen phishing attempts sent to certain email
addresses, we have mitigated those through the aforementioned
steps. Our internal security team has blocked the associated
addresses and/or domains of the senders and has enhanced email
security features to identify external emails. Overall, our
internal security posture continues to evolve as the market
evolves. We have a cyber insurance policy which will cover
certain expenses related to an attack, such as certain business
interruption costs associated with an incident.
We depend on prime contracts or subcontracts with the federal,
state and local governments for a substantial portion of our sales,
and our business would be seriously harmed if the government ceased
doing business with us or our prime contractors or significantly
decreased the amount of business it does with us or our prime
contractors.
We
derived approximately 70% of our sales in 2019 from contracts as
either a prime contractor or a subcontractor from government
contracts. We expect that we will continue to derive a substantial
portion of our sales for the foreseeable future from work performed
under government contracts, as we have in the past, and from
marketing efforts focused on commercial enterprises. If we or our
prime contractors were suspended or prohibited from contracting
with federal, state or local governments, or if our reputation or
relationship with the federal, state or local governments and
commercial enterprises were impaired, or if any of the foregoing
otherwise ceased doing business with us or our prime contractors or
significantly decreased the amount of business it does with us or
our prime contractors, our business, prospects, financial condition
and operating results would be materially adversely
affected.
Our business could be adversely affected by changes in budgetary
priorities of the federal, state and local
governments.
Because
we derive a significant portion of our sales from contracts with
federal, state and local governments, we believe that the success
and development of our business will continue to depend on our
successful participation in their contract programs. Changes in
federal, state and local government budgetary priorities could
directly affect our financial performance. A significant decline in
government expenditures, a shift of expenditures away from programs
which call for the types of services that we provide or a change in
government contracting policies, could cause U.S. Governmental
agencies as well as state and local governments to reduce their
expenditures under contracts, to exercise their right to terminate
contracts at any time without penalty, not to exercise options to
renew contracts or to delay or not originate new contracts. Any of
those actions could seriously harm our business, prospects,
financial condition or operating results. Moreover, although our
contracts with governmental entities may contemplate that our
services will be performed over a period of several years,
government entities usually must approve funds for a given program
each government fiscal year and may significantly reduce or
eliminate funding for a program. Significant reductions in these
appropriations could have a material adverse effect on our
business. Additional factors that could have a serious adverse
effect on our government contracting business include, but may not
be limited to:
9
●
changes in
government programs or requirements;
●
budgetary
priorities limiting or delaying government spending generally, or
by specific departments or agencies and changes in fiscal policies
or available funding, including potential governmental
shutdowns;
●
reductions in the
government's use of technology solutions firms;
●
a decrease in the
number of contracts reserved for small businesses, or small
business set asides, which could result in our inability to compete
directly for these prime contracts; and
●
curtailment of the
government uses of IT or related professional
services.
The Office of Management and Budget process for ensuring government
agencies properly support capital planning initiatives, including
information technology investments, could reduce or delay federal
information technology spending and cause us to lose
revenue.
The Office of Management and Budget, or OMB, supervises spending by
federal agencies, including enforcement of the Government
Performance Results Act. This Act requires, among other things,
that federal agencies make an adequate business justification to
support capital planning initiatives, including all information
technology investments. The factors considered by the OMB include,
among others, whether the proposed information technology
investment is expected to achieve an appropriate return on
investment, whether related processes are contemporaneously
reviewed, whether inter-operability with existing systems and the
capacity for these systems to share data across government has been
considered, and whether existing off-the-shelf products are being
utilized to the extent possible. If our clients do not adequately
justify proposed information technology investments to the OMB, the
OMB may refuse funding for their new or continuing information
technology investments, and we may lose revenue as a
result.
Our contracts with federal, state and local governments may be
terminated or adversely modified prior to completion, which could
adversely affect our business.
U.S.
Government contracts generally contain provisions, and are subject
to laws and regulations, that give the U.S. Government rights and
remedies not typically found in commercial contracts, including
provisions permitting the U.S. Government to:
●
terminate our
existing contracts;
●
reduce potential
future revenues from our existing contracts;
●
modify some of the
terms and conditions in our existing contracts;
●
suspend or
permanently prohibit us from doing business with the U.S.
Government or with any specific government agency;
●
impose fines and
penalties;
●
subject us to
criminal prosecution;
●
suspend work under
existing multiple year contracts and related task orders if the
necessary funds are not appropriated by Congress;
●
decline to exercise
an option to extend an existing multiple year
contract;
●
subject the award
of some contracts to protest or challenge by competitors, which may
require the contracting U.S. agency or department to suspend our
performance pending the outcome of the protest or challenge and
which may also require the government to solicit new bids for the
contract or result in the termination, reduction or modification of
the awarded contract; and
●
claim rights in
technologies and systems invented, developed or produced by
us.
The
U.S. Government may terminate a contract with us either for
convenience (for instance, due to a change in its perceived needs
or its desire to consolidate work under another contract) or if we
default by failing to perform under the contract. If the U.S.
Government terminates a contract with us for convenience, we
generally would be entitled to recover only our incurred or
committed costs, settlement expenses and profit on the work
completed prior to termination. If the U.S. Government terminates a
contract with us based upon our default, we generally would be
denied any recovery for undelivered work, and instead may be liable
for excess costs incurred by the U.S. Government in procuring
undelivered items from an alternative source. We may in the future
receive show-cause or cure notices under contracts that, if not
addressed to the U.S. Government's satisfaction, could give the
government the right to terminate those contracts for default or to
cease procuring our services under those contracts.
Our
U.S. Government contracts typically have terms of one or more base
years and one or more option years. Many of the option periods
cover more than half of the contract's potential term. U.S.
Governmental agencies generally have the right not to exercise
options to extend a contract. A decision to terminate or not to
exercise options to extend our existing contracts could have a
material adverse effect on our business, prospects, financial
condition and results of operations.
10
Certain
of our U.S. Government contracts also contain organizational
conflict of interest clauses that could limit our ability to
compete for certain related follow-on contracts. For example, when
we work on the design of a solution, we may be precluded from
competing for the contract to install that solution. While we
actively monitor our contracts to avoid these conflicts, we cannot
guarantee that we will be able to avoid all organizational conflict
of interest issues.
In addition, U.S. Government contracts are frequently awarded only
after formal competitive bidding processes, which have been and may
continue to be protracted, and typically impose provisions that
permit cancellation if funds are unavailable to the public
agency.
The
competitive bidding process presents several risks, including the
following:
●
we expend
substantial funds, managerial time and effort to prepare bids and
proposals for contracts that we may not win;
●
we may be unable to
estimate accurately the resources and costs that will be required
to service any contract we win, which could result in substantial
cost overruns; and
●
we may encounter
expense and delay if our competitors protest or challenge awards of
contracts to us in competitive bidding, and any such protest or
challenge could result in a requirement to resubmit bids on
modified specifications or in the termination, reduction or
modification of the awarded contract.
Unfavorable government audits could require us to refund payments
we have received, to forgo anticipated sales and could subject us
to penalties and sanctions.
The
federal, state and local government entities we work for generally
have the authority to audit and review our contracts with them
and/or our subcontracts with prime contractors. As part of that
process, the government agency reviews our performance on the
contract, our pricing practices, our cost structure and our
compliance with applicable laws, regulations and standards. If the
audit agency determines that we have improperly received payment or
reimbursement, we would be required to refund any such amount. If a
government audit uncovers improper or illegal activities by us, we
may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeitures of
profits, suspension of payments, fines and suspension or
disqualification from doing business with the government. Any such
unfavorable determination could adversely impact our ability to bid
for new work which would have a negative impact on our
business.
The failure by federal, state and local governments to approve
budgets on a timely basis could delay procurement of our services
and solutions and cause us to lose future revenues.
On an annual basis, Congress, and state and local governments must
approve budgets that govern spending by government entities that we
support. In years when governments do not complete the budget
process before the end of their fiscal year, governments may fund
operations pursuant to a continuing resolution. A continuing
resolution allows U.S. Government agencies and other government
entities to operate at spending levels approved in the previous
budget cycle. When the government operates under a continuing
resolution, it may delay funding we expect to receive from clients
on work we are already performing and will likely result in new
initiatives being delayed or in some cases cancelled.
We may lose money on some contracts if we do not accurately
estimate the expenses, time, and resources necessary to satisfy our
contractual obligations.
We may
originate two types of government contracts for our services:
time-and-materials and fixed-price. Each of these types of
contracts, to varying degrees, involves some risk that we could
underestimate our cost of fulfilling the contract, which may reduce
the profit we earn or lead to a financial loss on the
contract.
Under
time and materials contracts, we are reimbursed for labor at
negotiated hourly billing rates and for certain expenses. We assume
financial risk on time and material contracts because we assume the
risk of performing those contracts at negotiated hourly
rates.
Under
fixed-price contracts, we perform specific tasks for a fixed price.
Compared to cost-plus contracts, fixed price contracts generally
offer higher margin opportunities, but involve greater financial
risk because we bear the impact of cost overruns and bear the risk
of underestimating the level of effort required to perform the
contractual obligations, which could result in increased costs and
expenses.
Our
profits could be adversely affected if our costs under any of these
contracts exceed the assumptions we used in bidding for the
contract.
If we fail to establish and maintain important relationships with
government entities, our ability to successfully bid for new
business may be adversely affected.
To
develop new business opportunities, we rely on establishing and
maintaining relationships with various government entities. We may
be unable to successfully maintain our relationships with
government entities, and any failure to do so could materially
adversely affect our ability to compete successfully for new
business.
11
Our business may suffer if our facilities or our employees are
unable to obtain or retain the security clearances or other
qualifications needed to perform services for our
clients.
Many of
our U.S. Government contracts require employees and facilities used
in specific engagements to hold security clearances and to clear
National Agency Checks and Defense Security Service checks. Some of
our contracts require us to employ personnel with specified levels
of education, work experience and security clearances. Depending on
the level of clearance, security clearances can be difficult and
time-consuming to obtain. If our employees or our facilities lose
or are unable to obtain necessary security clearances or
successfully clear necessary National Agency or Defense Security
Service checks, we may not be able to win new business and our
existing clients could terminate their contracts with us or decide
not to renew them, and in each instance our operating results could
be materially adversely affected.
We must comply with a variety of laws, regulations and procedures
and our failure to comply could harm our operating
results.
We must
observe laws and regulations relating to the formation,
administration and performance of government contracts which affect
how we do business with our clients and impose added costs on our
business. For example, the Federal Acquisition Regulation and the
industrial security regulations of the Department of Defense and
related laws include provisions that:
●
allow U.S.
Government entities to terminate or not renew contracts if we come
under foreign ownership, control or influence;
●
require us to
disclose and certify cost and pricing data in connection with
contract negotiations;
●
require us to
prevent unauthorized access to classified information;
and
●
require us to
comply with laws and regulations intended to promote various social
or economic goals.
We are
subject to industrial security regulations of the U.S. Government
agencies that are designed to safeguard against foreigners' access
to classified information. If we were to come under foreign
ownership, control or influence, we could lose our facility
security clearance, which could result in our U.S. Government
clients terminating or deciding not to renew an existing contract
and could impair our ability to obtain new contracts.
In
addition, our employees and independent contractors must often
comply with procedures required by the specific agency for which
work is being performed, such as time recordation or prohibition on
removal of materials from a location.
Our
failure to comply with applicable laws, regulations or procedures,
including U.S. Government procurement regulations and regulations
regarding the protection of classified information, could result in
contract termination, loss of security clearances, suspension or
prohibition from contracting with government entities, civil fines
and damages and criminal prosecution and penalties, any of which
could materially adversely affect our business.
Federal, state and local governments may revise their procurement
or other practices in a manner adverse to us.
Federal,
state and local governments may revise
their procurement practices or adopt new contracting rules and
regulations, such as cost accounting standards. New contracting
methods may be adopted relating to GSA contracts, government-wide
contracts, or new standards for contract awards intended to achieve
certain social or other policy objectives, such as establishing new
set-aside programs for small or minority-owned businesses. In
addition, government entities may face restrictions from new
legislation or regulations, as well as pressure from government
employees and their unions, on the nature and amount of services
they may obtain from private contractors. These changes could
impair our ability to obtain new contracts or contracts under which
we currently perform when those contracts are put up for
re-competition bid. Any new contracting methods could be costly or
administratively difficult for us to implement and could harm our
operating results. For example, the Truthfulness, Responsibility
and Accountability in Contracting Act, proposed in 2001, would have
limited and severely delayed the U.S. Government's ability to use
private service contractors. Although this proposal was not
enacted, it or similar legislation could be proposed at any time.
Any reduction in the U.S. Government's use of private contractors
to provide federal information technology services could materially
adversely impact our business.
Failure to maintain strong relationships with government and
commercial contractors could result in a decline in our
sales.
We
derived approximately 78% of our sales in 2019 from contracts under
which we acted as a subcontractor. Our subcontracts with prime
contractors contain many of the same provisions as the prime
contracts and therefore carry many of the same risks previously
identified in these Risk Factors. As a subcontractor, we often lack
control over fulfillment of a contract, and poor performance on the
contract by others could tarnish our reputation, even when we
perform as required. We expect to continue to depend on
relationships with other contractors for a significant portion of
our sales in the foreseeable future. Moreover, our sales and
operating results could be materially adversely affected if any
prime contractor chooses to offer services of the type that we
provide or if any prime contractor teams with other companies to
independently provide those services.
12
Risks Related to our Business and Financial Condition
Our results of operations may be negatively impacted by the
coronavirus outbreak.
In
December 2019, the 2019 novel coronavirus surfaced in China and the
virus has now spread to other countries, including the United
States and infections have been reported globally. The impacts of
the outbreak are unknown and rapidly evolving.
To
date, the outbreak has not had a material adverse impact on our
operations. However, the future impact of the outbreak is highly
uncertain and cannot be predicted and there is no assurance that
the outbreak will not have a material adverse impact on our
business, operations and the market for our securities. The extent
of the impact, if any, will depend on future developments,
including actions taken to contain the coronavirus. There can be no
assurance that our personnel will not be impacted by these pandemic
diseases and ultimately see our workforce productivity reduced or
incur increased medical costs / insurance premiums as a result of
these health risks.
In
addition, a significant outbreak of coronavirus could result in a
widespread global health crisis that could adversely affect global
economies and financial markets resulting in an economic
downturn.
We are highly leveraged, which increases our operating deficit and
makes it difficult for us to grow.
At
December 31, 2019, we had current liabilities of approximately $3.8
million and long-term liabilities of $1.0 million and
stockholders’ deficiency of $3,907,310. We had a working
capital deficit of approximately $3.3 million and a current ratio
of .13. For 2019, we had operating income of approximately $330,000
and provided cash of approximately $30,000 for operating
activities. Working capital shortages may impair our business
operations and growth strategy, and accordingly, our business,
operations, and financial condition will be materially adversely
affected. Accordingly, there is substantial doubt about the
Company’s ability to continue as a going
concern.
We have been dependent on a limited number of high net worth
individuals to fund our working capital needs.
From
2003 through 2019, we received approximately $4.7 million in a
combination of equity, debt conversion and debt transactions from
several high net worth investors. We cannot provide assurance that
we will be able to continue to raise additional capital from this
group of investors, or that we will be able to secure funding from
additional sources.
At
December 31, 2019, we have current notes payable of $332,500 to
third parties, which includes convertible notes payable of
approximately $290,000. We have current maturities of long-term
obligations to third parties of $950,000 comprised of $264,000 that
was due on January 1, 2020, $265,000 which was due on January 1,
2018, $175,000 which was due on August 31, 2018 and $246,000 which
was due to the PBGC on September 15, 2018 in accordance with the
October 2011 Settlement Agreement. We have notes payable to related
parties of $58,000 and maturities of our long-term notes to related
parties of $512,935. 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 may require additional financing in the future, which may not be
available on acceptable terms.
We may
require additional funds for working capital and general corporate
purposes. We cannot provide assurance that adequate additional
financing will be available or, if available, will be offered on
acceptable terms.
Moreover,
our IT services billings generate accounts receivable that are
generally paid within 30 to 60 days from the invoice date. The cost
of those sales generally consists of employee salaries and benefits
that we must pay prior to our receipt of the accounts receivable to
which these costs relate. We therefore need sufficient cash
resources to cover such employee-related costs which, in many
cases, require us to borrow funds at costly terms.
We have secured 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 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 December 31, 2019, we had $67,000 of financing
availability, based on eligible accounts receivable under this
line. We pay fees based on the length of time that the invoice
remains unpaid. As we grow, additional working capital may be
required to support this difference in the timing of cash receipts
versus payroll disbursements. Moreover, our accounts receivable
financing lender may decide to cease subsequent advances at any
time in its discretion, upon our failure to meet certain
contractual requirements or upon the occurrence of certain events
or contingencies that are out of our control. In such event, our
short-term cash requirements would exceed available cash on hand
resulting in material adverse consequences to our
business.
Finally,
any additional equity financing and conversions by the holders of
existing notes payable to common stock will be dilutive to
stockholders. Debt financings, if available, may involve
restrictive covenants that further limit our ability to make
decisions that we believe will be in our best interests. If we
cannot obtain additional financing on terms acceptable to us when
required, our operations will be materially adversely affected, and
we may have to cease or substantially reduce
operations.
We rely on one customer for a large portion of our
revenues.
We depend on one customer for a large portion of our revenue.
During 2019, sales to one customer, including sales under
subcontracts, accounted for 62.6% of total sales and 22.1% of
accounts receivable at December 31, 2019. The loss of this customer
could have a significant impact on our revenues and harm our
business and results of operations.
13
Events affecting the credit markets may restrict our ability to
access additional financing.
Over the last several years, the U.S. and worldwide capital and
credit markets have 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 certain
financial markets, making terms for certain financings less
attractive, costlier, and in some cases, have resulted in the
unavailability of financing. Continued uncertainty and volatility
in the capital and credit markets may negatively impact our
business, including our ability to access additional financing at
reasonable terms, which may negatively affect our ability to fund
current operations or expand our business. These events also may
make it more difficult or costly for us to raise capital through
the issuance of our debt and equity securities.
If we acquire businesses or business assets and do not successfully
integrate the acquisitions, our results of operations could be
adversely affected.
We may
grow our business by acquiring or investing in companies and
businesses and assets that we feel have synergy and will complement
our business plan. As such, we periodically evaluate potential
business combinations and investments in other companies and
assets. We may be unable to profitably manage businesses and assets
that we may acquire or invest in. We may fail to integrate these
businesses and assets successfully without incurring substantial
expenses, delays or other problems that could negatively impact our
results of operations.
Our investments in cybersecurity and other business initiatives may
not be successful.
We have
invested in and continue to invest in cybersecurity capabilities to
add new products and services to address the needs of our clients,
including our newly introduced product, Nodeware. Our investments
may not be successful or increase our revenues. If we are not
successful in creating value from our investments by increasing
sales, our financial condition and prospects could be
harmed.
If we fail to adequately manage the size of our business, it could
have a severe negative impact on our financial results or stock
price.
Our management believes that to be successful we must appropriately
manage the size of our business. This may mean reducing costs and
overhead in certain economic periods, and selectively growing in
periods of economic expansion. In addition, we will be required to
implement operational, financial and management information
procedures and controls that are efficient and appropriate for the
size and scope of our operations. The management skills and systems
currently in place may not be adequate and we may not be able to
manage any significant reductions or growth
effectively.
We may have difficulties in managing our growth.
Our
future growth depends, in part, on our ability to expand, train and
manage our employee base and provide support to an expanded client
base. We must also enhance and implement new operating and software
systems to accommodate our growth and expansion of IT product and
service offerings. If we cannot manage growth effectively, it could
have a material adverse effect on our results of operations,
business and financial condition. In addition, acquisitions,
investments and expansion involve substantial infrastructure costs
and working capital. We cannot provide assurance that we will be
able to integrate acquisitions, if any, and expansions efficiently.
Similarly, we cannot provide assurance that any investments or
expansion will enhance our profitability. If we do not achieve
sufficient sales growth to offset increased expenses associated
with our expansion, our results will be adversely
affected.
We depend on the continued services of our key
personnel.
Our
future success depends, in part, on the continuing efforts of our
senior executive officers. The loss of any of these key employees
may materially adversely affect our business.
Our future success depends on our ability to continue to retain and
attract qualified employees.
We
believe that our future success depends upon our ability to
continue to train, retain, effectively manage and attract highly
skilled technical, managerial, sales and marketing personnel. This
includes skills for our new initiatives in cybersecurity. Employee
turnover is generally high in the IT services industry. If our
efforts in these areas are not successful, our costs may increase,
our sales efforts may be hindered, and the quality of our client
service may suffer. Although we invest significant resources in
recruiting and retaining employees, there is often significant
competition for certain personnel in the IT services industry. From
time to time, we experience difficulties in locating enough highly
qualified candidates in desired geographic locations, or with
required specific expertise.
We may lose revenue and our cash flow and profitability could be
negatively affected if expenditures are incurred prior to final
receipt of a contract or contract funding
modification.
We provide professional services and sometimes procure materials on
behalf of our clients under various contract arrangements. From
time to time, to ensure that we satisfy our clients’ delivery
requirements and schedules, we may elect, based on verbal
authorization, to initiate procurements or provide services in
advance of receiving formal written contractual authorization from
the government client or a prime contractor. If our government or
prime contractor requirements should change or the government
directs the anticipated procurement to a contractor other than us,
or if the materials become obsolete or require modification before
we are under contract for the procurement, our investment might be
at risk. If we do not receive the required funding, our cost of
services incurred that exceed contractual funding may not be
recoverable. This could reduce anticipated revenue or result in a
loss, negatively affecting our cash flow and
profitability.
14
Our employees or subcontractors may engage in misconduct or other
improper activities, which could cause us to lose
contracts.
While
we have ethics and compliance programs in place, we are exposed to
the risk that employee fraud or other misconduct could occur. We
may enter into arrangements with prime contractors and joint
venture partners to bid on and execute contracts or programs. As a
result, we are exposed to the risk that fraud or other misconduct
or improper activities by such persons may occur. Misconduct by
employees, prime contractors or joint venture partners could
include intentional failures to comply with federal laws, including
U.S. Government procurement regulations, proper handling of
sensitive or classified information, compliance with the terms of
our contracts that we receive, and falsifying time records or
failures to disclose unauthorized or unsuccessful activities to us.
These actions could lead to civil, criminal, and/or administrative
penalties (including fines, imprisonment, suspension and/or bars
from performing U.S. Government contracts) and harm our reputation.
The precautions we take to prevent and detect such activity may not
be effective in controlling unknown or unmanaged risks or losses,
and such misconduct by employees, prime contractors or joint
venture partners could result in serious civil or criminal
penalties or sanctions or harm to our reputation, which could cause
us to lose contracts or cause a reduction in revenue.
Risks Related to our Common Stock
Certain stockholders own a significant portion of our stock and may
delay or prevent a change in control or adversely affect the stock
price through sales in the open market.
As of March 25, 2020, one related party and one third party, who is
a former member of the board of directors, hold convertible notes
payable with the right to convert the notes payable and accrued
interest into shares of common stock at $.05 per share. If these
parties converted all principal and accrued interest into common
stock, these two individuals would own approximately 12.1% and
27.1%, respectively, (39.2% in the aggregate of our then
outstanding common stock, excluding stock options. However, such
notes may not be converted if such conversion would result
in a change in control which would limit the use of our net
operating loss carryforwards. We
estimate as of the date of this report that substantially all
convertible notes payable and accrued interest due to all related
parties could be converted to shares of common stock, which may
affect a change of control that would limit the use of our net
operating loss carryforwards.
The concentration of large percentages of ownership by a single
stockholder or a few stockholders may delay or prevent a change in
control. Additionally, the sale of a significant number of our
shares in the open market by a single stockholder or otherwise
could adversely affect our stock price.
The price of our common stock may be adversely affected by the
possible issuance of shares to third parties upon conversion of
outstanding notes.
We have three convertible notes outstanding to third parties that
are convertible into shares of common stock at prices ranging from
$.05 to $.25 per share. If these notes were converted into common
stock, the holders would receive 4,700,000 shares of our common
stock or approximately 13.9% of
our common stock outstanding as of March 25,
2020.
Our stock price is volatile and could be further affected by events
not within our control.
The
trading price of our common stock has been volatile and will
continue to be subject to volatility in the trading markets and
other factors.
The
closing market price for our common stock varied between a low of
$.005 and a high of $.085 in 2019. This volatility may affect the
price at which a stockholder could sell its shares of common stock,
and the sale of substantial amounts of our common stock could
adversely affect the price of our common stock. Our stock price is
likely to continue to be volatile and subject to significant price
and volume fluctuations in response to market and other factors,
including variations in our quarterly operating results and
announcement by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, or capital
commitments.
Our common stock is currently
quoted on the Over The Counter (OTC) Bulletin Board. Because there
is a limited public market for our common stock, a stockholder may
not be able to sell shares when he or she wants.
We cannot assure you that an active
trading market for our common stock will ever
develop.
There
is limited trading in our common stock, and we cannot assure you
that an active public market for our common stock will ever
develop. The lack of an active public trading market means that a
stockholder may not be able to sell shares of common stock when
wanted, thereby increasing market risk. Until our common stock is
listed on an exchange, we expect that the shares will continue to
be quoted on the OTC Bulletin Board. However, an investor may find
it difficult to obtain accurate quotations regarding the common
stock’s market value. In addition, if we failed to meet the
criteria set forth in SEC regulations, various requirements would
be imposed by law on broker-dealers who sell our securities to
persons other than established customers and accredited investors.
Consequently, such regulations may deter broker-dealers from
recommending or selling our common stock, which may further affect
the shares liquidity. Moreover, our ability to obtain future
financing may be adversely affected by the consequences of our
common stock trading on the OTC Bulletin Board.
Our common stock may be considered a “penny stock” and
may be difficult to buy or sell.
The
Securities and Exchange Commission (SEC) has adopted regulations
which generally define “penny stock” to be an equity
security that has a market or exercise price of less than $5.00 per
share, subject to specific exemptions. The market price of our
common stock is currently below $5.00 per share and therefore may
be designated as a “penny stock” according to SEC
rules. This designation requires any broker or dealer selling these
securities to disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and
determine that the purchaser is reasonably suitable to purchase the
securities. These rules may restrict the ability of brokers or
dealers to accept our share certificates into a customer account
and may affect the ability of our stockholders to sell their
shares.
15
Item 1B. Unresolved Staff Comments
Not
applicable.
Item 2. Properties
The
table below lists our facility location and square feet owned or
leased. Beginning on August 1, 2016, we lease our headquarters
facility under an operating lease agreement. Our rent expense is
$80,000 annually during the first year of the lease term and
increases by 1.5% annually thereafter. We have the right to
terminate the lease upon six months prior notice after three years
of occupancy.
|
At
December 31, 2019
|
Owned
|
Square Feet
Leased
|
Annual
Rent
|
Termination
Date
|
|
Pittsford, New
York
|
-
|
7,112
|
$ 83,654
|
June 30, 2022
|
We
believe our facility is in good operating condition. We do not own
or intend to invest in any real property and currently have no
policy with respect to investments or interests in real estate,
real estate mortgage loans or securities or interests in persons
primarily engaged in real estate activities.
Item 3. Legal Proceedings
We are not presently involved in any material legal
proceedings.
Item 4. Mine Safety Disclosures
Not
applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Our
common stock is quoted on the OTC Bulletin Board under the symbol
IMCI. The following table sets forth, for the periods indicated,
the high and low closing bid quotations per share for our common
stock for each quarter within the last two fiscal years, as
reported by the OTC Bulletin Board. Quotations represent
interdealer prices without an adjustment for retail markups,
markdowns or commissions and may not represent actual
transactions:
|
|
Bid
Prices
|
|
|
Year Ended December
31, 2019
|
High
|
Low
|
|
|
|
|
|
First
Quarter
|
$.024
|
$.005
|
|
Second
Quarter
|
$.030
|
$.010
|
|
Third
Quarter
|
$.085
|
$.018
|
|
Fourth
Quarter
|
$.059
|
$.028
|
|
|
|
|
|
Year Ended December
31, 2018
|
High
|
Low
|
|
|
|
|
|
First
Quarter
|
$.025
|
$.015
|
|
Second
Quarter
|
$.029
|
$.015
|
|
Third
Quarter
|
$.039
|
$.013
|
|
Fourth
Quarter
|
$.015
|
$.010
|
At
March 24, 2020, we had 198 record stockholders and estimate that we
had approximately 1,200 beneficial stockholders.
Dividend Policy
We have
never declared or paid a cash dividend on our common stock. It has
been the policy of our board of directors (the Board) to retain all
available funds to finance the development and growth of our
business. The payment of cash dividends in the future will be
dependent upon our earnings and financial requirements and other
factors deemed relevant by our Board.
16
Item 6. Selected Financial Data
As a smaller reporting company, we are not required to provide the
information in response to this Item.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Cautionary statement identifying important factors that could cause
our actual results to differ from those projected in
forward-looking statements.
Readers of this report are advised that this document contains both
statements of historical facts and forward-looking statements.
Forward-looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ
materially from those indicated by the forward-looking statements.
Examples of forward-looking statements include, but are not limited
to (i) projections of sales, income or loss, earnings per share,
capital expenditures, dividends, capital structure, and other
financial items, (ii) statements of our plans and objectives with
respect to business transactions and enhancement of stockholder
value, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and
statements about our business prospects.
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.
Business
Headquartered
in Pittsford, New York, Infinite Group, Inc. (IGI) is --- a
developer of cybersecurity software and a provider of cybersecurity
consulting services to commercial businesses and government
organizations that was expanded and built from our foundation of
managed IT and virtualization services. As part of these offerings
we:
●
focus on key
cybersecurity services (virtual CISO, compliance review and
assessment, incident response, penetration testing, managed
detection and response 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 cybersecurity 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
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 North
America;
●
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 including
the New York State and Local Government and Education (SLED)
entities and the New York State Office of General Services (NYS
OGS).
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
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.
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.
We are working to expand our managed services business with our
prime partner, Perspecta, and the current federal enterprise
customer and its customers.
Business
Overview
We had
sales of approximately $7.1 million in 2019 and approximately $6.4
million in 2018. We generated operating income of approximately
$329,000 in 2019 as compared to approximately $210,000 in 2018. We
had net income of approximately $48,000 in 2019 and $37,000 in
2018. We recorded other income of $83,250 in 2018 from the
write-off of a note payable. We derived approximately 80% of our
sales in 2019 and 77% in 2018 from contracts as either a prime
contractor or a subcontractor with the remainder coming from our
software business.
17
Results of Operations - Comparison of the years ended December 31,
2019 and 2018
The
following table compares our statements of operations data for the
years ended December 31, 2019 and 2018.
|
|
Years Ended December
31,
|
|||||
|
|
|
|
|
|
2019
vs. 2018
|
|
|
|
|
As a
% of
|
|
As a
% of
|
Amount
of
|
%
Increase
|
|
|
2019
|
Sales
|
2018
|
Sales
|
Change
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Sales
|
$7,094,279
|
100.0%
|
$6,370,336
|
100.0%
|
$723,943
|
11.4%
|
|
Cost of
sales
|
4,422,533
|
62.3
|
4,158,408
|
65.3
|
264,125
|
6.4
|
|
Gross
profit
|
2,671,746
|
37.7
|
2,211,928
|
34.7
|
459,818
|
20.8
|
|
General and
administrative
|
1,334,051
|
18.8
|
1,084,260
|
17.0
|
249,791
|
23.0
|
|
Selling
|
1,008,558
|
14.2
|
917,975
|
14.4
|
90,583
|
9.9
|
|
Total operating
expenses
|
2,342,609
|
33.0
|
2,002,235
|
31.4
|
340,374
|
17.0
|
|
Operating
income
|
329,137
|
4.7
|
209,693
|
3.3
|
119,444
|
57.0
|
|
Other
income
|
0
|
0.0
|
83,250
|
1.3
|
(83,250)
|
(100.0
|
|
Interest
expense
|
(281,160)
|
4.0
|
(255,943)
|
4.0
|
25,217
|
9.9
|
|
Net
income
|
$47,977
|
0.7%
|
$37,000
|
0.6%
|
$10,977
|
29.7%
|
|
Net income per
share - basic and diluted
|
$.00
|
|
$.00
|
|
$.00
|
|
Sales
For
2019 and 2018, in each year, our:
●
managed support
service and virtualization project sales comprised approximately
70% of our total sales;
●
cybersecurity
projects, Nodeware and commercial sales to small and medium sized
enterprises (SMEs), were approximately 22% of our total sales;
and
●
other IT consulting
services comprise the balance of our sales with 8%.
During 2019 and 2018, we delivered VMware virtualization software
licenses and project credits to New York State of approximately
$265,000 and $510,000, respectively. Since these are agent sales
and are reported net of cost of sales, we recorded sales of $
27,590 and $22,065 for 2018.
Sales
of virtualization subcontract projects increased in 2019. Our
virtualization subcontract project sales increased by 14% from 2018
to 2019. However, our virtualization sales decreased by 19.9% for
the fourth quarter of 2019 as compared to the fourth quarter of
2018. Our cybersecurity services business has grown by
approximately $400,000 in revenues in 2019 versus 2018. We began to
close sales of Nodeware with our channel partners during 2017 and
have seen continued increases in sales in 2018 and 2019. Our
commercial SME business continues to establish new relationships
with channel partners who purchase cybersecurity solutions from us.
We expect continuing future sales from Nodeware sales, security
assessments, and related projects by our cybersecurity
personnel.
Cost of Sales and Gross Profit
Cost of
sales principally represents the cost of employee services related
to our IT Services Group. In smaller amounts, we also incurred cost
of sales for third party software licenses for our commercial SME
partners.
Gross
profit increased by 20.8% while sales increased by 11.4% for 2019.
This was primarily due to increased gross profit earned by our
managed services business group. This was done by continued cost
controls in this group, especially related to reducing
headcount.
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 in 2019
consisting of offsetting fluctuations in various expense items and
increases in salaries of approximately $107,000 and professional
fees of $64,700.
Selling Expenses
The
increase in selling expenses in 2019 is principally due to the
increase of employee salaries and benefits totaling approximately
$330,400 due primarily to the growth to the cyber security and
Nodeware sales team.
18
Operating Income
The
increase in our operating income for 2019 is attributable to an increase in our gross
profit of $459,818 offset by increases in our general and
administrative expenses of $249,791 and our selling expenses of
$90,583.
Other Income
In
2018, we wrote off a note and accrued interest to a debtholder in
the amount of $83,250.
Interest Expense
Interest expense includes interest on indebtedness, amortization of
loan fees and fees for financing accounts receivable
invoices. The increase in interest expense is principally
attributable to a higher average prime rate in 2019 compared to
2018 as well as increased borrowing from debtholders and an option
fee associated with that debt.
Net Income/Loss
The
increase in net income is attributable to the items discussed above
for 2019 as compared to 2018.
Liquidity and Capital Resources
At
December 31, 2019, we had cash of $6,398 available for working
capital needs and planned capital asset expenditures. During 2019,
we financed our business activities 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. At December
31, 2019, we had approximately $67,000 under this line. At December
31, 2019, we had a working capital deficit of approximately
$3,297,000 and a current ratio of .13. Our objective is to improve
our working capital position through profitable operations, and we
may continue to borrow to provide cash for working
capital.
At
December 31, 2019, we have current notes payable of approximately
$332,500 to third parties, which includes convertible notes payable
of approximately $290,000. Also included is $12,500 in principal
amount of a note payable due on June 30, 2016 but not paid by then.
This note was issued in payment of software we purchased in
February 2016 and secured by a security interest in the software.
To date, the holder has not taken any action to collect the amount
past due on this note or to enforce the security interest in the
software.
We have
current maturities of long-term obligations of approximately
$246,000 to the Pension Benefit Guaranty Corporation (the PBGC)
with all principal due on September 15, 2018, which has not been
extended. We have maturities of our long-term notes to third
parties of $265,000 due on January 1, 2018, which has not been
renewed or amended, $175,000 due on August 31, 2018, and $264,000
due on January 1, 2020, which has not been amended. We also have
approximately $513,000 of liabilities due to related parties due on
January 1, 2020, which has not been amended. These notes have not
been paid. We plan to renegotiate the terms of the 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.
The following table summarizes our cash flow information for the
years presented, described below, and should be read in conjunction
with our financial statements appearing at Item 15, Page F-1, et
seq., of this report.
|
|
Years Ended December
31,
|
|
|
|
2019
|
2018
|
|
Net cash provided
(used) in operating activities
|
$29,572
|
$(130,122)
|
|
Net cash used in
investing activities
|
(196,160)
|
(546)
|
|
Net cash provided
by financing activities
|
143,270
|
86,650
|
|
Net decrease in
cash
|
$(23,318)
|
$(44,018)
|
Cash Flows Used in 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, depending on the contract terms. Our net
income of $47,977 for 2019 was increased by non-cash expenses for
depreciation, amortization and stock-based compensation of $74,455.
In addition, an increase in accounts payable and accrued expenses
of $115,891 offset by increases in accounts receivable and other
assets of $208,751 resulted in net cash provided in operating
activities of $29,572.
We are
marketing Webroot and Nodeware to our IT channel partners who
resell to their customers. We are making investments in our cyber
security team for penetration testing, vCISO and other services as
well as expanding our virtualization sales of projects and VMware
licenses to our customers. Due to the lengthy lead times typically
needed to generate these new sales, we do not expect to realize a
return from our sales and marketing personnel for one or more
quarters. As a result, we may continue to experience small
operating income or 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.
19
Cash Flows Used in Investing Activities
In 2019, we incurred capital expenditures for computer hardware as
well as software development labor for the enhancements to
Nodeware. We expect to continue to invest in computer hardware and
software to update our technology to support the growth of our
business.
Cash Flows Provided by Financing Activities
During
2019, we borrowed $200,000 from a related party under the terms of
a note payable. The note allows for up to $500,000 credit and is
due in August 2026. During 2018, we borrowed $70,000 from a related
party under the terms of a demand note and $20,000 from a related
party under the terms of our LOC financing agreement. During 2018,
we made principal payments of $56,730 to a related party note
holders.
We plan
to evaluate alternatives which may include renegotiating the terms
of the notes, seeking conversion of the notes to shares of common
stock and seeking funds to repay the notes. We continue to evaluate
repayment of our 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 December
31, 2019, we had financing availability, based on eligible accounts
receivable, of approximately $67,000 under this line. We pay fees
based on the length of time that the invoice remains unpaid. We
also have approximately $348,400 of available credit under various
lines of credit as of December 31, 2019.
During
May 2019, we originated a line of credit note payable for a
$500,000 with a related party and borrowed $200,000 and have
$300,000 available to borrow for working capital. This agreement
matures in August 2026.
During
2017, we originated two lines of credit with related parties
totaling $175,000. At December 31, 2018, we had $15,000 available
under these financing agreements which mature in July 2022 and
January 2023, respectively.
On
December 1, 2014, we entered into an unsecured line of credit
financing agreement (the LOC Agreement) with a member of our board
of directors. The LOC Agreement provides for working capital of up
to $400,000 through January 1, 2020. This agreement has been
extended with no date at this time. At December 31, 2019, we had
$33,400 of availability under the LOC Agreement.
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,
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 and third parties;
issuance of equity; use of our existing accounts receivable credit
facility; or a refinancing of our accounts receivable credit
facility.
Critical Accounting Policies and Estimates
See Note 3 to the Financial Statements for a discussion of the
Company’s accounting policies and estimates.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
As a smaller reporting company, we are not required to provide the
information required by this Item.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of
this report beginning on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
20
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our chief executive officer
and chief financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 (the Exchange Act) Rules
13a-15(e) and 15-d-15(e)) as of the end of the period covered by
this report (the Evaluation Date). Based upon that evaluation, our
chief executive officer and chief financial officer concluded that
as of the Evaluation Date, our disclosure controls and procedures
are effective to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act
(i) is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms and (ii)
is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate
to allow timely decisions regarding required
disclosure.
Our
management, including our chief executive officer and chief
financial officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors and all
fraud. Our disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives, and our
chief executive officer and chief financial officer concluded that
our disclosure controls and procedures are effective at that
reasonable assurance level. Further, the design of a control system
must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Infinite
Group have been detected.
(b) Management's Report on
Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act). Our management assessed the
effectiveness of our internal control over financial reporting as
of December 31, 2018. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework (2013). Our management has concluded
that, as of December 31, 2019, our internal control over financial
reporting was effective based on these criteria.
(c) Changes in Internal Control over Financial
Reporting
There
were no changes in our internal control over financial reporting
that occurred during the quarter ended December 31, 2019 that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Item 9B. Other Information
Information required by this item is disclosed elsewhere
herein.
PART III
Item 10. Directors, Executive Officers, and Corporate
Governance
Set forth below are the names, ages and positions of our executive
officers and directors.
|
Name
|
Age
|
Position
|
Affiliated
Since
|
|
James Villa
(1)
|
62
|
Chief Executive
Officer and President
|
2003
|
|
Donald W. Reeve
(1)
|
73
|
Chairman of the
Board
|
2013
|
|
Andrew
Hoyen
|
49
|
Director and Chief
Operating Officer
|
2014
|
|
Richard
Glickman
|
58
|
VP Finance and
Chief Accounting Officer
|
2019
|
________________________
(1) Member of the audit and compensation committees.
Each director is elected for a period of one year and serves until
his successor is duly elected and qualified. Officers are elected
by and serve at the will of our Board.
Background
The
principal occupation of each of our directors and executive
officers for at least the past five years is as
follows:
James Villa is our President and Chief Executive Officer and
a director. He became a director on July 1, 2008, our President on
February 25, 2010 and our Chief Executive Officer on January 21,
2014. He is also chairman of the audit and compensation committees.
Mr. Villa was our Acting Chief Executive Officer from December 31,
2010 to January 21, 2014. Mr. Villa brings to the Board his
experience with us since 2003 as well as professional experience
gained from his services to a variety of public and privately held
middle market businesses.
21
Donald W. Reeve became a director on December 31, 2013. He
became Chairman of the Board on August 20, 2019. Since January
2013, he has been the principal partner at ReTech Services, LLC, a
management consulting practice. Since August 2013, Mr. Reeve has
been providing consulting services to us on a part time basis
without cash compensation. Previously, Mr. Reeve was Senior Vice
President and Chief Information Officer for Wegmans Food Markets, Inc. (Wegmans)
from May 1986 until his retirement in August 2012. In that
position, he managed an information technology staff of
approximately 300 professionals with responsibilities for
development, application and support services of computer
technology. Prior to May 1986 and since 1970, he held various
positions of increasing responsibility for Wegmans. He attended
Monroe Community College and SUNY Empire State College, earned an
associate's degree at Rochester Business Institute and is a veteran
of the U.S. Army. Mr. Reeve brings to the Board the experience of
managing the IT requirements for a growing company in a competitive
environment. Mr. Reeve provides strategic guidance to the Board and
our management as we continue to enter various commercial IT
markets.
Andrew Hoyen was appointed Chief Administrative Officer and
Senior Vice President of Business Development on October 1, 2014.
In January 2016, he was appointed Chief Operating Officer. On July
18, 2017, he was elected to the board of directors. Mr. Hoyen is
responsible for developing and implementing our strategic direction
through improved operations, sales and marketing, product
development, and overall collaboration across the enterprise.
Previously, since 2011, he was Vice President of National Accounts
at Toyota Material Handling North America. Prior to that, from 2002
to 2011, he served in several executive roles in operations,
service and sales at Eastman Kodak Company and their spin-off,
Carestream Health. His last position at Carestream Health was Vice
President of Sales and Service for the Northeast Region. He holds a
Bachelor of Science degree in biotechnology from Worcester
Polytechnic Institute, a Master of Public Health degree from State
University of New York at Albany and a Master of Business
Administration degree from Rochester Institute of
Technology.
Committees of the Board of Directors
Our
Board has an audit committee and a compensation committee. The
audit committee reviews the scope and results of the audit and
other services provided by our independent registered public
accounting firm and our internal controls. The compensation
committee is responsible for the approval of compensation
arrangements for our officers and the review of our compensation
plans and policies. Each committee is comprised of Mr. Villa and
Mr. Reeve.
Audit Committee Financial Expert
Our
audit committee is comprised of Mr. Villa, as chairman, and Mr.
Reeve. The Board has determined that Mr. Villa qualifies as our
audit committee financial expert, as that term is defined in Item
407(d)(5) of Regulation S-K. Neither Mr. Villa nor Mr. Reeve is
independent for audit committee purposes under the definition
contained in Section 10A(m)(3) of the Exchange Act.
Code of Ethics
We have adopted a code of business conduct and ethics that applies
to our principal executive officer, principal financial officer and
other persons performing similar functions, as well as all
employees and directors. This code of business conduct and ethics is posted on
our website at www.IGIus.com under Business Conduct
Guidelines.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our officers and directors, and
persons who own more than ten percent of a registered class of our
equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than
ten-percent stockholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely
on review of the copies of such forms furnished to us, or written
representations that no Forms 5 were required, we believe that all
required Section 16(a) filings were timely made for the year ended
December 31, 2019. With respect to any of our former directors,
officers, and greater than ten-percent stockholders, we have no
knowledge of any known failure to comply with the filing
requirements of Section 16(a).
Item 11. Executive Compensation
The
Summary Compensation Table below includes, for each of the years
ended December 31, 2019 and 2018, individual compensation for
services to Infinite Group, Inc. paid to: (i) our Chief Executive
Officer, our Chief Financial Officer and (ii) the next most highly
paid executive officers whose total compensation exceeded $100,000
for the year ended December 31, 2019 (together, the Named
Executives).
| Name and Principal Position |
Year
|
Salary
|
Option
Awards *
|
Total
|
|
James
Villa
|
2019
|
$223,401
|
$5,575
|
$228,976
|
|
Chairman, President
and Chief Executive Officer
|
2018
|
$215,000
|
$-
|
$215,000
|
|
Andrew
Hoyen
|
2019
|
$214,251
|
$8,875
|
$223,126
|
|
Chief Operating
Officer
|
2018
|
$210,000
|
$-
|
$222,450
|
|
James
Witzel**
|
2019
|
$30,846
|
$-
|
$30,846
|
|
Chief Financial
Officer
|
2018
|
$100,000
|
$-
|
$100,000
|
|
Richard
Glickman
|
2019
|
$97,308
|
$3,325
|
$100,633
|
|
VP Finance and
Chief Accounting Officer
|
|
|
|
|
_________________
* The
amounts in this column reflect the grant date fair value for stock
option awards granted during the year and do not reflect whether
the recipient has realized a financial gain from such awards such
as by exercising stock options. The fair value of the stock option
awards was determined using the Black-Scholes option pricing model.
See Note 3 to the financial statements in this report regarding
assumptions underlying valuation of equity awards.
**
James Witzel retired in July 2019.
22
Stock Options
The following table provides information with respect to the value
of all unexercised options previously awarded to our Named
Executives as of December 31, 2019.
|
Name
|
Number
of Securities Underlying Unexercised Options
-
Exercisable
|
Number of Securities Underlying Unexercised
Options - Unexercisable
|
Option Exercise Price
|
Option Expiration Date
|
|
James
Villa
|
500,000
|
-
|
$.115
|
1/20/2024
|
|
|
500,000
|
-
|
$.04
|
9/29/2021
|
|
|
250,000
|
-
|
$.05
|
12/22/2024
|
|
|
|
|
|
|
|
Andrew
Hoyen
|
250,000
|
-
|
$.02
|
6/1/2026
|
|
|
500,000
|
-
|
$.04
|
9/29/2021
|
|
|
400,000
|
-
|
$.04
|
7/31/2022
|
|
|
100,000
|
-
|
$.04
|
7/17/2022
|
|
|
200,000
|
-
|
$.04
|
12/09/2024
|
|
|
250,000
|
-
|
$.05
|
12/22/2024
|
|
|
|
|
|
|
|
James
Witzel
|
300,000
|
-
|
$.145
|
6/17/2020
|
|
|
473,000
|
-
|
$.093
|
8/11/2021
|
|
|
210,000
|
-
|
$.115
|
1/20/2024
|
|
|
100,000
|
-
|
$.05
|
12/30/2024
|
|
|
40,000
|
-
|
$.05
|
3/2/2025
|
|
|
|
|
|
|
|
Richard
Glickman
|
100,000
|
100,000
|
$.02
|
7/23/2024
|
|
|
50,000
|
-
|
$.04
|
12/9/2024
|
Employment Agreements
We do
not have any employment agreements with any of the Named
Executives.
Compensation of Directors
Effective
August 13, 2019, we established that in connection with rendering
services as a Board of Directors, each non-management Director may
receive compensation, as applicable to each Director, if approved
by the Board. Directors are reimbursed for the costs relating to
attending Board and committee meetings.
Effective
August 20, 2019, the Board resolved to compensate Donald W. Reeve
$12,000 annually as Chairman of the Board.
At
December 31, 2019, Donald W. Reeve held exercisable options
for:
●
600,000 shares of
our common stock at an exercise price of $.05 per share which
expires on November 30, 2024;
●
500,000 shares of
common stock at an exercise price of $.15 per share which expires
on September 4, 2023; and
●
800,000 shares of
common stock at an exercise price of $.04 per share which expires
on September 29, 2021; and
●
250,000 shares of
common stock at an exercise price of $.05 per share which expires
on December 22, 2024.
On
December 1, 2014, we entered into an unsecured line of credit
financing agreement with Mr. Reeve. We paid an origination fee
consisting of (i) 600,000 shares of our common stock valued at
$30,000 and (ii) an immediately exercisable option to purchase
600,000 shares of our common stock at an exercise price of $.05
valued at $23,400 using the Black-Scholes option-pricing
model.
On September 30, 2016, the unsecured line of credit
financing agreement maturity date was
extended from December 31, 2017 to January 1, 2020. As
consideration for extending the maturity date, we granted an
immediately exercisable option to purchase 800,000 common shares at
$.04 per share with an estimated fair value of $14,720 using
the Black-Scholes option-pricing model.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial
ownership of our common stock, our only class of voting securities,
as of March 24, 2020 by:
●
each
person known to us to be the beneficial owner of more than 5% of
our outstanding shares;
●
each
director;
●
each
Named Executive named in the Summary Compensation Table above;
and
●
all
directors and executive officers as a group.
23
Except as otherwise indicated, the persons listed below have sole
voting and investment power with respect to all shares of common
stock owned by them. All information with respect to beneficial
ownership has been furnished to us by the respective stockholder.
The address of record of each individual listed in this table,
except if set forth below, is c/o Infinite Group, Inc., 175
Sully’s Trail, Suite 202, Pittsford, New York
14534.
|
Name of Beneficial Owner (1)
|
Shares
of Common Stock Beneficially Owned (1)
|
Percentage
of Ownership
|
|
Richard
Glickman
|
190,000 (3)
|
0.7%
|
|
Andrew
Hoyen
|
2,136,734 (4)
|
6.9%
|
|
Donald
W. Reeve
|
2,981,460 (5)
|
9.6%
|
|
James
Villa
|
6,963,137 (6)
|
19.8%
|
|
All
Directors and Officers (4 persons) as a group
|
12,271,331 (2)
|
31.1%
|
|
|
|
|
|
5% Stockholders:
|
|
|
|
Paul J.
Delmore
|
|
|
|
One America
Place
|
|
|
|
600 West Broadway,
28th Floor
|
|
|
|
San
Diego, CA 92101
|
2,545,151 (8)
|
8.8%
|
|
|
|
|
|
James
Leonardo
|
2,500,000
|
8.6%
|
|
435
Smith Street
|
|
|
|
Rochester,
New York 14608
|
|
|
|
|
|
|
|
Allan
M. Robbins
|
12,544,887 (9)
|
30.9%
|
|
44
Hampstead Drive
|
|
|
|
Webster,
NY 14580
|
|
|
|
|
|
|
|
James
Witzel
|
2,024,901 (7)
|
6.6%
|
|
12677
Dundee Lane
|
|
|
|
Naples
, FL 34120
|
|
|
|
(1)
|
Pursuant
to the rules of the Securities and Exchange Commission, shares of
common stock include shares for which
the individual, directly or indirectly, has voting or shares voting
or disposition power, whether or not they are held for the
individual’s benefit, and shares which an individual
or group has a right to acquire within 60 days from March 25, 2020
pursuant to the exercise of options or upon the conversion of
securities are deemed to be outstanding for the purpose of
computing the percent of ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table. On
March 25, 2020, we had 29,061,883 shares of common stock
outstanding.
|
| (2) |
Assumes
that all currently exercisable options, which total 5,473,000
shares, and convertible securities, which total 16,565,566 shares,
owned by members of the group have been exercised.
|
|
(3)
|
Includes
150,000 shares subject to currently exercisable
options.
|
|
(4)
|
Includes
250,000 shares, which are issuable upon the conversion of a note in
the principal amount of $25,000 through March 25, 2020; and
1,250,000 shares subject to currently exercisable
options.
|
|
(5)
|
Includes
2,150,000 shares subject to currently exercisable
options.
|
|
(6)
|
Includes
4,901,137 shares, which are issuable upon the conversion of notes
to Northwest Hampton Holdings, LLC, whose sole member is James
Villa, including principal in the amount of $146,300 and accrued
interest in the amount of $98,757 through March 24, 2020; and
1,000,000 shares subject to currently exercisable
options.
|
| (7) |
Includes
317,594 shares, which are issuable upon the conversion of a note in
the principal amount of $9,000 and accrued interest in the amount
of $6,880 through March 24, 2020; and 1,123,000 shares subject to
currently exercisable options.
|
|
(8)
|
Includes
2,360,000 shares owned of record by Upstate Holding Group, LLC, an
entity wholly-owned by Mr. Delmore.
|
|
(9)
|
Includes
11,544,887 shares, which are issuable upon the conversion of the
notes including principal in the amount of $304,000 and accrued
interest in the amount of $295,063 through March 24,
2020.
|
24
Securities Authorized for Issuance Under Equity Compensation
Plans
The
Company’s Board and stockholders approved a stock option
plans adopted in 2005, which has authority to grant options to
purchase up to an aggregate of 990,000 common shares at December
31, 2019. Since this plan has expired, no more options may be
granted.
The
2009 Plan was established in February 2009 to align the interests
of our employees, consultants, agents and affiliates with those of
our stockholders to incent them to increase their efforts on our
behalf and to promote the success of our business. Under the 2009
Plan up to 4,000,000 shares of common stock were authorized for
option grants. The 2009 Plan expired on February 3, 2019;
therefore, expired options after that date could not be re-issued.
Generally, the 2009 Plan is administered by the compensation
committee of the Board and provides (i) for the granting of
non-qualified stock options, (ii) that the maximum term for options
granted under the plan is 10 years and (iii) that the exercise
price for the options may not be less than 100% of the fair market
value of our common stock on the date of grant. As of December 31,
2019, an aggregate of 3,000 shares were available under our 2009
stock option plan (the 2009 Plan) for option grants.
The
2019 Plan was established in August 2019 to align the interests of
our employees, consultants, agents and affiliates with those of our
stockholders to incent them to increase their efforts on our behalf
and to promote the success of our business. Under the 2019 Plan up
to 1,500,000 shares of common stock were authorized for option
grants. Generally, the 2019 Plan is administered by the
compensation committee of the Board and provides (i) for the
granting of non-qualified stock options, (ii) that the maximum term
for options granted under the plan is 10 years and (iii) that the
exercise price for the options may not be less than 100% of the
fair market value of our common stock on the date of grant. As of
December 31, 2019, an aggregate of 141,500 shares were available
under our 2019 stock option plan (the 2019 Plan) for option
grants.
The
following table summarizes, as of December 31, 2019, the (i)
options granted under our option plans and (ii) all other
securities subject to contracts, options, warrants, and rights or
authorized for future issuance outside of our plans. The shares
covered by outstanding options or authorized for future issuance
are subject to adjustment for changes in capitalization stock
splits, stock dividends and similar events.
|
|
Equity Compensation Plan Table
|
||
|
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options, warrants
and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity compensation
plans previously approved by security holders (1)
|
990,000
|
$.10
|
-
|
|
Equity compensation
plans not previously approved by security holders (2)
|
5,120,500
|
$.05
|
144,500
|
|
Individual option
grants that have not been approved by security holders
(3)
|
4,800,000
|
$.04
|
-
|
|
Total
|
10,910,500
|
$.05
|
144,500
|
___________________________
|
(1)
|
Consists
of grants under our 2005 Stock Option Plans of which all are
exercisable at December 31, 2019.
|
|
(2)
|
Consists
of grants under our 2009 Plan and 2019 Plan of which 4,995,500 are
exercisable at December 31, 2019.
|
|
(3)
|
Consists
of individual option grants approved by the Board of which all are
exercisable at December 31, 2019.
|
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Officers, Directors, and Equity Investment
On May
7, 2019, we entered into a note payable agreement for up to
$500,000 with Dr. Harry Hoyen. Dr. Harry Hoyen is the brother of
Mr. Andrew Hoyen, our Chief Operating Officer and member of our
Board. The note has an interest rate of 7.5% and is due on August
31, 2026. We borrowed $200,000 during the year ended December 31,
2019, which remains outstanding as of December 31, 2019. As
consideration for providing this financing, we granted a stock
option to purchase a total of 2,500,000 common shares at an
exercise price of $.02 and recorded interest expense of $14,250
using the Black-Scholes option pricing model to determine the
estimated fair value of the option.
On July
12, 2018, we issued an unsecured demand note payable to Northwest
Hampton Holdings, LLC (Northwest) in the principal amount of
$70,000 with interest at 6% per annum. On June 19, and July 17,
2017, we issued unsecured demand notes payable to Northwest in the
principal amount of $12,000 with interest at 6% per annum. On
August 1, 2019, we paid $40,000 plus accrued interest to the
noteholder. On December 11, 2019, we paid $4,000 of principal only
to the noteholder. Mr. James Villa, our Chief Executive Officer and
President, is the sole member of Northwest.
25
On June
29, 2017, we issued an unsecured demand note payable to Mr. Donald
Reeve, a member of our board, in the principal amount of $20,000
with interest at 6% per annum.
On July
18, 2017, we entered into an unsecured line of credit financing
agreement for $100,000 with Mr. Andrew Hoyen, our Chief Operating
Officer and member of our Board. The LOC Agreement provides for
working capital of up to $100,000 with interest at 6% due quarterly
through July 1, 2022. The principal balance owed was $90,000 at
December 31, 2019. In consideration for providing the financing,
Mr. Andrew Hoyen was granted an option to purchase 400,000 shares
of common stock at $.04 per share with
an estimated fair value of $9,960 using the Black-Scholes
option-pricing model. The option expires on July 31,
2022.
On
September 21, 2017, we entered into an unsecured line of credit
financing agreement for $75,000 with Mr. Harry Hoyen, a related
party. The LOC Agreement provides for working capital of up to
$75,000 with interest at 6% due quarterly through January 2, 2023.
The principal balance owed was $70,000 at December 31, 2019. In
consideration for providing the financing, Mr. Harry Hoyen was
granted an option to purchase 400,000 shares of common stock at
$.04 per share with an estimated fair
value of $4,080 using the Black-Scholes option-pricing
model. The option expires on January 2, 2023.
We are
obligated under a convertible note payable to Northwest. At March
24, 2020, Northwest is the holder of a convertible note bearing
interest at 6% with principal of $146,300 and convertible accrued
interest of $98,757 which matured on January 1, 2020 and is
convertible into shares of our common stock at a conversion price
of $.05 per share for a total of 4,901,137 shares. Principal of
$203,324 was reduced by payments of $53,700 during 2015 and $3,324
during 2014 on this note.
At
March 24, 2020, Mr. James Witzel, our former Chief Financial
Officer, is the holder of a convertible note bearing interest at
6%, with principal of $9,000 and convertible accrued interest of
$6,880 which matures on January 1, 2021 and is convertible into
shares of our common stock at a conversion price of $.05 per share
for a total 317,594 shares.
The
interest rates on the notes payable to Northwest and Mr. Witzel
(collectively, the Notes) are adjusted annually, on January
1st of each year, to a rate
equal to the prime rate in effect on December 31st of the
immediately preceding year, plus one and one quarter percent, but
in no event less than 6% per annum. The interest rate was 6% at
March 24, 2020. The Notes are secured by a security interest in all
our assets.
Generally, upon notice, prior to the maturity date, note holders
can convert all or a portion of the outstanding principal on the
Notes. However, the Notes are not convertible into shares of our
common stock to the extent conversion would result in a change of
control which would limit the use of our net operating loss
carryforwards; provided, however, this limitation will not apply if
we close a transaction with another third party or parties that
results in a change of control which will limit the use of our net
operating loss carryforwards. Prior to any conversion, the holders of the Notes
are entitled to convert their Notes, on a pari passu basis and upon
any such participation the requesting note holder shall
proportionately adjust his conversion request such that, in the
aggregate, a change of control, which will limit the use of our net
operating loss carryforwards, does not occur; provided, however,
the right to participate is only available to a noteholder if his
Note is then convertible into 5% or more of our common
stock.
On
December 1, 2014, we entered into an unsecured line of credit
financing agreement with Mr. Donald W. Reeve, a member of our board
of directors which provides for working capital of up to $400,000.
We paid an origination fee consisting of (i) 600,000 shares of our
common stock valued at $30,000 and (ii) immediately exercisable
options to purchase 600,000 shares of our common stock at an
exercise price of $.05 valued at $23,400 using the Black-Scholes
option-pricing model. On September 30,
2016, the maturity date was extended from December 31, 2017 to
January 1, 2020. As consideration for extending the maturity date
to January 1. 2020, we granted an immediately exercisable option to
purchase 800,000 common shares at $.04 per share with an estimated
fair value of $14,720 using the Black-Scholes option-pricing
model. The note balance was $363,955
at March 24, 2020 with interest at 6.60% payable monthly in
arrears.
On
February 12, 2015, we issued a note payable to Mr. Andrew Hoyen,
our Chief Administrative Officer and Senior Vice President of
Business Development, in the principal amount of $25,000 with
interest at 7% per annum which matured on March 31, 2018. During,
2019, Mr. Hoyen extended the maturity date to March 31, 2021. At
the election of the holder, the principal of the note is
convertible into shares of our common stock at a conversion price
of $.10 per share for a total of 250,000 shares.
Director Independence
Our Board has determined that Donald Reeve is independent in
accordance with the NASDAQ’s independence standards. Our
audit and compensation committees consist of Mr. Villa and Mr.
Reeve, of which only Mr. Reeve is sufficiently independent for
compensation committee purposes under NASDAQ’s standards and
neither of them is sufficiently independent for audit committee
purposes under NASDAQ’s standards due to their respective
beneficial ownership of our common stock.
Item 14. Principal Accountant Fees and Services
The
aggregate fees billed by our principal accounting firm, Freed
Maxick CPAs, P.C. for the years ended December 31, 2019 and 2018
are as follows:
|
|
2019
|
2018
|
|
Audit
fees
|
$80,000
|
$70,500
|
Audit fees for 2019 and 2018 were for professional services
rendered for the audits of our annual financial statements and
reviews of the financial statements included in our Quarterly
Reports on Form 10-Q. There were no tax or other non-audit related
services provided by the independent accountants for 2019 and
2018.
26
As a matter of policy, each permitted non-audit service is
pre-approved by the audit committee or the audit committee’s
chairman pursuant to delegated authority by the audit committee,
other than de minimus non-audit services for which the pre-approval
requirements are waived in accordance with the rules and
regulations of the SEC.
Audit Committee Pre-Approval Policies and Procedures
The
audit committee charter provides that the audit committee will
pre-approve audit services and non-audit services to be provided by
our independent auditors before the accountant is engaged to render
these services. The audit committee may consult with management in
the decision-making process, but may not delegate this authority to
management. The audit committee may delegate its authority to
pre-approve services to one or more committee members, provided
that the designees present the pre-approvals to the full committee
at the next committee meeting.
Item 15. Exhibits and
Financial Statement Schedules
|
(a)
|
The
following documents are filed as part of this report:
|
(1)
Financial Statements – See the Index to the financial
statements on page F-1.
(b)
Exhibits:
Exhibit
No. Description
|
3.1
|
Certificate
of Incorporation of the Company dated April 29, 1993.
(1)
|
|
3.5
|
By-Laws
of the Company. (1)
|
|
4.1
|
Specimen
Stock Certificate. (1)
|
|
10.3
|
Form
of Stock Option Agreement. (1)
|
|
10.9
|
Modification
Agreement No. 3 to Promissory Notes between Allan Robbins and the
Company dated October 1, 2005. (6)
|
27
|
10.22
|
Promissory
Note in favor of the PBGC dated October 17, 2011. (15)
|
|
101.INS
XBRL Instance Document. *
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document. *
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document. *
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document. *
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document. *
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document. *
|
* Filed
as an exhibit hereto.
**Management
contract or compensatory plan or arrangement.
#
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended. Omitted portions have been filed
separately with the SEC.
(1)
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (File #33- 61856) and incorporated herein by
reference.
(2)
Incorporated by reference to Appendix II of the Company's DEF14A
filed on February 1, 2006.
(3)
Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
(4)
Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998.
(5)
Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2002.
(6)
Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2005.
(7)
Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2006.
(8)
Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2007.
(9)
Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2008.
(10)
Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2009.
(11)
Incorporated by reference to the Company's Quarter Report on Form
10-Q for the quarterly period ended June 30, 2010.
(12)
Incorporated by reference to the Company's Quarter Report on Form
10-Q for the quarterly period ended September 30,
2010.
28
(13)
Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2010.
(14)
Incorporated by reference to the Company's Current Report on Form
8-K filed on September 12, 2011.
(15)
Incorporated by reference to the Company's Current Report on Form
8-K filed on November 7, 2011.
(16)
Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2012.
(17)
Incorporated by reference to the Company's Current Report on Form
8-K filed on December 4, 2014.
(18)
Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2014.
(19)
Incorporated by reference to the Company's Quarter Report on Form
10-Q for the quarterly period ended September 30,
2015.
(20)
Incorporated by reference to the Company's Quarter Report on Form
10-Q for the quarterly period ended September 30,
2016.
(21)
Incorporated by reference to the Company's Quarter Report on Form
10-Q for the quarterly period ended June 30, 2017.
(22) Incorporated
by reference to the Company's Quarter Report on Form 10-Q for the
quarterly period ended September 30, 2017.
(23)
Incorporated by reference to the Company's Current report on Form
10-K for the fiscal year ended December 31, 2017.
(24) Incorporated
by reference to the Company's Current Report on Form 8-K filed on
May 16, 2019.
(25) Incorporated
by reference to the Company's Current Report on Form 8-K filed on
August 22, 2019.
Information
required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes
thereto.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
Infinite
Group, Inc.
|
|
|
|
|
|
|
|
|
Date:
March 30, 2020
|
By:
|
/s/
James Villa
|
|
|
|
|
James
Villa
|
|
|
|
|
Chief
Executive Officer
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
/s/
James Villa
|
|
|
|
|
James
Villa
|
|
Chief
Executive Officer and President
(Principal
Executive Officer)
|
March
30, 2020
|
|
|
|
|
|
|
/s/
Richard Glickman
|
|
|
|
|
Richard
Glickman
|
|
VP
Finance and Chief Accounting Officer
|
March
30, 2020
|
|
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Andrew Hoyen
|
|
|
|
|
Andrew
Hoyen
|
|
Chief
Operating Officer and Director
|
March
30, 2020
|
|
|
|
|
|
|
/s/
Donald W. Reeve
|
|
|
|
|
Donald
W. Reeve
|
|
Chairman
of the Board
|
March
30, 2020
|
29
FINANCIAL STATEMENTS
INFINITE GROUP, INC.
DECEMBER 31, 2019
with
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
F-1
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders
Infinite
Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Infinite Group,
Inc. (the Company) as of December 31, 2019 and 2018, the related
statements of operations, changes in stockholders’ deficiency
and cash flows for the years then ended, and the related notes to
the financial statements (collectively, the financial statements).
In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and
its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
Going Concern
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has negative
working capital, a stockholders’ deficiency, and will be
dependent on obtaining future financing. This raises substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters also are described in
Note 2. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
Freed Maxick CPAs, P.C.
We have not been able to determine the specific year that we began
serving as the Company’s auditor; however, we are aware that
we have served as the Company’s auditor since at least
1995.
Rochester,
New York
March
30, 2020
|
INFINITE
GROUP, INC.
BALANCE
SHEETS
|
||
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
ASSETS
|
||
|
Current
assets:
|
|
|
|
Cash
|
$6,398
|
$29,716
|
|
Accounts
receivable, net of allowances of $17,455 and $22,000 as of December
31, 2019 and 2018, respectively
|
432,289
|
286,187
|
|
Prepaid expenses
and other current assets
|
65,285
|
2,906
|
|
Total current
assets
|
503,972
|
318,809
|
|
|
|
|
|
Right
of Use Asset – Operating Lease, net
|
195,441
|
0
|
|
Property
and equipment, net
|
5,915
|
8,627
|
|
Software,
net
|
184,676
|
0
|
|
Deposits
|
6,937
|
6,667
|
|
Total
assets
|
$896,941
|
$334,103
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
||
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$217,777
|
$367,536
|
|
Accrued
payroll
|
218,352
|
218,328
|
|
Accrued interest
payable
|
939,440
|
839,189
|
|
Accrued
retirement
|
254,348
|
244,423
|
|
Accrued expenses
– other and other current liabilities
|
243,031
|
87,581
|
|
Current maturities
of long-term obligations
|
950,000
|
686,000
|
|
Operating lease
liability - Short-term
|
74,373
|
0
|
|
Current maturities
of long-term obligations - related parties
|
512,935
|
34,350
|
|
Notes
payable
|
332,500
|
332,500
|
|
Notes payable -
related parties
|
58,000
|
102,000
|
|
Total current
liabilities
|
3,800,756
|
2,911,907
|
|
|
|
|
|
Long-term
obligations:
|
|
|
|
Notes
payable:
|
|
|
|
Other
|
486,890
|
744,335
|
|
Related
parties
|
394,000
|
677,955
|
|
Operating Lease
liability - Long-term
|
122,605
|
0
|
|
|
|
|
|
Total
liabilities
|
4,804,251
|
4,334,197
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
Stockholders'
deficiency:
|
|
|
|
Common stock, $.001
par value, 60,000,000 shares authorized; issued and outstanding:
29,061,883 shares
|
29,061
|
29,061
|
|
Additional paid-in
capital
|
30,638,173
|
30,593,366
|
|
Accumulated
deficit
|
(34,574,544)
|
(34,622,521)
|
|
Total
stockholders’ deficiency
|
(3,907,310)
|
(4,000,094)
|
|
Total
liabilities and stockholders’ deficiency
|
$896,941
|
$334,103
|
|
INFINITE
GROUP, INC.
STATEMENTS
OF OPERATIONS
|
||
|
|
Years
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Sales
|
$7,094,279
|
$6,370,336
|
|
Cost of
sales
|
4,422,533
|
4,158,408
|
|
Gross
profit
|
2,671,746
|
2,211,928
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
General and
administrative
|
1,334,051
|
1,084,260
|
|
Selling
|
1,008,558
|
917,975
|
|
Total costs and
expenses
|
2,342,609
|
2,002,235
|
|
|
|
|
|
Operating
income
|
329,137
|
209,693
|
|
|
|
|
|
Other income - (see
Note 6 & Note 7)
|
0
|
83,250
|
|
|
|
|
|
Interest
expense:
|
|
|
|
Related
parties
|
(89,079)
|
(61,923)
|
|
Other
|
(192,081)
|
(194,020)
|
|
Total interest
expense
|
(281,160)
|
(255,943)
|
|
|
|
|
|
Net
income
|
$47,977
|
$37,000
|
|
|
|
|
|
Net
income/loss per share – basic and diluted
|
$.00
|
$.00
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
29,061,883
|
29,061,883
|
|
|
|
|
|
Weighted
average shares outstanding – diluted
|
29,811,883
|
29,061,883
|
|
|
||
|
INFINITE
GROUP, INC.
STATEMENTS
OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Years Ended December 31, 2019 and 2018
|
|||||
|
|
|
Additional
|
|
|
|
|
|
Common
Stock
|
Paid-in
|
Accumulated
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2017
|
29,061,883
|
$29,061
|
$30,591,896
|
$(34,659,521)
|
(4,038,564)
|
|
|
|
|
|
|
|
|
Stock based
compensation
|
0
|
0
|
1,470
|
0
|
1,470
|
|
Net
income
|
0
|
0
|
0
|
37,000
|
37,000
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2018
|
29,061,883
|
$29,061
|
$30,593,366
|
$(34,622,521)
|
(4,000,094)
|
|
|
|
|
|
|
|
|
Stock based
compensation
|
0
|
0
|
44,807
|
0
|
44,807
|
|
Net
income
|
0
|
0
|
0
|
47,977
|
47,977
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2019
|
29,061,883
|
$29,061
|
$30,638,173
|
$(34,574,544)
|
(3,907,310)
|
|
|
|
|
|
|
|
See
notes to audited financial statements.
|
INFINITE
GROUP, INC.
STATEMENTS
OF CASH FLOWS
|
||
|
|
Years
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Cash
flows from operating activities:
|
|
|
|
Net
income
|
$47,977
|
$37,000
|
|
Adjustments to
reconcile net income to net cash provided by (used
in) operating activities:
|
|
|
|
Stock based
compensation
|
44,807
|
1,470
|
|
Depreciation and
amortization
|
29,648
|
24,183
|
|
Bad debt
recovery
|
0
|
(8,000)
|
|
Gain on settlement
of debt
|
0
|
(83,250)
|
|
(Increase) decrease
in assets:
|
|
|
|
Accounts
receivable
|
(146,102)
|
201,107
|
|
Prepaid expenses
and other current assets
|
(62,649)
|
1,419
|
|
Increase (decrease)
in liabilities:
|
|
|
|
Accounts
payable
|
(149,759)
|
(497,395)
|
|
Accrued expenses
and other current liabilities
|
255,725
|
183,807
|
|
Accrued
retirement
|
9,925
|
9,537
|
|
Net
cash provided by (used in) operating activities
|
29,572
|
(130,122)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchases of
property and equipment
|
(1,945)
|
(546)
|
|
Capitalization of
software development costs
|
(194,215)
|
0
|
|
Net
cash used in investing activities
|
(196,160)
|
(546)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds from notes
payable - related parties
|
200,000
|
90,000
|
|
Repayments of notes
payable - related parties
|
(56,730)
|
(3,350)
|
|
Net
cash provided by financing activities
|
143,270
|
86,650
|
|
|
|
|
|
Net
decrease in cash
|
(23,318)
|
(44,018)
|
|
|
|
|
|
Cash - beginning of
year
|
29,716
|
73,734
|
|
|
|
|
|
Cash
- end of year
|
$6,398
|
$29,716
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
Cash payments
for:
|
|
|
|
Interest
|
$152,908
|
$121,522
|
|
|
|
|
|
Income
taxes
|
$0
|
$0
|
See
notes to audited financial statements.
INFINITE GROUP, INC.
NOTES TO THE AUDITED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION & BUSINESS
The
accompanying financial statements consist of the financial
statements of Infinite Group, Inc. (the Company).
The
Company operates in one segment, the field of information
technology (IT) consulting services, with all operations based in
the United States. The primary consulting services are in the
cybersecurity and VMWare support services. There were no
significant sales from customers in foreign countries during 2019
and 2018. All assets are located in the United States.
NOTE 2. - MANAGEMENT PLANS
The
Company reported operating income of $329,137 in 2019 and $209,693
in 2018, net income of $47,977 in 2019 and $37,000 in 2018, and
stockholders’ deficiencies of $3,907,310 and $4,000,094 at
December 31, 2019 and 2018, respectively. Accordingly and due to
current working capital deficit of approximately $3.3 million,
there is substantial doubt about the Company’s ability to
continue as a going concern within one year of issuance of the
financial statements.
The
Company’s mission is to drive shareholder value by developing
and bringing to market automated, cost effective, and innovative
cybersecurity technologies. The Company’s strategy is to
build its business by designing, developing, and marketing IT
security-based products and solutions that fill technology gaps in
cybersecurity.
The
Company brought one product to market and intends to bring other
proprietary products and solutions to market through a channel of
partners and distributors. The products and solutions are designed
to simplify the security needs in customer and partner
environments, with a focus on Small and Medium-Sized Enterprises
(SMEs). The Company enables its partners by providing recurring
revenue-based business models that use its automated plug and play
solutions. Products may be sold as standalone solutions or
integrated into existing environments to further automate the
management of security and related IT functions. The
Company’s ability to succeed depends on how successful it is
in differentiating itself in the market at a time when competition
in these markets is on the rise. The Company works with its
partner, Webroot, to increase its base of channel partners and to
increase sales of Webroot’s cloud-based endpoint security
solution, with the objective of growing its recurring revenue
model.
The
Company’s cybersecurity services business is conducted within
its professional services organization (PSO). The Company provides
services and technical resources to support both its channel
partners and end customers. The Company’s goal is to expand
on these services throughout the United States via its growing
partner network and salesperson team.
The
Company is working to expand its managed services business with its
current federal enterprise customer and its customers.
Nodeware® - In May
2016, the Company filed a provisional patent application for its
proprietary product, Nodeware. In May 2017, the Company filed
a utility patent application for Nodeware. The patent application
is ready for examination by the U.S. patent application examiner.
The Company launched Nodeware in November 2016. Nodeware is an
automated vulnerability management and network security scanning
solution that enhances security by proactively identifying,
monitoring, and addressing potential vulnerabilities on networks,
creating a safeguard against hackers and ransomware with simplicity
and affordability. Customers have the option to purchase Nodeware
to accommodate the varying network needs of their organizations.
Nodeware provides a value-based solution designed for SMEs with
single subnet or several subnets as well as accommodating larger
organizations with more advanced network needs.
Nodeware assesses
vulnerabilities in a computer network using scanning technology to
capture a comprehensive view of the security exposure of a network
infrastructure. Users receive alerts and view network information
through a proprietary dashboard. Continuous and automated internal
scanning and external on demand scanning are available within this
offering.
Nodeware continues
to release upgrades with the most recent one in August 2019. This
upgrade provides a next generation of the Platform. The new
platform’s features include integration of a new,
cutting-edge scanning engine, a new reporting engine
to easily access
reports within the Dashboard, allowing users to
securely archive every report and retrieve them instantly
and greater technology enhancements around device identification
and fingerprinting. Another new feature added to Nodeware was
on-demand report generation, which enables IGI’s channel
partners to easily pull reports for
customers and run reports simultaneously
for better cybersecurity management.
Nodeware
creates an opportunity for resellers, including managed service
providers, managed security service providers, distributors, and
value-added resellers. The Company sells Nodeware in the commercial
sector through its channel partners and agents.
Technology and Product Development - The
Company’s goal is to position its products and solutions to
enable vertical integration with other solutions. The Company has a
technology and product development strategy aligned with its
business strategy.
Cybersecurity Services - The Company
provides cybersecurity consulting services to channel partners and
direct customers across different vertical markets (banking,
healthcare, manufacturing, etc.). Its cybersecurity projects use
Nodeware to create a living document that a customer can use to go
forward on a path of continuous improvement for its overall IT
security. The Company validates overall network security with the
goal of maintaining the integrity of confidential client
information, preserving the continuity of services, and minimizing
potential data damage from attempted threats and incidents. The
Company has also started a Managed Detection & Response (MDR)
program. This MDR solution includes preparation & consultation,
detection and analysis, containment & eradication, and incident
response all in one program. It includes 24 by 7 monitoring at the
Company’s Security Operations Center.
Continue to Improve Operations and Capital
Resources
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.
During
2019, the Company borrowed $200,000 from a related party under the
terms of a note payable. At December 31, 2019, the Company had
$300,000 available under this financing agreements. During 2018,
the Company borrowed $90,000 from related parties under the terms
of demand notes.
During
2017, the Company originated lines of credit with related parties
totaling $175,000 and borrowed $140,000. During 2018, the Company
borrowed an additional $20,000. At December 31, 2019, the Company
had approximately $15,000 available under these financing
agreements.
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, however substantial doubt about the
Company’s ability to continue as a going concern has not been
alleviated. 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.
The
Company plans to evaluate alternatives which may include
renegotiating the terms of the notes, seeking conversion of the
notes to shares of common stock and seeking funds to repay the
notes. The Company continues to evaluate repayment of our notes
payable based on its cash flow.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable - Credit is granted to substantially all
customers throughout the United States. The Company carries its
accounts receivable at invoice amount, less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful
accounts, based on a history of past write-offs and collections and
current credit conditions. The Company’s policy is to not
accrue interest on past due receivables. Management determined that
an allowance of $17,455 for doubtful accounts was reasonably stated
at December 31, 2019 ($22,000 – 2018).
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist of cash
accounts in financial institutions. The cash accounts occasionally
exceed the federally insured deposit amount; however, management
does not anticipate nonperformance by financial institutions.
Management reviews the financial viability of these institutions on
a periodic basis.
Loan Origination Fees - The Company capitalizes the costs of
loan origination fees and amortizes the fees as interest expense
over the contractual life of each agreement and show as a reduction
of the debt.
Sale of Certain Accounts
Receivable - The Company has available a financing
line with a financial institution (the Purchaser). In connection
with this line of credit, the Company adopted FASB ASC 860
“Transfers and Servicing”. FASB ASC 860 provides
consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings.
The Company has a factoring line with the Purchaser which enables
the Company to sell selected accounts receivable invoices to the
Purchaser with full recourse against the Company.
These
transactions qualify for a sale of assets since (1) the Company has
transferred all of its right, title and interest in the selected
accounts receivable invoices to the financial institution, (2) the
Purchaser may pledge, sell or transfer the selected accounts
receivable invoices, and (3) the Company has no effective control
over the selected accounts receivable invoices since it is not
entitled to or obligated to repurchase or redeem the invoices
before their maturity and it does not have the ability to
unilaterally cause the Purchaser to return the invoices. Under FASB
ASC 860, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when
extinguished.
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 equal to 10% of the total accounts
receivable invoice sold to the Purchaser. The fee is charged at
prime plus 3.6% (effective rate of 8.35% at December 31, 2019)
against the average daily outstanding balance of funds
advanced.
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 year ended December 31, 2019, the
Company sold approximately $4,742,933 ($5,181,140 - 2018) of its
accounts receivable to the Purchaser. As of December 31,
2019, $324,125 ($363,213 - 2018) of these receivables remained
outstanding. Additionally, as of December 31, 2019, the
Company had $67,000 available under the financing line with the
financial institution ($0 - 2018). After deducting estimated
fees and advances from the Purchaser, the net receivable from the
Purchaser amounted to $32,412 at December 31, 2019 ($36,321 - 2018)
and is included in accounts receivable in the accompanying balance
sheets as of that date.
There
were no gains or losses on the sale of the accounts receivable
because all were collected. The cost associated with the financing
line was approximately $53,600 for the year ended December 31, 2019
($53,600 - 2018). These financing line fees are classified on the
statements of operations as interest expense.
Property and Equipment - Property and equipment are recorded at
cost and are depreciated over their estimated useful lives for
financial statement purposes. The cost of improvements to leased
properties is amortized over the shorter of the lease term or the
life of the improvement. Maintenance and repairs are charged to
expense as incurred while improvements are
capitalized.
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 December 31, 2019, there is $194,215 of costs
capitalized and $9,539 of accumulated amortization ($0 in 2018).
During the year ended December 31, 2019 there was $9,539 of
amortization expense recorded ($0 in 2018). Future amortization is
expected to be $184,676 at a rate of $58,092, $64,738, $55,500 and
$6,646 for the years 2020, 2021, 2022 and 2023, respectively. Costs
incurred prior to reaching technological feasibility are expensed
as incurred. Labor amounts expensed related to these development
costs amounted to approximately $58,000 and $182,000 during the
year ended December 31, 2019 and 2018, respectively.
Accounting for the Impairment or Disposal of
Long-Lived Assets -
The Company follows provisions of FASB ASC 360 “Property,
Plant and Equipment” in accounting for the impairment of
disposal of long-lived assets. This standard specifies, among other
things, that long-lived assets are to be reviewed for potential
impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable. The Company determined
that there was no impairment of long-lived assets during 2019 and
2018.
Revenue Recognition - Effective January 1, 2018, the Company
adopted Topic 606 using the modified retrospective approach and
applied the guidance to those contracts which were not completed as
of January 1, 2018. Adoption of Topic 606 did not impact the timing
of revenue recognition in the Company’s financial statements
for the current or prior periods. Accordingly, no adjustments have
been made to opening retained earnings or prior period
amounts.
The
Company’s revenues are generated under both time and material
and fixed price agreements. Managed Support services revenue
is recognized when the associated costs are incurred, which
coincides with the consulting services being provided. Time
and materials service agreements are based on hours worked and are
billed at agreed upon hourly rates for the respective position plus
other billable direct costs. Fixed price service agreements
are based on a fixed amount of periodic billings for recurring
services of a similar nature performed according to the contractual
arrangements with clients. These agreements are arrangements
for monthly or weekly support services. Under both types of
agreements, the delivery of services occurs when an employee works
on a specific project or assignment as stated in the contract or
purchase order. Based on historical experience, the Company
believes that collection is reasonably assured.
The
Company sells licenses of Nodeware and third-party software,
principally Webroot. Substantially all customers are invoiced
monthly at fixed rates for license fees and revenue is recognized
over time.
The
Company sells VMware software and service credits. Sales are
recorded upon receipt of the software or credits by the customer.
The Company does not take title to the software or credits.
Accordingly, the Company accounts for these as agent sales and
reduces its sales amount by the related cost of sales.
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 December 31, 2019 or 2018 for contracts with an
expected original duration of more than one year. The following
table summarizes the revenue recognized by the major
services:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Managed support
services
|
$4,986,217
|
$4,922,061
|
|
Cybersecurity
projects and software
|
1,569,972
|
1,177,769
|
|
Other IT consulting
services
|
538,090
|
270,506
|
|
Total
sales
|
$7,094,279
|
$6,370,336
|
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 U.S. Government for which we manage one of the
nation’s largest physical and virtual Microsoft Windows
environments.
●
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.
Cyber security projects and software
Cyber
security projects and software revenue includes the selling of
licenses of Nodeware™ and third-party software, principally
Webroot™ as well as performing cybersecurity assessments,
testing and consulting as a vCISO (Virtual Chief Information
Security Officer).
●
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.
●
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, testing and vCISO 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 either 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. For the year ended December
31, 2019, we recognized revenue of $17,497 that was included in the
accrued expenses-other liability balance at the beginning of the
period presented. Deferred revenue that will be realized during the
succeeding 12-month period is $168,824, and the remaining deferred
revenue of $10,000 is scheduled to be realized in
2022.
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
2019, sales to one client, including sales under subcontracts for
services to several entities, accounted for 62.6% of total sales
(69.7% - 2018) and 22.1% of accounts receivable at December 31,
2019 (10.5% - 2018).
Sales and Cost of Sales - The Company
designates certain sales of third party software and project
credits as agent sales where the Company does not have the
performance obligation to deliver the software or credits to the
end user. Accordingly, cost of sales is recorded as a reduction of
sales and only the gross profit is included in sales in the
accompanying statements of operations. For the years ended December
31, 2019 and 2018, the Company designated agent sales of $238,136
and $488,314, respectively. The related accounts receivables and
accounts payable are recorded on a gross basis in the accompanying
balance sheets.
Stock Options - The Company recognizes
compensation expense related to stock-based payments at the grant
date fair value of the awards. The Company uses the Black-Scholes
option pricing model to determine the estimated fair value of the
awards.
Income Taxes - The Company accounts for
income tax expense in accordance with FASB ASC 740 “Income
Taxes.” Deferred taxes are provided on an asset and liability
method whereby deferred tax assets are recognized for deductible
temporary differences, operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of
enactment.
The
Company periodically reviews tax positions taken to determine if it
is more likely than not that the position would be sustained upon
examination. The Company did not have any material unrecognized tax
benefit at December 31, 2019 or 2018. The Company recognizes
accrued interest and penalties related to unrecognized tax benefits
in tax expense. During the years ended December 31, 2019 and 2018,
the Company recognized no interest and penalties.
The
Company files U.S. federal tax returns and tax returns in various
states. The tax years 2016 through 2019 remain open to examination
by the taxing jurisdictions to which the Company is
subject.
Fair Value of Financial Instruments
- The Company has determined
the fair value of debt and other financial instruments using a
valuation hierarchy. The hierarchy, which prioritizes the inputs
used in measuring fair value, consists of three
levels.
Level 1
uses observable inputs such as quoted prices in active
markets;
Level 2
uses inputs other than quoted prices in active markets that are
either directly or indirectly observable; and
Level 3
is defined as unobservable inputs in which little or no market data
exist and requires the Company to develop its own
assumptions.
The
hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level
3 measurements).
The
carrying amounts of cash, accounts receivable and accounts payable
and accrued expenses are reasonable estimates of their fair value
due to their short maturity. Based on the borrowing rates currently
available to the Company for loans similar to its term debt and
notes payable, the fair value approximates the carrying
amounts.
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 options and notes assumed to be exercised. In
a loss year, the calculation for basic and diluted earnings per
share is the same, as the impact of potential common shares is
anti-dilutive.
The
following table sets forth the computation of basic and diluted
loss per share as of December 31, 2019 and 2018:
|
|
Years ended December 31,
|
|
|
|
2019
|
2018
|
|
Numerator
for basic and diluted net income per share:
|
|
|
|
Net
income
|
$47,977
|
$37,000
|
|
Basic
and diluted net income per share
|
$.00
|
$.00
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
Basic
shares
|
29,061,883
|
29,061,883
|
|
Diluted
shares
|
29,811,883
|
29,061,883
|
|
|
|
|
|
Anti-dilutive
shares excluded from net income per share
|
29,195,736
|
28,952,076
|
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 or conversion prices were
greater than the average market price of the common shares or their
inclusion would have been anti-dilutive.
Reclassifications - The Company reclassifies amounts in
its prior year financial statements to conform to the current
year’s presentation.
Use of Estimates - The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Leases - In February 2016, the FASB
issued amended guidance for lease arrangements to increase
transparency and comparability by providing additional information
to users of financial statements regarding an entity's leasing
activities. The new standard requires entities to recognize a
liability for their lease obligations and a corresponding
right-of-use asset, initially measured at the present value of the
lease payments. Subsequent accounting depends on whether the
agreement is deemed to be a financing or operating lease. For
operating leases, a lessee recognizes its total lease expense as an
operating expense over the lease term. The ASU requires that assets
and liabilities be presented and disclosed separately, and the
liabilities must be classified appropriately as current and
noncurrent. The ASU further requires additional disclosure of
certain qualitative and quantitative information related to lease
agreements. The ASU was effective for the Company beginning on
January 1, 2019, at which time we adopted the new standard using
the modified retrospective approach as of the date of
adoption.
NOTE 4. - PROPERTY AND EQUIPMENT
Property and
equipment consists of:
|
|
|
December
31,
|
|
|
|
Depreciable Lives
|
2019
|
2018
|
|
Software
|
3
years
|
$34,934
|
$34,934
|
|
Equipment
|
3 to 10
years
|
131,719
|
129,774
|
|
Furniture and
fixtures
|
5 to 7
years
|
17,735
|
17,735
|
|
|
184,388
|
182,443
|
|
|
Accumulated
depreciation
|
|
(178,473)
|
(173,816)
|
|
|
$5,915
|
$8,627
|
|
Depreciation
expense was $4,567 and $10,267 for the years ended December 31,
2019 and 2018, respectively.
NOTE 5. - LOAN FEES
On
December 1, 2014, the Company entered into an unsecured line of
credit financing agreement with a member of its Board. The Company
paid an origination fee consisting of (i) 600,000 shares of its
common stock valued at $30,000 and (ii) an immediately exercisable
option to purchase 600,000 shares of its common stock at an
exercise price of $.05 valued at $23,400 using the Black-Scholes
option-pricing model, which was fully expensed through December 31,
2017. On September 30, 2016, the note
maturity date was extended from December 31, 2017 to January 1,
2020. This note has not been extended as of the date of this
filing. As consideration for extending the maturity date, the
Company granted the lender an option to purchase 800,000 common
shares at $.04 per share with an estimated fair value of
$14,720 using the Black-Scholes option-pricing model, which
is being amortized ratably over the period January 1, 2018 through
December 31, 2019.
On March 14, 2016, the Company entered into
an unsecured financing agreement with a third-party lender
(“2016 Note Payable”). In consideration for providing
the financing, the Company paid the lender a fee consisting of
2,500,000 shares of its common stock valued at $37,500 on the date
of the agreement based upon the closing bid quotation of its common
stock on the OTC Bulletin Board on that date. These deferred
financing fees are being amortized ratably through
2021.
On July
18, 2017, the Company entered into an unsecured line of credit
financing agreement with an officer and member of its Board. In
consideration for providing the financing, the lender was granted
an option to purchase 400,000 shares of common stock at $.04 per
share with an estimated fair value of
$9,960 using the Black-Scholes option-pricing model. The
option expires on July 17, 2022.
On
September 21, 2017, the Company entered into an unsecured line of
credit financing agreement with a related party. In consideration
for providing the financing, the lender was granted an option to
purchase 400,000 shares of common stock at $.04 per share
with an estimated fair value of
$4,080 using the Black-Scholes option-pricing model. The
option expires on January 2, 2023.
The
unamortized deferred financing costs are recorded as a reduction of
the principal owed and are expensed over the life of the debt or
the extension period. At December 31, 2019, the Company has
deferred financing costs of $52,220 less accumulated amortization
expenses of $39,110 ($25,195 - 2018) with a net carrying value of
$13,110 ($27,025 - 2018). These amounts are shown as a reduction to
the debt. See Note 7.
NOTE 6. - NOTES PAYABLE - CURRENT
Notes
payable consist of:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Demand note
payable, 10%, secured by Software (A)
|
$12,500
|
$12,500
|
|
Demand note payable
to former director, 10%, unsecured
|
30,000
|
30,000
|
|
Convertible demand
note payable to former director, 12%, unsecured (B)
|
40,000
|
40,000
|
|
Convertible notes
payable, 6% (C)
|
150,000
|
150,000
|
|
Convertible term
note payable, 7%, secured (D)
|
100,000
|
100,000
|
|
|
$332,500
|
$332,500
|
(A)
Demand Note payable, 10%, secured by
Software - During 2015, the Company issued a note in
connection with the purchase of Software.
(B)
Convertible demand note payable to former
director, 12%, unsecured - At December 31, 2019 and 2018, the
Company was obligated for $40,000 with interest at 12%. The note is
unsecured and the principal is convertible at the option of the
holder into shares of common stock at $.11 per share.
(C)
Convertible notes payable, 6%, maturity date of
December 31, 2016 - At December 31, 2019, the Company was
obligated to unrelated third parties for $150,000 ($150,000 - 2018)
(“The Notes”). The principal is unsecured and
convertible at the option of the holders into shares of common
stock at $.05 per share. The Notes bear interest at 6.0% at
December 31, 2019 (6.0% - 2018). The Notes are convertible into
shares of common stock subject to the following limitations. The
Notes are not convertible to the extent that shares of common stock
issuable upon the proposed conversion would result in a change in
control of the Company which would limit the use of its net
operating loss carryforwards; provided, however if the Company
closes a transaction with another third party or parties that
results in a change of control which will limit the use of its net
operating loss carryforwards, then the foregoing limitation shall
lapse. Prior to any conversion by a requesting note holder, each
note holder holding a note which is then convertible into 5% or
more of the Company’s common stock shall be entitled to
participate on a pari passu basis with the requesting note holder
and upon any such participation the requesting note holder shall
proportionately adjust his conversion request such that, in the
aggregate, a change of control, which will limit the use of the
Company’s net operating loss carryforwards, does not
occur.
(D)
Convertible term note payable, 7%, secured,
maturity date of October 4, 2016 - The note bears interest at the rate of
7% per annum, payable monthly, and is secured by a subordinate lien
on all the Company’s assets. The note's principal is
convertible at the option of the holder into shares of the
Company’s common stock at $.10 per share, which was the price
of the Company's common stock on the closing date of the
agreement.
Notes
payable - related parties consist of:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Demand notes
payable to officer and director, 6%, unsecured
|
$38,000
|
$82,000
|
|
Demand note payable
to director, 6%, unsecured
|
20,000
|
20,000
|
|
|
$58,000
|
$102,000
|
NOTE 7. - LONG-TERM OBLIGATIONS
Notes Payable - Other - Term notes payable - other consist
of:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
2016 note payable,
6%, unsecured, due December 31, 2021 (A)
|
$500,000
|
$500,000
|
|
Convertible note
payable, 6%, due January 1, 2020 (B)
|
264,000
|
264,000
|
|
Note payable, 10%,
secured, due January 1, 2018 (C)
|
265,000
|
265,000
|
|
Convertible term
note payable,12%, secured, due August 31, 2018 (D)
|
175,000
|
175,000
|
|
Term note payable -
PBGC, 6%, secured (E)
|
246,000
|
246,000
|
|
|
1,450,000
|
1,450,000
|
|
Less: deferred
financing costs
|
13,110
|
19,665
|
|
|
1,436,890
|
1,430,335
|
|
Less: current
maturities
|
950,000
|
686,000
|
|
|
$486,890
|
$744,335
|
(A)
2016 note payable, 6%, unsecured, due December
31, 2021 - On March 14, 2016, the Company entered into
an unsecured financing agreement with a third-party lender. At
December 31, 2016, the Company was obligated for $500,000.
Borrowings bear interest at 6% with interest payments due
quarterly. Principal is due on December 31, 2021. Principal and
interest may become immediately due and payable upon the occurrence
of customary events of default. In consideration for providing the
financing, the Company paid the lender a fee of 2,500,000 shares of
its common stock valued at $37,500 on the date of the agreement
based upon the closing bid quotation of its common stock on the OTC
Bulletin Board on that date. These deferred financing costs are
recorded as a reduction of the principal owed and are amortized
over the life of the debt. The balance of the note payable was
$467,225 at December 31, 2016 consisting of principal due of
$500,000 offset by deferred financing costs of $32,775. As of
December 31, 2019, the balance was $486,890 (2018 - $480,335). The
lender has piggy back registration rights for these shares. The
Company’s Chief Executive Officer and President agreed to
guarantee the loan obligations if he is no longer an
“affiliate” of the Company as defined by Securities and
Exchange Commission rules.
(B)
Convertible note payable, 6%, due January 1,
2020 - This note has the same terms as item (C) of Note 6
except it matures on January 1, 2020 and has not been
extended.
(C)
Note payable, 10%, secured, due January 1, 2018
- During the years ended December 31, 2004 and 2003, the
Company issued secured notes payable aggregating $265,000. These
borrowings bear interest at 10% and were due, as modified on
January 1, 2018. This note has not been further extended. The notes
are secured by a first lien on accounts receivable that are not
otherwise used by the Company as collateral for other borrowings
and by a second lien on accounts receivable.
(D)
Convertible term note payable, 12%, secured,
due August 31, 2018 -
The Company entered into a secured loan agreement during 2008 for
working capital. The loan bears interest at 12%, which is payable
monthly and was due, as modified on August 31, 2018 for an
aggregate of $175,000. During 2009, the note was modified for its
conversion into common shares at $.25 per share, which was the
closing price of the Company’s common stock on the date of
the modification. The note is secured by a subordinate lien on all
assets of the Company.
(E)
Term note payable - PBGC, 6%, secured
- On October 17, 2011, in
accordance with of the Settlement Agreement dated September 6, 2011
(the “Settlement Agreement”), the Company issued a
secured promissory note in favor of the Pension Benefit Guaranty
Corporation (the “PBGC”) for $300,000 bearing interest
at 6% per annum due in scheduled quarterly payments over a
seven-year period with a balloon payment of $219,000 due on
September 15, 2018.
Notes Payable - Related Parties
Notes
payable - related parties consist of:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Note payable, up to
$500,000, 7.5%, due August 31, 2026 (A)
|
$200,000
|
0
|
|
Convertible notes
payable, 6% (B)
|
155,300
|
$155,300
|
|
Note payable,
$400,000 line of credit, 8.35%, unsecured (C)
|
366,635
|
379,365
|
|
Convertible note
payable, 7%, due March 31, 2021 (D)
|
25,000
|
25,000
|
|
Note payable,
$100,000 line of credit, 6%, unsecured (E)
|
90,000
|
90,000
|
|
Note payable,
$75,000 line of credit, 6%, unsecured (F)
|
70,000
|
70,000
|
|
|
906,935
|
719,665
|
|
Less deferred
financing costs
|
0
|
7,360
|
|
|
906,935
|
712,305
|
|
Less current
maturities
|
512,935
|
34,350
|
|
|
$394,000
|
$677,955
|
(A)
Note payable of up to $500,000, 7.5%, due
August 31, 2026 - On May 7, 2019, the Company entered into a
note payable agreement for up to $500,000 with a related party. The
note has an interest rate of 7.5% and is due on August 31, 2026.
The Company borrowed $200,000 during the year ended December 31,
2019, which remains outstanding as of December 31, 2019. As
consideration for providing this financing, the Company granted a
stock option to purchase a total of 2,500,000 common shares at an
exercise price of $.02 and recorded interest expense of $14,250
using the Black-Scholes option pricing model to determine the
estimated fair value of the option.
(B)
Convertible notes payable, 6% - The
Company has various notes payable to related parties totaling
$155,300 of which $146,300 matured on January 1, 2020 and $9,000
matures on January 1, 2021. The notes that matured on January 1,
2020 were not extended and are past due. Principal and accrued
interest are convertible at the option of the holder into shares of
common stock at $.05 per share. The notes bear interest at 6.75% at
December 31, 2019. The rate is adjusted annually, on January
1st of
each year, to the prime rate in effect on December 31st of the immediately
preceding year, plus one and one quarter percent, and in no event,
shall the interest rate be less than 6% per annum. The rate
effective as of January 1, 2020 was 6.00%.
The
Company executed collateral security agreements with the note
holders providing for a subordinate security interest in all the
Company’s assets. Generally, upon notice, prior to the note
maturity date, the Company can prepay all or a portion of the
outstanding notes.
The
Notes are convertible into shares of common stock subject to the
following limitations: The Notes are not convertible to the extent
that shares of common stock issuable upon the proposed conversion
would result in a change in control of the Company which would
limit the use of its net operating loss carryforwards; provided,
however, if the Company closes a transaction with another third
party or parties that results in a change of control which will
limit the use of its net operating loss carryforwards, then the
foregoing limitation shall lapse. Prior to any conversion by a
requesting note holder, each note holder holding a note which is
then convertible into 5% or more of the Company’s common
stock shall be entitled to participate on a pari passu basis with
the requesting note holder and upon any such participation the
requesting note holder shall proportionately adjust his conversion
request such that, in the aggregate, a change of control, which
will limit the use of the Company’s net operating loss
carryforwards, does not occur.
(C)
Note payable, $400,000 line of credit, 8.35%,
unsecured - On December 1, 2014, the Company entered into an
unsecured line of credit financing agreement with a member of its
Board. The LOC Agreement provides for working capital of up to
$400,000 through January 1, 2020. This agreement was not extended
and is past due. The Company is required to provide the lender with
a report stating the use of proceeds for each pending draw under
the line of credit. Borrowings of $100,000 or more bear interest at
the prime rate plus 2.85% (effective rate of 7.60% at December 31,
2019). Principal and interest are due
monthly using an amortization schedule that requires payments of
$8,000 annually and a balloon payment of the remaining balance at
maturity. The balance of the note payable was $366,635 at
December 31, 2019 ($372,005 - 2018) consisting of principal due of
$366,635 ($379,365 - 2018) offset by deferred financing costs of $0
($7,360 – 2018).
(D)
Convertible note payable, 7%, due March 31,
2021 - On February 12, 2015, the Company borrowed $25,000
from a Company officer. The note is unsecured and matured on March
31, 2018 with principal convertible at the option of the holder
into shares of common stock at $.10 per share. In 2019, the Company
officer extended the due date to March 31, 2021.
(E)
Note payable, $100,000 line of credit, 6%,
unsecured - On July 18, 2017, the Company entered into an
unsecured line of credit financing agreement with an officer and
member of its Board. The LOC Agreement provides for working capital
of up to $100,000 with interest at 6% due quarterly through July 1,
2022. In consideration for providing the financing, the lender was
granted an option to purchase 400,000 shares of common stock at
$.04 per share. The option expires on July 17, 2022.
(F)
Note payable, $75,000 line of credit, 6%,
unsecured - On September 21, 2017, the Company entered into
an unsecured line of credit financing agreement with a related
party. The LOC Agreement provides for working capital of up to
$75,000 with interest at 6% due quarterly through January 2, 2023.
In consideration for providing the financing, the lender was
granted an option to purchase 400,000 shares of common stock at
$.04 per share. The option expires on January 2, 2023.
Long-Term
Obligations
As of
December 31, 2019, minimum future annual payments of long-term
obligations and amortization of deferred financing costs are as
follows:
|
|
Annual
|
Annual
|
|
|
|
Payments
|
Amortization
|
Net
|
|
Due Prior to
2020
|
$698,020
|
$0
|
$698,020
|
|
2020
|
764,915
|
0
|
764,915
|
|
2021
|
624,000
|
13,110
|
610,890
|
|
2022
|
0
|
0
|
0
|
|
2023
|
70,000
|
0
|
70,000
|
|
2024
|
0
|
0
|
0
|
|
2025
|
0
|
0
|
0
|
|
2026
|
200,000
|
0
|
200,000
|
|
Total long-term
obligations
|
$2,356,935
|
$13,110
|
$2,343,825
|
NOTE 8. - STOCKHOLDERS' DEFICIENCY
Preferred Stock - The Company’s
certificate of incorporation authorizes its Board to issue up to
1,000,000 shares of preferred stock. The stock is issuable in
series that may vary as to certain rights and preferences, as
determined upon issuance, and has a par value of $.01 per share. As
of December 31, 2019, and 2018, there were no preferred shares
issued or outstanding.
2005 Plan - The Company’s Board
and stockholders approved a stock option plans adopted in 2005,
which has authority to grant options to purchase up to an aggregate
of 990,000 common shares at December 31, 2019 (1,030,000 -
2018).
2009 Plan - During 2009, the
Company’s Board approved the 2009 stock option plan, which
grants options to purchase up to an aggregate of 4,000,000 common
shares of which 3,000 common shares are available for grant at
December 31, 2019 (348,000 - 2018). Options issued to date are
nonqualified since the Company has decided not to seek stockholder
approval of the 2009 Plan.
2019 Plan - During 2019, the
Company’s Board approved the 2019 stock option plan, which
grants options to purchase up to an aggregate of 1,500,000 common
shares of which 141,500 common shares are available for grant at
December 31, 2019. Options issued to date are nonqualified since
the Company has decided not to seek stockholder approval of the
2019 Plan.
NOTE 9. - STOCK OPTION PLANS AND AGREEMENTS
The
Company grants stock options to its key employees and independent
service providers as it deems appropriate. Options expire from five
to ten years after the grant date.
Option Agreements - The Company's Board
approved stock option agreements with consultants and a member of
the Board of which options for an aggregate of 500,000 common
shares are outstanding at December 31, 2019 with an average
exercise price of $.15 per share. At December 31, 2019, options for
500,000 shares are vested. Options for 938,000 shares were
forfeited unvested in January 2019.
Loan Fees - On May 7, 2019, the Company
entered into a note payable agreement for up to $500,000 with a
related party. The note has an interest rate of 7.5% and is due on
August 31, 2026. The Company borrowed $200,000 which remains
outstanding as of December 31, 2019. As consideration for providing
this financing, the Company granted a stock option to purchase a
total of 2,500,000 common shares at an exercise price of $.02 and
recorded interest expense of $14,250 using the Black-Scholes option
pricing model to determine the estimated fair value of the
option.
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model based on the following
assumptions. Volatility is based on the Company’s historical
volatility. The expected life of the options was determined using
the simplified method for plain vanilla options as stated in FASB
ASC 718 to improve the accuracy of this assumption while
simplifying record keeping requirements until more detailed
information about the Company’s exercise behavior is
available. The risk-free rate for the life of the option is based
on the U.S. Treasury yield curve in effect at the time of
grant.
The
following assumptions were used for the years ended December 31,
2019 and 2018.
|
|
2019
|
2018
|
|
Risk free interest
rate
|
1.38%
to 2.55%
|
2.86% to
2.95%
|
|
Expected dividend
yield
|
0%
|
0%
|
|
Expected stock
price volatility
|
100%
|
100%
|
|
Expected life of
options
|
2.75
to 3.90 years
|
2.75
years
|
The
following is a summary of stock option activity, including
qualified and non-qualified options for the years ended December
31, 2019 and 2018:
|
|
Number
of Options Outstanding
|
Weighted
Average Exercise Price
|
Remaining
Contractual Term
|
Aggregate
Intrinsic Value
|
|
Outstanding at
December 31, 2017
|
8,031,000
|
$.10
|
|
|
|
Granted
|
300,000
|
$.02
|
|
|
|
Expired
|
(411,000)
|
$.26
|
|
|
|
Outstanding at
December 31, 2018
|
7,920,000
|
$.09
|
|
|
|
Granted
|
4,203,500
|
$.03
|
|
|
|
Expired
|
(275,000)
|
$.07
|
|
|
|
Forfeited
|
(938,000)
|
$.23
|
|
|
|
Outstanding
at December 31, 2019
|
10,910,500
|
$.05
|
4.1
years
|
$165,600
|
|
|
|
|
|
|
|
Vested
or expected to vest and exercisable at December 31,
2019
|
10,910,500
|
$.05
|
4.1
years
|
$165,600
|
At
December 31, 2019, there was $0 of total unrecognized compensation
cost related to outstanding non-vested options.
The
weighted average fair value of options granted was $.03 and $.01
per share for the years ended December 31, 2019 and 2018,
respectively. The exercise price for all options granted equaled or
exceeded the market value of the Company’s common stock on
the date of grant.
NOTE 10. - INCOME TAXES
The
components of income tax expense (benefit) consists of the
following:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Deferred:
|
|
|
|
Federal
|
$49,000
|
$158,000
|
|
State
|
6,000
|
170,000
|
|
|
55,000
|
328,000
|
|
Change in valuation
allowance
|
(55,000)
|
(328,000)
|
|
|
$0
|
$0
|
At
December 31, 2019, the Company had federal net operating loss
carryforwards of approximately $7,300,000 ($7,600,000 - 2018) and
various state net operating loss carryforwards of approximately
$3,200,000 ($3,400,000 - 2018) which expire from 2020 through
2039. These carryforwards exclude federal net operating loss
carryforwards from inactive subsidiaries and net operating loss
carryforwards from states that the Company does not presently
operate in. Utilization of the net operating loss
carryforwards may be subject to a substantial annual limitation due
to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. The annual limitation
may result in the expiration of the net operating loss
carryforwards before utilization.
At
December 31, 2019, a net deferred tax asset, representing the
future benefit attributed primarily to the available net operating
loss carryforwards and defined benefit plan expenses in the amount
of approximately $1,943,000 ($1,998,000 - 2018), had been fully
offset by a valuation allowance because management believes that
the statutory limitations on utilization of the operating losses
and concerns over achieving profitable operations diminish the
Company’s ability to demonstrate that it is more likely than
not that these future benefits will be realized before they
expire.
The
following is a summary of the Company's temporary differences and
carryforwards which give rise to deferred tax assets and
liabilities.
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Deferred tax assets
(liabilities):
|
|
|
|
Net
operating loss carryforwards
|
$1,650,000
|
$1,707,000
|
|
Defined
benefit pension liability
|
60,000
|
60,000
|
|
Operating
Lease ROU
|
(48,000)
|
0
|
|
Operating
Lease Liability
|
48,000
|
0
|
|
Reserves
and accrued expenses payable
|
233,000
|
231,000
|
|
Gross
deferred tax asset
|
1,943,000
|
1,998,000
|
|
Deferred tax asset
valuation allowance
|
(1,943,000)
|
(1,998,000)
|
|
Net deferred tax
asset
|
$0
|
$0
|
The
differences between the U.S. statutory federal income tax rate and
the effective income tax rate in the accompanying statements of
operations are as follows:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Statutory U.S.
federal tax rate
|
21.0%
|
21.0%
|
|
|
|
|
|
Change in valuation
allowance
|
(115.6)
|
(886.4)
|
|
Net operating loss
carryforward expiration
|
71.5
|
315.0
|
|
State
taxes
|
12.8
|
458.4
|
|
|
|
|
|
Expired stock-based
compensation
|
3.1
|
7.6
|
|
Note receivable
reserve
|
0.0
|
77.7
|
|
Other permanent
non-deductible items
|
7.2
|
6.7
|
|
Effective income
tax rate
|
0.0%
|
0.0%
|
NOTE 11. - EMPLOYEE RETIREMENT PLANS
Simple IRA Plan - Through December 31, 2012, the Company
offered a simple IRA plan as a retirement plan for eligible
employees who earned at least $5,000 of annual compensation.
Eligible employees could elect to contribute a percentage of their
compensation up to a maximum of $11,500. The accrued liability for
the simple IRA plan, including interest, was $254,348 and $244,423,
as of December 31, 2019 and 2018, respectively.
401(k) Plan - Effective January 1, 2013,
the Company began offering a defined contribution 401(k) plan in
place of the simple IRA plan. For 2019, 401(k) employee
contribution limits are $19,000 plus a catch-up contribution for those over
age 50 of $6,000. The Company can elect to make a discretionary
contribution to the Plan. No discretionary contribution was
approved for 2019 or 2018.
NOTE 12. - LEASE
Beginning on August
1, 2016, the Company leases its headquarters facility under an
operating lease agreement that expires on June 30, 2022. The
Company has the right to terminate the lease upon six months prior
notice after three years of occupancy. Rent expense is $80,000
annually during the first year of the lease term and increases by
1.5% annually thereafter.
Upon
adoption of the ASU on January 1, 2019, the Company recognized a
right-of-use asset of $265,825 and a lease liability of $265,825
related to the existing office lease that is classified as an
operating lease.
Supplemental
balance sheet information related to the operating lease was as
follows:
|
|
December
31, 2019
|
|
Right of use asset
– lease, net
|
$195,441
|
|
Operating lease
liability - short-term
|
$74,373
|
|
Operating lease
liability - long-term
|
122,605
|
|
Total
operating lease liability
|
$196,978
|
|
|
|
|
Discount rate -
operating lease
|
6.0%
|
NOTE 13. - RELATED PARTY ACCRUED INTEREST PAYABLE
Accrued Interest Payable - Included in
accrued interest payable is accrued interest payable to related
parties of $157,067 at December 31, 2019 ($148,703 -
2018).
NOTE 14. - SUBSEQUENT EVENT
In
December 2019, a novel strain of coronavirus was reported in Wuhan,
Hubei province, China. In the first several months of 2020, the
virus, SARS-CoV-2, and resulting disease, COVID-19, spread to the
United States, including New York State, the geographic location in
which the Company’s headquarters operates. On March 21, 2020,
New York Governor Andrew Cuomo issued an Executive Order entitled
“New York State on PAUSE” (Policy that Assures Uniform
Safety for Everyone) (the “Order”), pursuant to which,
all non-essential employees (as defined by the State) must stay at
home starting March 22, 2020 through April 19, 2020. The Company
was deemed essential. On March 25, 2020, Colorado Governor Jared
Polis announced an executive order for Coloradans to stay at home
in order to help prevent the spread of coronavirus. The
stay-at-home order went into effect Thursday, March 26, 2020 at 6
a.m. and will last through Saturday, April 11, 2020.
Beginning March 16,
2020, prior to the Order, most of the Company’s New York
employees began temporarily working remotely to ensure the safety
and well-being of our employees and their families. The Colorado
employees began working remotely on March 26, 2020. The
Company’s technology infrastructure, for some time, has been
set up to handle offsite seamless operations to address alternative
disaster recovery disruption. As a result, all employees will
continue to work remotely unless they report needing sick leave or
family leave pursuant to regulated benefits.
INFINITE
GROUP, INC.
Incentive
Stock Option Agreement
Date:
December 10, 2019
Infinite Group,
Inc., a Delaware corporation (the “Company”), pursuant
to its 2019 Stock Option Plan (“the Plan”), hereby
grants Andrew Hoyen (the
“Optionee”) an incentive stock option to purchase a
total of 200,000 shares
of the Company’s Common Stock, par value $.001 per share, at
the price of $.04 per share
on the terms and conditions set forth herein and in the Plan. As
used herein, the term “Company” includes any affiliates
of the Company.
1.
Duration.
(a)
This option shall
become effective on the date of grant and shall be exercisable as
for 200,000 shares on December 10, 2019.
(b) This
option shall expire five years from the date hereof on December 9,
2024 (the “Termination Date”).
2.
Written Notice of Exercise.
This
option may be exercised only by the delivery to the Secretary or
Treasurer of the company at its principal office within the time
specified in Paragraph 1, of a written notice of exercise
substantially in the form described in Paragraph 8.
3.
Anti-Dilution Provisions.
(a) If
there is any stock dividend, stock split, or combination of shares
of Common Stock of the Company, the number and amount of shares
then subject to this option shall be proportionately and
appropriately adjusted; no change shall be made in the aggregate
purchase price to be paid for all shares subject to this option,
but the aggregate purchase price shall be allocated among all
shares subject to this option after giving effect to the
adjustment.
(b)
If there is any
other change in the Common Stock of the Company, including
recapitalization, reorganization, sale of exchange of assets,
exchange of shares, offering of subscription rights, or a merger or
consolidation in which the Company is the surviving corporation, an
adjustment, if any, shall be made in the shares then subject to
this option as the Board of Directors may deem equitable. Failure
of the Board of Directors to provide for an adjustment pursuant to
this subparagraph prior to the effective date of any Company action
referred to herein shall be conclusive evidence that no adjustment
is required in consequence of such action.
(c)
If the Company is
merged into or consolidated with any other corporation, or if it
sells all or substantially all of its assets to any other
corporation, then either (i) the Company shall cause provisions to
be made for the continuance of this option after such event, or for
the substitution for this option of an option covering the number
and class of securities which the Optionee would have been entitled
to receive in such merger or consolidation by virtue of such sale
if the Optionee had been the holder of record of a number of shares
of Common Stock of the Company equal to the number of shares
covered by the unexercised portion of this option, or (ii) the
Company shall give to the Optionee written notice of its election
not to cause such provision to be made and this option shall become
exercisable in full (or, at the election of the optionee, in part)
at any time during a period of 20 days, to be designated by the
Company, ending not more than 10 days prior to the effective date
of the merger, consolidation or sale, in which case this option
shall not be exercisable to any extent after the expiration of such
20 -day period. In no event, however, shall this option be
exercisable after the Termination Date.
4.
Investment Representation; Legend on Certificates; Special
Restriction on Resale.
The
Optionee agrees that until such time as a registration statement
under the Securities Act of 1933 becomes effective with respect to
the option and/or the stock underlying the option, the Optionee is
taking this option and will take the stock underlying the option,
for investment and not for resale or distribution. The Company
shall have the right to place upon the face of any stock
certificate or certificates evidencing shares issuable upon the
exercise of this option such legend as the Board of Directors may
prescribe for the purpose of preventing disposition of such shares
in violation of the Securities Act of 1933, as now or hereafter
provided.
5.
Non-Transferability.
This
option shall not be transferable by the Optionee other than by will
or by laws of descent or distribution, and is exercisable during
the lifetime of the Optionee only by the Optionee.
6.
Certain Rights Not Conferred by Option.
The
Optionee shall not, by virtue of holding this option, be entitled
to any rights of a stockholder in the Company.
7.
Expenses.
The
Company shall pay all original issue and transfer taxes with
respect to the issuance and transfer of shares of Common Stock of
the Company pursuant hereto and all other fees and expenses
necessarily incurred by the Company in connection
therewith.
8.
Exercise of Options.
(a)
An option shall be
exercisable by written notice of such exercise, in the form
prescribed by the Board of Directors to the Secretary or Treasurer
of the Company, at its principal office. The notice shall specify
the number of shares for which the option is being exercised (which
number shall be 50,000) and shall be accompanied by payment in full
of the purchase price of such shares. No shares shall be delivered
upon exercise of any option until all laws, rules and regulations,
which the Board of Directors may deem applicable, have been
complied with. If a registration statement under the Securities Act
of 1933, as amended (the “Act”) is not then in effect
with respect to the shares issuable upon such exercise, it shall be
a condition precedent that the person exercising the option give to
the Company a written representation and undertaking, satisfactory
in form and substance to the Board of Directors, that he is
acquiring the shares for his own account for investment and not
with a view to the distribution thereof.
(b) The
person exercising an option shall not be considered a record holder
of the stock so purchased for any purpose until the date on which
he is actually recorded as the holder of such stock in the records
of the Company.
(c) If
the Optionee ceases to serve as an employee of the Company, he may,
but only within thirty (30) days after the date he ceases to be an
employee of the Company, exercise this option to the extent that he
was entitled to exercise it as of the date of such termination. If
the Optionee shall have been an employee of the Company at the time
of his death or permanent disability, then this option shall be
exercisable by his personal representative or him, as the case may
be, for a period ending on the earlier of (i) one year from the
date of the death or permanent disability or (ii) the date on which
the option expires in accordance with its terms. Notwithstanding
the provisions of this Section 8(c), in the event that the
Employee’s employment is terminated “for cause,”
as such term is defined and interpreted by the courts of the State
of New York, the Employee’s right to exercise this Option
shall expire on the date of his termination.
9.
Covenant not to Compete or Otherwise Injure the Company; Work
Product.
The
acceptance by the Optionee of this option shall constitute the
acceptance of and agreement to all of the terms and conditions
contained herein and in the Plan, and shall further constitute a
covenant and agreement on the part of the Optionee to the effect
that, without any additional compensation:
(a)
The Optionee shall,
so long as he is affiliated with the Company, and for a period of
12 months after the termination of his affiliation with the
Company, he will not engage in any competitive activities as herein
defined:
(i)
Hiring, offering to
hire, enticing away or in any other manner persuading or attempting
to persuade any officer, employee or agent of the Company to
discontinue his relationship with the Company without the written
permission of the Company unless the Optionee clearly establishes
that the relationship was initiated by the other party
thereto;
(ii)
Directly or
indirectly soliciting, diverting, taking away or attempting to
solicit, divert, or take away any business of the Company of which
the Optionee has any knowledge during the term of his employment,
unless the Optionee clearly establishes that the relationship was
initiated by the other party thereto. The term
“business” shall mean actual or proposed contracts or
arrangements for products or services of the Company and any
reasonable extension or continuation of the business of the Company
as constituted upon the termination of Optionee’s
employment.
(b)
The Optionee shall
not make or permit to be made, except in pursuance of his duties
and for the sole use and account of the Company or its nominees,
any copies, abstracts or summaries of any Company reports, papers,
documents or programs, whether made by him or by
others.
(c)
The Optionee shall
keep confidential and not disclose to others, except as required by
his service as an employee or by law, any matter or thing
ascertained by him through his association with the Company, not
otherwise publicly known, the disclosure of which might possibly be
contrary to the best interest of any person, firm, or corporation
doing business with the Company, or of the Company.
10.
Governing
Plan.
This
Agreement is subject to the terms and conditions of the Plan, a
copy of which is available upon request from the Secretary of the
Company.
INFINITE
GROUP, INC.
By the
Company: _/s/ James
Villa_____________________________
James
Villa, President
Regarding: Option
agreement dated December 10, 2019 for 200,000 shares of the
Company’s Common Stock, par value $.001 per share, at the
price of $.04 per share, I accept the terms of this
agreement.
By the
Optionee: _/s/ Andrew
Hoyen______________________________
Andrew
Hoyen
3 Blandford
Lane
Fairport,
NY 14450
INFINITE
GROUP, INC.
Incentive
Stock Option Agreement
Date:
December 23, 2019
Infinite Group,
Inc., a Delaware corporation (the “Company”), pursuant
to its 2019 Stock Option Plan (“the Plan”), hereby
grants Donald Reeve (the
“Optionee”) an incentive stock option to purchase a
total of 250,000 shares
of the Company’s Common Stock, par value $.001 per share, at
the price of $.05 per share
on the terms and conditions set forth herein and in the Plan. As
used herein, the term “Company” includes any affiliates
of the Company.
1.
Duration.
(a)
This option shall
become effective on the date of grant and shall be exercisable as
for 250,000 shares on December 23, 2019.
(b) This
option shall expire five years from the date hereof on December 22,
2024 (the “Termination Date”).
2.
Written Notice of Exercise.
This
option may be exercised only by the delivery to the Secretary or
Treasurer of the company at its principal office within the time
specified in Paragraph 1, of a written notice of exercise
substantially in the form described in Paragraph 8.
3.
Anti-Dilution Provisions.
(a) If
there is any stock dividend, stock split, or combination of shares
of Common Stock of the Company, the number and amount of shares
then subject to this option shall be proportionately and
appropriately adjusted; no change shall be made in the aggregate
purchase price to be paid for all shares subject to this option,
but the aggregate purchase price shall be allocated among all
shares subject to this option after giving effect to the
adjustment.
(b)
If there is any
other change in the Common Stock of the Company, including
recapitalization, reorganization, sale of exchange of assets,
exchange of shares, offering of subscription rights, or a merger or
consolidation in which the Company is the surviving corporation, an
adjustment, if any, shall be made in the shares then subject to
this option as the Board of Directors may deem equitable. Failure
of the Board of Directors to provide for an adjustment pursuant to
this subparagraph prior to the effective date of any Company action
referred to herein shall be conclusive evidence that no adjustment
is required in consequence of such action.
(c)
If the Company is
merged into or consolidated with any other corporation, or if it
sells all or substantially all of its assets to any other
corporation, then either (i) the Company shall cause provisions to
be made for the continuance of this option after such event, or for
the substitution for this option of an option covering the number
and class of securities which the Optionee would have been entitled
to receive in such merger or consolidation by virtue of such sale
if the Optionee had been the holder of record of a number of shares
of Common Stock of the Company equal to the number of shares
covered by the unexercised portion of this option, or (ii) the
Company shall give to the Optionee written notice of its election
not to cause such provision to be made and this option shall become
exercisable in full (or, at the election of the optionee, in part)
at any time during a period of 20 days, to be designated by the
Company, ending not more than 10 days prior to the effective date
of the merger, consolidation or sale, in which case this option
shall not be exercisable to any extent after the expiration of such
20 -day period. In no event, however, shall this option be
exercisable after the Termination Date.
4.
Investment Representation; Legend on Certificates; Special
Restriction on Resale.
The
Optionee agrees that until such time as a registration statement
under the Securities Act of 1933 becomes effective with respect to
the option and/or the stock underlying the option, the Optionee is
taking this option and will take the stock underlying the option,
for investment and not for resale or distribution. The Company
shall have the right to place upon the face of any stock
certificate or certificates evidencing shares issuable upon the
exercise of this option such legend as the Board of Directors may
prescribe for the purpose of preventing disposition of such shares
in violation of the Securities Act of 1933, as now or hereafter
provided.
5.
Non-Transferability.
This
option shall not be transferable by the Optionee other than by will
or by laws of descent or distribution, and is exercisable during
the lifetime of the Optionee only by the Optionee.
6.
Certain Rights Not Conferred by Option.
The
Optionee shall not, by virtue of holding this option, be entitled
to any rights of a stockholder in the Company.
7.
Expenses.
The
Company shall pay all original issue and transfer taxes with
respect to the issuance and transfer of shares of Common Stock of
the Company pursuant hereto and all other fees and expenses
necessarily incurred by the Company in connection
therewith.
8.
Exercise of Options.
(a)
An option shall be
exercisable by written notice of such exercise, in the form
prescribed by the Board of Directors to the Secretary or Treasurer
of the Company, at its principal office. The notice shall specify
the number of shares for which the option is being exercised (which
number shall be 50,000) and shall be accompanied by payment in full
of the purchase price of such shares. No shares shall be delivered
upon exercise of any option until all laws, rules and regulations,
which the Board of Directors may deem applicable, have been
complied with. If a registration statement under the Securities Act
of 1933, as amended (the “Act”) is not then in effect
with respect to the shares issuable upon such exercise, it shall be
a condition precedent that the person exercising the option give to
the Company a written representation and undertaking, satisfactory
in form and substance to the Board of Directors, that he is
acquiring the shares for his own account for investment and not
with a view to the distribution thereof.
(b) The
person exercising an option shall not be considered a record holder
of the stock so purchased for any purpose until the date on which
he is actually recorded as the holder of such stock in the records
of the Company.
(c) If
the Optionee ceases to serve as an employee of the Company, he may,
but only within thirty (30) days after the date he ceases to be an
employee of the Company, exercise this option to the extent that he
was entitled to exercise it as of the date of such termination. If
the Optionee shall have been an employee of the Company at the time
of his death or permanent disability, then this option shall be
exercisable by his personal representative or him, as the case may
be, for a period ending on the earlier of (i) one year from the
date of the death or permanent disability or (ii) the date on which
the option expires in accordance with its terms. Notwithstanding
the provisions of this Section 8(c), in the event that the
Employee’s employment is terminated “for cause,”
as such term is defined and interpreted by the courts of the State
of New York, the Employee’s right to exercise this Option
shall expire on the date of his termination.
9.
Covenant not to Compete or Otherwise Injure the Company; Work
Product.
The
acceptance by the Optionee of this option shall constitute the
acceptance of and agreement to all of the terms and conditions
contained herein and in the Plan, and shall further constitute a
covenant and agreement on the part of the Optionee to the effect
that, without any additional compensation:
(a)
The Optionee shall,
so long as he is affiliated with the Company, and for a period of
12 months after the termination of his affiliation with the
Company, he will not engage in any competitive activities as herein
defined:
(i)
Hiring, offering to
hire, enticing away or in any other manner persuading or attempting
to persuade any officer, employee or agent of the Company to
discontinue his relationship with the Company without the written
permission of the Company unless the Optionee clearly establishes
that the relationship was initiated by the other party
thereto;
(ii)
Directly or
indirectly soliciting, diverting, taking away or attempting to
solicit, divert, or take away any business of the Company of which
the Optionee has any knowledge during the term of his employment,
unless the Optionee clearly establishes that the relationship was
initiated by the other party thereto. The term
“business” shall mean actual or proposed contracts or
arrangements for products or services of the Company and any
reasonable extension or continuation of the business of the Company
as constituted upon the termination of Optionee’s
employment.
(b)
The Optionee shall
not make or permit to be made, except in pursuance of his duties
and for the sole use and account of the Company or its nominees,
any copies, abstracts or summaries of any Company reports, papers,
documents or programs, whether made by him or by
others.
(c)
The Optionee shall
keep confidential and not disclose to others, except as required by
his service as an employee or by law, any matter or thing
ascertained by him through his association with the Company, not
otherwise publicly known, the disclosure of which might possibly be
contrary to the best interest of any person, firm, or corporation
doing business with the Company, or of the Company.
10.
Governing
Plan.
This
Agreement is subject to the terms and conditions of the Plan, a
copy of which is available upon request from the Secretary of the
Company.
INFINITE
GROUP, INC.
By the
Company: _/s/ James
Villa_____________________________
James
Villa, President
Regarding: Option
agreement dated December 23, 2019 for 250,000 shares of the
Company’s Common Stock, par value $.001 per share, at the
price of $.05 per share, I accept the terms of this
agreement.
By the
Optionee: _/s/ Donald W.
Reeve_________________________
Donald
W. Reeve
7 Cross Meadow
Lane
Pittsford,
NY 14534
INFINITE
GROUP, INC.
Incentive
Stock Option Agreement
Date:
December 23, 2019
Infinite Group,
Inc., a Delaware corporation (the “Company”), pursuant
to its 2019 Stock Option Plan (“the Plan”), hereby
grants James Villa (the
“Optionee”) an incentive stock option to purchase a
total of 250,000 shares
of the Company’s Common Stock, par value $.001 per share, at
the price of $.05 per share
on the terms and conditions set forth herein and in the Plan. As
used herein, the term “Company” includes any affiliates
of the Company.
1.
Duration.
(a)
This option shall
become effective on the date of grant and shall be exercisable as
for 250,000 shares on December 23, 2019.
(b) This
option shall expire five years from the date hereof on December 22,
2024 (the “Termination Date”).
2.
Written Notice of Exercise.
This
option may be exercised only by the delivery to the Secretary or
Treasurer of the company at its principal office within the time
specified in Paragraph 1, of a written notice of exercise
substantially in the form described in Paragraph 8.
3.
Anti-Dilution Provisions.
(a) If
there is any stock dividend, stock split, or combination of shares
of Common Stock of the Company, the number and amount of shares
then subject to this option shall be proportionately and
appropriately adjusted; no change shall be made in the aggregate
purchase price to be paid for all shares subject to this option,
but the aggregate purchase price shall be allocated among all
shares subject to this option after giving effect to the
adjustment.
(b)
If there is any
other change in the Common Stock of the Company, including
recapitalization, reorganization, sale of exchange of assets,
exchange of shares, offering of subscription rights, or a merger or
consolidation in which the Company is the surviving corporation, an
adjustment, if any, shall be made in the shares then subject to
this option as the Board of Directors may deem equitable. Failure
of the Board of Directors to provide for an adjustment pursuant to
this subparagraph prior to the effective date of any Company action
referred to herein shall be conclusive evidence that no adjustment
is required in consequence of such action.
(c)
If the Company is
merged into or consolidated with any other corporation, or if it
sells all or substantially all of its assets to any other
corporation, then either (i) the Company shall cause provisions to
be made for the continuance of this option after such event, or for
the substitution for this option of an option covering the number
and class of securities which the Optionee would have been entitled
to receive in such merger or consolidation by virtue of such sale
if the Optionee had been the holder of record of a number of shares
of Common Stock of the Company equal to the number of shares
covered by the unexercised portion of this option, or (ii) the
Company shall give to the Optionee written notice of its election
not to cause such provision to be made and this option shall become
exercisable in full (or, at the election of the optionee, in part)
at any time during a period of 20 days, to be designated by the
Company, ending not more than 10 days prior to the effective date
of the merger, consolidation or sale, in which case this option
shall not be exercisable to any extent after the expiration of such
20 -day period. In no event, however, shall this option be
exercisable after the Termination Date.
4.
Investment Representation; Legend on Certificates; Special
Restriction on Resale.
The
Optionee agrees that until such time as a registration statement
under the Securities Act of 1933 becomes effective with respect to
the option and/or the stock underlying the option, the Optionee is
taking this option and will take the stock underlying the option,
for investment and not for resale or distribution. The Company
shall have the right to place upon the face of any stock
certificate or certificates evidencing shares issuable upon the
exercise of this option such legend as the Board of Directors may
prescribe for the purpose of preventing disposition of such shares
in violation of the Securities Act of 1933, as now or hereafter
provided.
5.
Non-Transferability.
This
option shall not be transferable by the Optionee other than by will
or by laws of descent or distribution, and is exercisable during
the lifetime of the Optionee only by the Optionee.
6.
Certain Rights Not Conferred by Option.
The
Optionee shall not, by virtue of holding this option, be entitled
to any rights of a stockholder in the Company.
7.
Expenses.
The
Company shall pay all original issue and transfer taxes with
respect to the issuance and transfer of shares of Common Stock of
the Company pursuant hereto and all other fees and expenses
necessarily incurred by the Company in connection
therewith.
8.
Exercise of Options.
(a)
An option shall be
exercisable by written notice of such exercise, in the form
prescribed by the Board of Directors to the Secretary or Treasurer
of the Company, at its principal office. The notice shall specify
the number of shares for which the option is being exercised (which
number shall be 50,000) and shall be accompanied by payment in full
of the purchase price of such shares. No shares shall be delivered
upon exercise of any option until all laws, rules and regulations,
which the Board of Directors may deem applicable, have been
complied with. If a registration statement under the Securities Act
of 1933, as amended (the “Act”) is not then in effect
with respect to the shares issuable upon such exercise, it shall be
a condition precedent that the person exercising the option give to
the Company a written representation and undertaking, satisfactory
in form and substance to the Board of Directors, that he is
acquiring the shares for his own account for investment and not
with a view to the distribution thereof.
(b) The
person exercising an option shall not be considered a record holder
of the stock so purchased for any purpose until the date on which
he is actually recorded as the holder of such stock in the records
of the Company.
(c) If
the Optionee ceases to serve as an employee of the Company, he may,
but only within thirty (30) days after the date he ceases to be an
employee of the Company, exercise this option to the extent that he
was entitled to exercise it as of the date of such termination. If
the Optionee shall have been an employee of the Company at the time
of his death or permanent disability, then this option shall be
exercisable by his personal representative or him, as the case may
be, for a period ending on the earlier of (i) one year from the
date of the death or permanent disability or (ii) the date on which
the option expires in accordance with its terms. Notwithstanding
the provisions of this Section 8(c), in the event that the
Employee’s employment is terminated “for cause,”
as such term is defined and interpreted by the courts of the State
of New York, the Employee’s right to exercise this Option
shall expire on the date of his termination.
9.
Covenant not to Compete or Otherwise Injure the Company; Work
Product.
The
acceptance by the Optionee of this option shall constitute the
acceptance of and agreement to all of the terms and conditions
contained herein and in the Plan, and shall further constitute a
covenant and agreement on the part of the Optionee to the effect
that, without any additional compensation:
(a)
The Optionee shall,
so long as he is affiliated with the Company, and for a period of
12 months after the termination of his affiliation with the
Company, he will not engage in any competitive activities as herein
defined:
(i)
Hiring, offering to
hire, enticing away or in any other manner persuading or attempting
to persuade any officer, employee or agent of the Company to
discontinue his relationship with the Company without the written
permission of the Company unless the Optionee clearly establishes
that the relationship was initiated by the other party
thereto;
(ii)
Directly or
indirectly soliciting, diverting, taking away or attempting to
solicit, divert, or take away any business of the Company of which
the Optionee has any knowledge during the term of his employment,
unless the Optionee clearly establishes that the relationship was
initiated by the other party thereto. The term
“business” shall mean actual or proposed contracts or
arrangements for products or services of the Company and any
reasonable extension or continuation of the business of the Company
as constituted upon the termination of Optionee’s
employment.
(b)
The Optionee shall
not make or permit to be made, except in pursuance of his duties
and for the sole use and account of the Company or its nominees,
any copies, abstracts or summaries of any Company reports, papers,
documents or programs, whether made by him or by
others.
(c)
The Optionee shall
keep confidential and not disclose to others, except as required by
his service as an employee or by law, any matter or thing
ascertained by him through his association with the Company, not
otherwise publicly known, the disclosure of which might possibly be
contrary to the best interest of any person, firm, or corporation
doing business with the Company, or of the Company.
10.
Governing
Plan.
This
Agreement is subject to the terms and conditions of the Plan, a
copy of which is available upon request from the Secretary of the
Company.
INFINITE
GROUP, INC.
By the
Company: _/s/ Richard
Glickman___________________________
Richard
Glickman, Chief Accounting Officer and VP Finance
Regarding: Option
agreement dated December 23, 2019 for 250,000 shares of the
Company’s Common Stock, par value $.001 per share, at the
price of $.05 per share, I accept the terms of this
agreement.
By the
Optionee: _/s/ James
Villa_________________________________
James
Villa
308
Rock Beach Road
Rochester,
NY 14617
INFINITE
GROUP, INC.
Incentive
Stock Option Agreement
Date:
December 23, 2019
Infinite Group,
Inc., a Delaware corporation (the “Company”), pursuant
to its 2019 Stock Option Plan (“the Plan”), hereby
grants Andrew Hoyen (the
“Optionee”) an incentive stock option to purchase a
total of 250,000 shares
of the Company’s Common Stock, par value $.001 per share, at
the price of $.05 per share
on the terms and conditions set forth herein and in the Plan. As
used herein, the term “Company” includes any affiliates
of the Company.
1.
Duration.
(a)
This option shall
become effective on the date of grant and shall be exercisable as
for 250,000 shares on December 23, 2019.
(b) This
option shall expire five years from the date hereof on December 22,
2024 (the “Termination Date”).
2.
Written Notice of Exercise.
This
option may be exercised only by the delivery to the Secretary or
Treasurer of the company at its principal office within the time
specified in Paragraph 1, of a written notice of exercise
substantially in the form described in Paragraph 8.
3.
Anti-Dilution Provisions.
(a) If
there is any stock dividend, stock split, or combination of shares
of Common Stock of the Company, the number and amount of shares
then subject to this option shall be proportionately and
appropriately adjusted; no change shall be made in the aggregate
purchase price to be paid for all shares subject to this option,
but the aggregate purchase price shall be allocated among all
shares subject to this option after giving effect to the
adjustment.
(b)
If there is any
other change in the Common Stock of the Company, including
recapitalization, reorganization, sale of exchange of assets,
exchange of shares, offering of subscription rights, or a merger or
consolidation in which the Company is the surviving corporation, an
adjustment, if any, shall be made in the shares then subject to
this option as the Board of Directors may deem equitable. Failure
of the Board of Directors to provide for an adjustment pursuant to
this subparagraph prior to the effective date of any Company action
referred to herein shall be conclusive evidence that no adjustment
is required in consequence of such action.
(c)
If the Company is
merged into or consolidated with any other corporation, or if it
sells all or substantially all of its assets to any other
corporation, then either (i) the Company shall cause provisions to
be made for the continuance of this option after such event, or for
the substitution for this option of an option covering the number
and class of securities which the Optionee would have been entitled
to receive in such merger or consolidation by virtue of such sale
if the Optionee had been the holder of record of a number of shares
of Common Stock of the Company equal to the number of shares
covered by the unexercised portion of this option, or (ii) the
Company shall give to the Optionee written notice of its election
not to cause such provision to be made and this option shall become
exercisable in full (or, at the election of the optionee, in part)
at any time during a period of 20 days, to be designated by the
Company, ending not more than 10 days prior to the effective date
of the merger, consolidation or sale, in which case this option
shall not be exercisable to any extent after the expiration of such
20 -day period. In no event, however, shall this option be
exercisable after the Termination Date.
4.
Investment Representation; Legend on Certificates; Special
Restriction on Resale.
The
Optionee agrees that until such time as a registration statement
under the Securities Act of 1933 becomes effective with respect to
the option and/or the stock underlying the option, the Optionee is
taking this option and will take the stock underlying the option,
for investment and not for resale or distribution. The Company
shall have the right to place upon the face of any stock
certificate or certificates evidencing shares issuable upon the
exercise of this option such legend as the Board of Directors may
prescribe for the purpose of preventing disposition of such shares
in violation of the Securities Act of 1933, as now or hereafter
provided.
5.
Non-Transferability.
This
option shall not be transferable by the Optionee other than by will
or by laws of descent or distribution, and is exercisable during
the lifetime of the Optionee only by the Optionee.
6.
Certain Rights Not Conferred by Option.
The
Optionee shall not, by virtue of holding this option, be entitled
to any rights of a stockholder in the Company.
7.
Expenses.
The
Company shall pay all original issue and transfer taxes with
respect to the issuance and transfer of shares of Common Stock of
the Company pursuant hereto and all other fees and expenses
necessarily incurred by the Company in connection
therewith.
8.
Exercise of Options.
(a)
An option shall be
exercisable by written notice of such exercise, in the form
prescribed by the Board of Directors to the Secretary or Treasurer
of the Company, at its principal office. The notice shall specify
the number of shares for which the option is being exercised (which
number shall be 50,000) and shall be accompanied by payment in full
of the purchase price of such shares. No shares shall be delivered
upon exercise of any option until all laws, rules and regulations,
which the Board of Directors may deem applicable, have been
complied with. If a registration statement under the Securities Act
of 1933, as amended (the “Act”) is not then in effect
with respect to the shares issuable upon such exercise, it shall be
a condition precedent that the person exercising the option give to
the Company a written representation and undertaking, satisfactory
in form and substance to the Board of Directors, that he is
acquiring the shares for his own account for investment and not
with a view to the distribution thereof.
(b) The
person exercising an option shall not be considered a record holder
of the stock so purchased for any purpose until the date on which
he is actually recorded as the holder of such stock in the records
of the Company.
(c) If
the Optionee ceases to serve as an employee of the Company, he may,
but only within thirty (30) days after the date he ceases to be an
employee of the Company, exercise this option to the extent that he
was entitled to exercise it as of the date of such termination. If
the Optionee shall have been an employee of the Company at the time
of his death or permanent disability, then this option shall be
exercisable by his personal representative or him, as the case may
be, for a period ending on the earlier of (i) one year from the
date of the death or permanent disability or (ii) the date on which
the option expires in accordance with its terms. Notwithstanding
the provisions of this Section 8(c), in the event that the
Employee’s employment is terminated “for cause,”
as such term is defined and interpreted by the courts of the State
of New York, the Employee’s right to exercise this Option
shall expire on the date of his termination.
9.
Covenant not to Compete or Otherwise Injure the Company; Work
Product.
The
acceptance by the Optionee of this option shall constitute the
acceptance of and agreement to all of the terms and conditions
contained herein and in the Plan, and shall further constitute a
covenant and agreement on the part of the Optionee to the effect
that, without any additional compensation:
(a)
The Optionee shall,
so long as he is affiliated with the Company, and for a period of
12 months after the termination of his affiliation with the
Company, he will not engage in any competitive activities as herein
defined:
(i)
Hiring, offering to
hire, enticing away or in any other manner persuading or attempting
to persuade any officer, employee or agent of the Company to
discontinue his relationship with the Company without the written
permission of the Company unless the Optionee clearly establishes
that the relationship was initiated by the other party
thereto;
(ii)
Directly or
indirectly soliciting, diverting, taking away or attempting to
solicit, divert, or take away any business of the Company of which
the Optionee has any knowledge during the term of his employment,
unless the Optionee clearly establishes that the relationship was
initiated by the other party thereto. The term
“business” shall mean actual or proposed contracts or
arrangements for products or services of the Company and any
reasonable extension or continuation of the business of the Company
as constituted upon the termination of Optionee’s
employment.
(b)
The Optionee shall
not make or permit to be made, except in pursuance of his duties
and for the sole use and account of the Company or its nominees,
any copies, abstracts or summaries of any Company reports, papers,
documents or programs, whether made by him or by
others.
(c)
The Optionee shall
keep confidential and not disclose to others, except as required by
his service as an employee or by law, any matter or thing
ascertained by him through his association with the Company, not
otherwise publicly known, the disclosure of which might possibly be
contrary to the best interest of any person, firm, or corporation
doing business with the Company, or of the Company.
10.
Governing
Plan.
This
Agreement is subject to the terms and conditions of the Plan, a
copy of which is available upon request from the Secretary of the
Company.
INFINITE
GROUP, INC.
By the
Company: _/s/ James
Villa_____________________________
James
Villa, President
Regarding: Option
agreement dated December 23, 2019 for 250,000 shares of the
Company’s Common Stock, par value $.001 per share, at the
price of $.05 per share, I accept the terms of this
agreement.
By the
Optionee: _/s/ Andrew
Hoyen______________________________
Andrew
Hoyen
3 Blandford
Lane
Fairport,
NY 14450
EXHIBIT 31.1
CERTIFICATION
I, James Villa, certify that:
1.
I
have reviewed this annual report on Form 10-K of Infinite Group,
Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the
period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4.
The
registrant’s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared;
b)
Designed such
internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c)
Evaluated
the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
d)
Disclosed
in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
5.
The
registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a)
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial
information; and
b)
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 30,
2020
/s/
James Villa
-----------------------------------
James
Villa
Chief
Executive Officer
(Principal
Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Richard Glickman, certify that:
1.
I
have reviewed this annual report on Form 10-K of Infinite Group,
Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the
period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4.
The
registrant’s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared;
b)
Designed such
internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c)
Evaluated
the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
d)
Disclosed
in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
5.
The
registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a)
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial
information; and
b)
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 30,
2020
/s/
Richard Glickman
-----------------------------------
Richard
Glickman
VP
Finance and Chief Accounting Officer
(Principal
Financial Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Infinite Group, Inc. (the
“Company”) on Form 10-K for the fiscal year ending
December 31, 2019 as filed with the Securities and Exchange
Commission (“SEC”) on the date hereof (the "Report"),
I, James Villa, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended;
and
(2)
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
A
signed original of this written statement has been provided to the
Company and will be retained by the Company and furnished to the
SEC or its staff upon request.
Dated: March 30,
2020
__/s/ James
Villa_____
James Villa
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Infinite Group, Inc. (the
"Company") on Form 10-K for the fiscal year ending December 31,
2019 as filed with the Securities and Exchange Commission
(“SEC”) on the date hereof (the "Report"), I, Richard
Glickman, VP Finance and Chief Accounting Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended;
and
(2)
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
A
signed original of this written statement has been provided to the
Company and will be retained by the Company and furnished to the
SEC or its staff upon request.
Dated: March 30,
2020
__/s/ Richard
Glickman____________
Richard Glickman
VP Finance and Chief Accounting Officer
(Principal Financial and Accounting Officer)