INFINITE GROUP INC S-1/A, filed Sep 9, 2022
INFINITE GROUP INC (IMCI)
As filed with the Securities and Exchange Commission on September 9, 2022
Registration No. 333-262167
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Pre-Effective Amendment No. 4)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
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Infinite Group, Inc.
(
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
James Villa
Chief Executive Officer
Infinite Group, Inc.
175 Sully’s Trail, Suite 202
Pittsford, New York 14534
(585) 385-0610
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With copies to:
Alexander R. McClean, Esq. C. Christopher Murillo, Esq. Harter Secrest & Emery LLP 1600 Bausch & Lomb Place Rochester, New York 14604 (585) 232-6500 |
| Anthony W. Basch, Esq. J. Britton Williston, Esq. Kaufman & Canoles, P.C. 1021 East Cary Street, Suite 1400 Richmond, Virginia 23219 (804) 771-5700 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
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| Emerging growth company |
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 7(a)(2)(B) of the Securities Act. ☐
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The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the Company is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 2022 |
Up to 3,000,000 Common Units
Each Consisting of
One Share of Common Stock and
Three Redeemable Warrants Each to Purchase One Share of Common Stock
Up to 3,000,000 Pre-funded Units
Each Consisting of
One Pre-funded Warrant to Purchase One Share of Common Stock and
Three Redeemable Warrants Each to Purchase One Share of Common Stock
This prospectus relates to the firm commitment public offering of 3,000,000 units of Infinite Group, Inc. (“Infinite Group,” the “Company,” “we,” “our,” or “us”), a Delaware corporation, based on an assumed initial offering price of $5.00 per common unit, the mid-point of the anticipated price range of the units. We are offering up to 3,000,000 of units consisting of either (i) one share of common stock and three redeemable warrants each to purchase one share of common stock (the “common units”); or (ii) one pre-funded warrant to purchase one share of common stock at an exercise price of $0.001 per share and three redeemable warrants each to purchase one share of common stock (the “pre-funded units” and together with the common units, the “units”). We anticipate that the initial public offering price will be between $4.38 and $5.62 per unit. The offering price of units at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business, may be at a discount to the current market price of our shares of common stock.
The pre-funded units are being offered to purchasers in lieu of common units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock. There can be no assurance that we will sell any of the pre-funded units being offered. The purchase price of each pre-funded unit is equal to the price per unit being sold to the public in this offering, minus $0.001. The pre-funded warrants will be immediately exercisable and may be exercised at any time until all of the pre-funded warrants are exercised in full. We are offering the pre-funded units at an assumed public offering price of $4.999 per pre-funded unit based on an assumed initial offering price of $5.00 per common unit, the mid-point of the anticipated price range.
The units have no stand-alone rights and will not be certificated or issued as stand-alone securities. The shares of our common stock or pre-funded warrants, as the case may be, and the redeemable warrants comprising our units can only be purchased together in this offering, but the securities included in the units are immediately separable and will be issued separately in this offering.
The redeemable warrants included within the units will be exercisable immediately, have an exercise price per share of common stock of $5.00 (equal to 100% of the public offering price of one common unit based on an assumed initial offering price of $5.00 per common unit, the mid-point of the anticipated price range), and will expire five years from the date of issuance or when redeemed.
Our common stock is presently traded on the over-the-counter market and quoted on the OTCQB market under the symbol “IMCI.” We have applied to list our common stock and redeemable warrants on the Nasdaq Capital Market under the symbols “IMCI” and “IMCIW,” respectively. No assurance can be given that our application will be approved. On September 6, 2022, the last reported sale price of our common stock was approximately $0.09 per share, without giving effect to the proposed reverse stock split. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not complete this offering. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system.
The final offering price of the units will be determined between the underwriter and us at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business, and may be at a discount to the current market price. Therefore, the recent market price used throughout this prospectus may not be indicative of the actual public offering price for our units.
On December 15, 2021, our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1, to be effective at the ratio and date to be determined by our board of directors. Our stockholders approved the reverse stock split range at our annual meeting on January 26, 2022. Unless otherwise noted and other than in our financial statements and the notes thereto, the share and per share information in this prospectus reflects a proposed reverse stock split of the outstanding common stock and treasury stock of the Company at an assumed 50-to-1 ratio to occur immediately following the effective date but prior to the closing of the offering
This prospectus contains or incorporates by reference summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information. All summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed or have been incorporated by reference as exhibits to the registration statement of which this prospectus forms a part, and you may obtain copies of those documents as described in this prospectus under the heading “Where You Can Find More Information.”
Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus. You should carefully consider these risk factors, as well as the information contained in this prospectus before you invest.
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Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
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Public Offering Price |
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Underwriting Discounts and Commissions (1) |
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Proceeds to us before expenses (2) |
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1. | We have also agreed to issue warrants to purchase shares of our common stock to the underwriter and to reimburse the underwriter for certain expenses. Does not include a non-accountable expense allowance equal to 1% of the public offering price. See “Underwriting” for additional information regarding total underwriter compensation. |
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2. | The amount of offering proceeds to us presented in this table does not give effect to any exercise of the: (i) over-allotment option (if any) we have granted to the managing underwriter as described below and (ii) warrants being issued to the underwriter in this offering; or (iii) the redeemable warrants. |
We have granted the underwriters a 45-day option to purchase up to 450,000 additional shares of common stock and/or pre-funded warrants, representing 15% of the shares and pre-funded warrants sold in the offering and/or up to 1,350,000 additional redeemable warrants, representing 15% of the redeemable warrants sold in the offering, solely to cover over-allotments, if any. The purchase price to be paid per additional share of common stock will be equal to the public offering price of one common unit, less the purchase price for the redeemable warrants included within the common unit and the underwriting discount. The purchase price to be paid per pre-funded warrant will be equal to the public offering price of one pre-funded unit, less the purchase price for the one redeemable warrant included within the pre-funded unit and the underwriting discount. The purchase price to be paid per each additional redeemable warrant will be $0.01.
The underwriter expects to deliver the securities against payment to the investors in this offering on or about , 2022.
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| Aegis Capital Corporation |
The date of this prospectus is , 2022.
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TABLE OF CONTENTS
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY |
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PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
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You should rely only on information contained in this prospectus. We have not authorized anyone to provide you with additional information or information different from the information contained in this prospectus. Neither the delivery of this prospectus nor the sale of our securities means that the information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful or in any state or other jurisdiction where the offer is not permitted.
The information in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since those dates.
No person is authorized in connection with this prospectus to give any information or to make any representations about us, the securities offered hereby or any matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us.
We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are intended to qualify for the “safe harbor” created by those sections. The words “anticipate,” “believe,” “could,” “estimate,” “continue,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” “is likely”, “forecast”, “seek” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. All statements other than statements of historical facts contained in this prospectus, including among others, statements regarding this offering, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements.
Our actual results and the timing of certain events may differ materially from those expressed or implied in such forward-looking statements due to a variety of factors and risks, including, but not limited to, those set forth under “Risk Factors,” those set forth from time to time in our other filings with the SEC, including risks related to the following:
| · | our ability to continue as a going concern and our history of losses; |
| · | our ability to obtain additional financing; |
| · | the ongoing coronavirus (“COVID-19”) pandemic; |
| · | our lack of significant revenues; |
| · | our ability to prosecute, maintain or enforce our intellectual property rights; |
| · | disputes or other developments relating to proprietary rights and claims of infringement; |
| · | the accuracy of our estimates regarding expenses, future revenues and capital requirements; |
| · | the implementation of our business model and strategic plans for our business and technology; |
| · | the successful development of our sales and marketing capabilities; |
| · | the potential markets for our products and our ability to serve those markets; |
| · | the rate and degree of market acceptance of our products and any future products; |
| · | our ability to retain key management personnel; |
| · | regulatory developments and our compliance with applicable laws; and |
| · | our liquidity. |
The forward-looking statements involve known and unknown risks, uncertainties and other important 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 the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.
The forward-looking statements in this prospectus are made only as of the date hereof or as indicated and represent our views as of the date of this prospectus. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as the result of new information, future events or otherwise, except as required by law.
Notwithstanding the above, Section 27A of the Securities Act and Section 21E of the Exchange Act expressly state that the safe harbor for forward looking statements does not apply to companies that issue penny stocks. We believe we will not be considered an issuer of penny stock after this offering. However, if we are considered to be an issuer of penny stock, the safe harbor for forward looking statements under Section 27A of the Securities Act and Section 21E of the Exchange Act will not be available to us.
Industry and Market Data
This prospectus contains estimates made, and other statistical data published, by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this prospectus from our own research as well as from industry and general publications, surveys and studies conducted by third parties. This data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are inherently subject to a high degree of uncertainty and actual events or circumstances may differ materially from events and circumstances reflected in this information. We caution you not to give undue weight to such projections, assumptions and estimates. While we believe that these publications, studies and surveys are reliable, we have not independently verified the data contained in them. In addition, while we believe that the results and estimates from our internal research are reliable, such results and estimates have not been verified by any independent source.
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PROSPECTUS SUMMARY
This summary highlights certain information appearing elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information you should consider before investing in our securities and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information included elsewhere in this prospectus. Before you make an investment decision, you should read this entire prospectus carefully, including the risks of investing in our securities discussed under the section of this prospectus entitled “Risk Factors” and similar headings. You should also carefully read our financial statements, and the exhibits to the registration statement of which this prospectus is a part.
Overview
Headquartered in Pittsford, New York, Infinite Group is a developer of cybersecurity software and related cybersecurity consulting, advisory, and managed information security services. We principally sell our software and services through indirect channels such as Managed Service Providers (“MSPs”), Managed Security Services Providers (“MSSPs”), agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the cybersecurity market at a time when competition and consolidation in these markets are on the rise. Our strategy to differentiate our cybersecurity software and services from our competitors is to combine customized software and professional services, and grow our business by designing, developing, and marketing cybersecurity software-as-a-service (“SaaS”) solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI CyberLabs (“CyberLabs”), to fill technology gaps we identify, and then we bring these software and services to market through our existing channel partner and customer relationships. Our software and services are designed to simplify and manage the security needs of our customers and channel partners in a variety of environments. We focus on the small and medium-sized enterprises market. We support our channel partners by providing recurring-revenue business models for both services and through our cybersecurity SaaS solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions.
As part of these software and service offerings we: | ||
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| · | Internally developed and brought to market Nodeware®, a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware provides an economical solution for small and medium-sized enterprises as compared to more costly solutions focused on enterprise-sized customers, and is designed to accommodate the varying network needs of our end customers’ organizations and networks. Nodeware’s flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. We intend to continue to develop our intellectual property to serve as the core to our proprietary software and services. In addition to our proprietary software and services we also act as a master distributor for other cybersecurity software, principally Webroot, a cloud-based endpoint security platform solution, where we market to and provide support for over 225 small channel partners across North America. For the six months ended June 30, 2022, our software revenue was approximately $532,000, with approximately 29% of that being related to Nodeware. For the twelve months ended December 31, 2021, our software revenue was approximately $1,011,000, with approximately 17% of that being related to Nodeware; |
| · | Provide cybersecurity consulting and advisory services to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology. As part of our consulting and advisory services, we are contracted to support existing information technology and executive teams at both the customer and channel partner level, and provide security leadership and guidance. We validate overall corporate and infrastructure cybersecurity with the goal of maintaining and securing the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from threats and incidents. For the six months ended June 30, 2022, our cybersecurity consulting services revenue, excluding software sales, was approximately $627,000. For the twelve months ended December 31, 2021, our cybersecurity consulting services revenue, excluding software sales, was approximately $1,769,000; and |
| · | Provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, by providing in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment. For the six months ended June 30, 2022, our managed support services revenue was approximately $2,205,000. For the twelve months ended December 31, 2021, our managed support services revenue was approximately $4,325,000. |
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Sales and Marketing Strategy
During 2021, approximately 89% of our business comes from our channel sales and approximately 11% from direct sales to end customers. Managed support services accounts for approximately 60% of total sales, cybersecurity software and services accounts for approximate 38% of total sales and other consulting services accounts for approximately 2% of total sales.
Virtually all managed information security support services revenue is derived from one customer, a major independent agency of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments as a subcontractor through our channel partner, Peraton. We are working to expand our managed information security support services business with our channel partner Peraton, and to potentially grow the current federal enterprise customer and to expand to other Peraton customers.
We sell our cybersecurity software and services, including Nodeware, through our channel partners, which include direct channel partners, Telarus, TD SYNNEX, and Staples, and through our direct cybersecurity services teams. Our cybersecurity services include Chief Information Security Team as a Service (CISOTaaS ™), PenLogic™ penetration testing services, security assessments, incident response and others, and are provided through our channel partners and direct to end customers as a cybersecurity solution to the technical services they provide. Our channel partners utilize our expertise in cybersecurity to bring additional services to their end customers that are beyond their normal scope of offerings, and building our network of channel partners allows us the ability to efficiently gain access to a greater number of customers. We continue to drive development of our cybersecurity business through channel and direct marketing, social media programs, and fostering our extensive cybersecurity industry relationships. We are not reliant on any one customer for our cybersecurity software and services sales given that we work with a number of channel partners and direct customers. In addition to our cybersecurity software and services, we provide from time to time other information technology consulting services to existing clients.
Recent Developments
During the six months ended June 30, 2022, we had sales of approximately $3,364,000 million, an operating loss of approximately $1,295,000 and a net loss of approximately $1,701,000. During the year ended December 31, 2021, we had sales of approximately $7.2 million, an operating loss of approximately $1.4 million and a net loss of approximately $1.6 million. These losses were due primarily to increased investment in sales and marketing for Nodeware and related services, together with increased costs associated with our preparations to list on Nasdaq and with assessing potential acquisition targets. As a result of growing demand and accelerated growth in the cybersecurity market, we continue to grow our team of cybersecurity sales and technical consultants internally and leverage contractors when needed to fill short term gaps. For the six months ended June 30, 2022, we added 3 new employees, primarily to the sales and marketing team. We added 12 new employees, primarily in the areas of sales, marketing, and technical consulting for cybersecurity services in 2021. We had full year sales of approximately $7.2 million in 2020 and $7.1 million in 2019, generating operating income of approximately $1,000 and $329,000 and net income of approximately $676,000 and $48,000, respectively.
On August 8, 2022, the Company, as borrower, entered into a financing arrangement (the “Loan Agreement”) with Celtic Bank (the “Lender”), a Utah corporation. Pursuant to the Loan Agreement, the Lender agreed to lend the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the Loan Agreement, payments are due beginning August 15, 2022, and shall consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher. Subsequent payments shall also consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher, with the final payment due on February 6, 2024. The Loan is subject to customary events of default.
On July 29, 2022, the Company and Andrew Hoyen (“Hoyen Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Hoyen Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Hoyen Lender (the “Hoyen Note”). The Hoyen Note and the Hoyen Modification was approved by the disinterested members of our Board of Directors. The Hoyen Modification extends the due date of the Hoyen Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Hoyen Modification, the Company agreed to repay to Lender $16,000 of the accrued interest on the Hoyen Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 8,000 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Note was $10,930 as of July 29, 2022. Except as set forth in the Hoyen Modification, the terms of the Hoyen Note remain the same.
On June 30, 2022, and September 6, 2022 the Company and Donald W. Reeve (“Reeve Lender”), a director of the company, entered into note modification agreements (each a “Reeve Modification” and collectively, the “Reeve Modifications”) with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The 2020 Note, the 2021 Note and the Reeve Modifications were each approved by the disinterested members of our Board of Directors. The Reeve Modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note of $100,000 to January 1, 2023. The Reeve Modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616 will be due. Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.
In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware Cloud security solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing channel partner relationships.
On November 3, 2021, we entered into a financing arrangement (the “Bridge Loan”) with Mast Hill Fund, L.P. (“Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, the Mast Hill agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 28,000 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On February 15, 2022, we entered into a second financing arrangement (the “Second Bridge Loan”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 18,500 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On April 12, 2022, we entered into a third financing arrangement (the “Third Bridge Loan”) with Talos Victory Fund, LLC (“Talos” and together with Mast Hill, the “Lenders”) on substantially the same terms as our financing arrangements with Mast Hill. In exchange for a promissory note, the Talos agreed to lend the Company $296,000, which bears interest at a rate of eight percent (8%) per annum, less $29,600 original issue discount. As additional consideration for the financing, the Company issued Talos a 5-year warrant to purchase 14,800 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On May 31, 2022, we entered into a fourth financing arrangement (the “Fourth Bridge Loan” and together with the Bridge Loan, Second Bridge Loan, and Third Bridge Loans, the “Loans”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 17,750 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on the one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lenders have the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $5.00 per share. On April 29, 2022, Mast Hill exercised the warrant issued to them on November 3, 2021 in full on a cashless basis and acquired 17,205 shares of Common Stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for more information regarding the Loans. |
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On December 15, 2021, our board of directors (the “Board”) approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock and recommended that the stockholders of the Company authorize the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On January 26, 2022, the company’s stockholders voted to authorize the reverse stock split. As of the date of this report, the Board has not set a record date or a ratio for the reverse stock split. The reverse stock split will not impact the number of authorized shares of common stock which will remain at 60,000,000 shares. Unless otherwise noted and other than in our financial statements and the notes thereto, the share and per share information in this prospectus reflects a proposed reverse stock split of the outstanding common stock and treasury stock of the Company at an assumed 50-to-1 ratio to occur immediately following the effective date but prior to the closing of the offering.
Business Strategy
We have a threefold business strategy composed of: | ||
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| · | providing differentiated cybersecurity software and services to small to mid-sized enterprises who lack the internal resources to focus on cybersecurity related matters by combining customized software and professional services; |
| · | designing, developing, and marketing cybersecurity SaaS solutions, including our Nodeware solution; and |
| · | identifying other cybersecurity companies to acquire as part of a roll-up strategy. |
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We believe our ability to succeed depends on how successful we are in differentiating ourselves in the market at a time when competition and consolidation in these markets is on the rise. Our software and services are designed to simplify the security needs of our customers and channel partners, with a focus on the small to mid-sized enterprises, and we believe our ability to integrate our product and service offerings differentiates them from our competitors. In addition, we support our channel partners by providing recurring-revenue business models for both services and our cybersecurity SaaS solutions.
Cybersecurity is a constantly evolving field, so we devote significant efforts in developing proprietary software and services to meet our customer and channel partners’ evolving needs. These efforts have resulted in the development of our patented and patent-pending Nodeware solution. We expect to continue to make significant investments in developing other intellectual property to serve as the core to other proprietary software and services.
Historically, a significant portion of our revenues has been derived through our managed support services, however, we believe our cybersecurity SaaS solutions, including Nodeware, present an opportunity for significant growth. We believe that Nodeware’s ability to be deployed in an underserved market segment, across a wide variety of networks and the ability to integrate it into existing and new cybersecurity software and services, will allow us to significantly grow this segment of our business. Similarly, we believe Nodeware’s SaaS recurring revenue business model and its flexibility as a standalone or integrated solution makes it an attractive part of our channel partners’ portfolio of products. Accordingly, in 2021 we made significant investments in Nodeware sales and marketing to grow our team of cybersecurity sales and technical consultants. As a result, we believe we are seeing the pipeline growth expected from focused efforts, which we anticipate will convert to revenue growth in 2022 and beyond.
We believe the market for cybersecurity services for small and medium-sized enterprises is fragmented and does not currently meet the needs of this customer base. The market is fragmented and is beginning to consolidate, which is why we are seeking to strategically acquire other cybersecurity technology and services companies.
Intellectual Property
We believe that our intellectual property is an asset that will contribute to the growth and profitability of our business. We rely on a combination of patented, patent-pending and confidentiality procedures, trademarks and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks.
Our current patent and trademark portfolio consists of a patent for the Nodeware solution and process for scanning for vulnerabilities and a pending patent covering the methodologies associated with identifying and cataloging the assets on or across any physical or cloud network, together with a registered trademark for the “Nodeware” name and other trademarks and tradenames associated with our company and products. We intend to continue to work to enhance our intellectual property position on the Nodeware solution and in other appropriate cybersecurity technology we generate.
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Research and Development
Our research and development efforts are focused on ensuring our software and services continually adapt to ever-evolving cybersecurity threats, developing new and improved functionality to meet our customers’ needs, and to enable robust and efficient integration with other industry solutions. Our research and development team is responsible for the design, development, testing and quality of our software, including Nodeware, and works to ensure that our software is available, reliable and stable. Costs incurred prior to reaching technological feasibility are expensed as incurred, subsequently they are capitalized until product launch.
Listing on the Nasdaq Capital Market
Our common stock is presently traded on the over-the-counter market and quoted on the OTCQB market under the symbol “IMCI.” We have applied to list our common stock and redeemable warrants on the Nasdaq Capital Market under the symbols “IMCI” and “IMCIW,” respectively. No assurance can be given that our application will be approved. On September 6, 2022, the last reported sale price of our common stock was approximately $0.09 per share, without giving effect to the proposed reverse stock split. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not complete this offering. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system.
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Summary of Principal Risks
An investment in shares of our units involves a high degree of risk. If any of the factors enumerated below or in the section entitled “Risk Factors” occurs, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. In that case, the market price of our securities could decline, and you may lose some or all of your investment. Some of the more significant risks relating to this offering and an investment in our units include: | ||
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| · | our ability to continue as a going concern, which could cause our stockholders to lose some or all of their investment in us; |
| · | the ongoing COVID-19 pandemic and its impact on our business and our operations; |
| · | our history of fluctuating operating results; |
| · | our ability to raise additional capital in this offering or through additional offerings, which may not be available on favorable terms, if at all, and without which we may not be able to continue as a going concern; |
| · | our highly leveraged financial status and working capital deficit; |
| · | our accrued liability for a previously-offered retirement plan; |
| · | our past and possible future use of an accounts receivable credit facility; |
| · | our ability to successfully protect our intellectual property rights, and claims of infringement by others; |
| · | our ability to successfully commercialize our patented software; |
| · | the risk of losing a major customer that accounts for a large portion of our revenue; |
| · | our reliance on our channel partners to generate a substantial amount of our revenue; |
| · | our reliance on certain of our vendors to competently operate certain functions of our business; |
| · | our reliance on third-party vendors and third-party software; |
| · | the impact to our business if federal, state, or local governments decreased the amount of business they do with us or our prime contractors; |
| · | our ability to effectively compete in a highly competitive environment; |
| · | the ability of our software and services to gain market acceptance, obtain market share, and maintain market share; |
| · | the ability of our software and services to correctly detect and identify vulnerabilities; |
| · | the ability of our software and services to meet and comply with applicable regulations and industry standards; |
| · | the market for cloud solutions for information technology, security, and compliance may not evolve as we anticipate; |
| · | our compliance with software licenses; |
| · | our compliance with federal, state, and local tax regulations governing sales and use tax or other taxes; |
| · | our ability to effectively manage the size of our business; |
| · | our ability to effectively manage and integrate businesses or business assets we acquire; |
| · | our ability to manage growth effectively; |
| · | our ability to retain key management personnel; |
| · | the exposure of our directors or officers because of our lack of directors and officers liability insurance; |
| · | our ability to create value from our investments; |
| · | our ability to hire and retain qualified and experienced technical, sales, and marketing teams; |
| · | cybersecurity, privacy, and data handling threats and incidents; |
| · | the volatility of our stock price, even once listed on Nasdaq; |
| · | our expectation that we will not declare dividends to our stockholders for the foreseeable future; |
| · | the immediate and substantial dilution in net tangible book value; |
| · | the dilution of our shares as a result of the issuance of additional shares in connection with financing arrangements; |
| · | the impact of the reverse stock split on the liquidity of our shares; |
| · | the decline in the price of our stock due to offers or sales of substantial number of our shares; |
| · | the limited trading volume and price fluctuations of our shares; |
| · | the broad discretion of our management over the proceeds from this offering; |
| · | the speculative nature of the redeemable warrants offered in this offering; |
| · | the lack of established trading market for the redeemable warrants offered in this offering; |
| · | the redeemable warrants offered in this offering will only confer the right to acquire our shares at a fixed price, until such time as the redeemable warrants are exercised or redeemed; |
| · | the redeemable warrants offered in this offering could discourage an acquisition of us by a third party; |
| · | our ability to meet and comply with Nasdaq’s initial listing requirements; |
| · | our ability to meet and comply with Nasdaq’s initial listing requirements; and |
| · | our ability to maintain an effective system of disclosure controls. |
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Corporate 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, New York 14534 and our phone number is (585) 385-0610. Our website address is www.igicybersecurity.com. We have not incorporated by reference into this prospectus the information included on or linked from our website and you should not consider it to be part of this prospectus.
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THE OFFERING | ||
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Issuer: |
| Infinite Group, Inc. |
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Units offered: |
| We are offering up 3,000,000 units consisting of either (i) common units or (ii) pre-funded units. The units will be offered at a price range of $4.38 per unit to $5.62 per unit and an assumed public offering price of $5.00 per unit, the midpoint of the range. |
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Common units offered: |
| Each common unit consists of one share of our common stock and three redeemable warrants each to purchase one share of our common stock. The common units will not be certificated or issued in stand-alone form. The shares of our common stock and the redeemable warrants comprising the common units are immediately separable upon issuance and will be issued separately in this Offering. |
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Pre-funded units offered: |
| We are also offering to those purchasers, if any, whose purchase of units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded units in lieu of common units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock. There can be no assurance that we will sell any of the pre-funded units being offered. Each pre-funded unit will consist of a pre-funded warrant and three redeemable warrants. The purchase price of each pre-funded unit is equal to the price per unit being sold to the public in this offering, minus $0.001. The pre-funded warrants will be immediately exercisable and may be exercised at any time until all of the pre-funded warrants are exercised in full. We are offering the pre-funded units at an assumed public offering price of $4.999 per pre-funded unit based on an assumed initial offering price of $5.00 per common unit, the mid-point of the anticipated price range. For each pre-funded unit we sell, the number of common units we are offering will be decreased on a one-for-one basis. Because we will issue three redeemable warrants as part of each common unit or pre-funded unit, the number of redeemable warrants sold in this offering will not change as a result of a change in the mix of the common units and pre-funded units sold. This prospectus also relates to the offering of the common shares issuable upon exercise of the pre-funded warrants. . |
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Shares of common stock outstanding prior to the offering (1): |
| 679,223 shares. |
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Shares of common stock outstanding after the offering (1)(2): |
| 3,679,223 shares (assuming the exercise of any pre-funded warrants and none of the redeemable warrants issued in this offering are exercised). |
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Over-allotment option: |
| We have granted the underwriters a 45-day option to purchase up to 450,000 additional shares of common stock and/or pre-funded warrants, representing 15% of the shares and pre-funded warrants sold in the offering and/or up to 1,350,000 additional redeemable warrants, representing 15% of the redeemable warrants sold in the offering, solely to cover over-allotments, if any. The purchase price to be paid per additional share of common stock will be equal to the public offering price of one unit, less the purchase price for the redeemable warrants included within the unit and the underwriting discount. The purchase price to be paid per pre-funded warrant will be equal to the public offering price of one pre-funded unit, less the purchase price for the redeemable warrants included within the pre-funded unit and the underwriting discount. The purchase price to be paid per additional redeemable warrant will be $0.01. |
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Use of proceeds: |
| We estimate that the net proceeds to us from this offering will be approximately $13,246,000 after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We plan on using the proceeds from this offering for marketing and sales, development costs, repayment of debt and working capital, among other things. Our management will retain broad discretion over the allocation of the net proceeds from this offering. For a more complete description of our intended use of the net proceeds from this offering, see “Use of Proceeds.” |
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Description of the redeemable warrants: |
| The redeemable warrants included within the units will be exercisable immediately and have an exercise price per share of common stock of $5.00 (equal to 100% of the public offering price of one common unit based on an assumed initial offering price of $5.00 per common unit, the mid-point of the anticipated price range). Each redeemable warrant is exercisable for one share of common stock, subject to adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our common stock, and in the event that the Company’s common stock trades below the exercise price during the 90 day period following this offering, as described herein. A holder may not exercise any portion of a redeemable warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of the outstanding common stock after exercise, as such percentage ownership is determined in accordance with the terms of the warrants, except that upon notice from the holder to us, the holder may waive such limitation up to a percentage, not in excess of 9.99%. Each redeemable warrant will be exercisable immediately upon issuance and will expire on , 2027 (five years after the initial issuance date) or when redeemed. The terms of the redeemable warrants will be governed by a Warrant Agreement, dated as of the effective date of this offering, between us and Issuer Direct, as the warrant agent (the “Warrant Agent”).
The exercise price and number of shares of common stock issuable upon exercise of the redeemable warrants may be adjusted in certain circumstances within two (2) years from issuance, including in the event of a stock dividend or recapitalization, reorganization, merger, or consolidation. The redeemable warrants will also be adjusted for issuances of common stock at prices below its exercise price under certain circumstances. However, in no event will the exercise price be adjusted to a price below $2.50 per share (equal to 50% of the public offering price of one common unit based on an assumed initial offering price of $5.00 per common unit).
Additionally, on the date that is 90 calendar days immediately following the initial issuance date of the redeemable warrants, the exercise price of the redeemable warrants will be reduced to the reset price, provided that such value is less than the exercise price in effect on that date. The reset price is equal to the greater of (a) 50% of the initial exercise price or (b) 100% of the lowest daily volume weighted average price per share of common stock occurring during the 90 calendar days following the issuance date of the redeemable warrants. The lowest reset price is $2.50 per share (equal to 50% of the public offering price of one common unit based on an assumed initial offering price of $5.00 per common unit).
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| This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the redeemable warrants. For more information regarding the redeemable warrants, you should carefully read the section titled “Description of the Securities-Redeemable Warrants” in this prospectus. |
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Redemption of redeemable warrants: |
| We may redeem the outstanding warrants at a price of $0.01 per warrant share upon certain conditions where the price of our common stock has equaled or exceeded $[ ] per share (as adjusted for share splits, share dividends, recapitalizations and similar events) for a 30 consecutive trading day period. We must give notice of our intent for redemption at least 30 days prior to the date of redemption. Upon our notice to warrant holders of our intent to call the warrants for redemption, each holder will have 30 trading days during which it may exercise its warrant prior to the planned redemption date; if such holder does not exercise prior to the redemption date, the warrants held by such holder will be redeemed and the warrant holder will have no other rights other than the right to receive the nominal redemption price of $0.01 per warrant share upon surrender of the warrant.
• in whole and not in part; • at a price of $0.001 per warrant; • upon a minimum of 30 days’ prior written notice of redemption, which we refer to as the 30-day redemption period; and • if, and only if, the last sale price of our common stock equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for a 20-trading day. |
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Description of pre-funded warrants: |
| The terms of the pre-funded warrants are substantially similar to the redeemable warrants, except that the pre-funded warrants have an exercise price of $0.001, are not redeemable, and do not expire. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the pre-funded warrants. For more information regarding the pre-funded warrants, you should carefully read the section titled “Description of the Securities-Pre-funded Warrants” in this prospectus. |
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Underwriter’s Warrants: |
| The registration statement of which this prospectus is a part also registers for sale shares underlying warrants (the “Underwriter’s Warrants”) to purchase 120,000 shares of our common stock to Aegis Capital Corp. (the “underwriter”), as the sole underwriter, as a portion of the underwriting compensation payable to the underwriter in connection with this offering. The Underwriter’s Warrants will be exercisable beginning on a date which is six months from the commencement of sales under the registration statement of which this prospectus is a part at an exercise price of $6.25 (125% of the public offering price of the common units) and will expire five years from the date of such commencement of sales. Please see “Underwriting - Underwriter’s Warrants” for a description of these warrants. |
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Trading symbol: |
| Our common stock is presently traded on the over-the-counter market and quoted on the OTCQB market under the symbol “IMCI.” We have applied to list our common stock and redeemable warrants on the Nasdaq Capital Market under the symbols “IMCI” and “IMCIW,” respectively. No assurance can be given that our application will be approved. On September 6, 2022, the last reported sale price of our common stock was approximately $0.09 per share, without giving effect to the proposed reverse stock split. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not complete this offering. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system. |
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Reverse stock split: |
| On December 15, 2021, our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1, to be effective at the ratio and date to be determined by our board of directors. Our stockholders approved the reverse stock split range at our annual meeting on January 26, 2022. We intend to effectuate the reverse split of our common stock in a ratio to be determined by the Board prior to consummation of this offering. Unless otherwise noted and other than in our financial statements and the notes thereto, the share and per share information in this prospectus reflects a proposed reverse stock split of the outstanding common stock and treasury stock of the Company at an assumed 50-to-1 ratio to occur immediately following the effective date but prior to the closing of the offering. |
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Lock-up Agreements: |
| We and our directors, officers, and certain principal stockholders (holders of 10% or more of our outstanding shares) have agreed not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock for a period of 180 days after the date of this prospectus. See “Underwriting-Lock-Up Agreements.” |
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Risk factors: |
| Investing in our securities involves a high degree of risk and purchasers of our securities may lose their entire investment. See “Risk Factors” and the other information included and incorporated by reference into this prospectus for a discussion of risk factors you should carefully consider before deciding to invest in our securities. |
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(1) | Unless we indicate otherwise, the number of shares of our common stock outstanding is based on 679,223 shares of common stock outstanding on September 6, 2022, but does not include, as of that date: | |
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| · | 200,050 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $4.04 per share; |
| · | 60,953 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $8.25 per share |
| · | 91,930 shares authorized for issuance pursuant to equity incentive plans; and |
| · | 208,717 shares of our common stock issuable upon conversion of convertible notes. |
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Except as otherwise indicated, all information in this prospectus assumes: | ||
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| · | no exercise of the outstanding options described above; |
| · | full exercise of any pre-funded warrants included in the pre-funded units; |
| · | no exercise of the redeemable warrants included in the units or the Underwriter’s Warrants;
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| · | no exercise of the underwriter’s over-allotment option; and |
| · | a proposed reverse stock split of the outstanding common stock and treasury stock of the Company at an assumed 50-to-1 ratio to occur immediately following the effective date but prior to the closing of the offering. |
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RISK FACTORS
Any investment in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this prospectus, before you decide whether to purchase our securities. If any of the following risks or uncertainties actually occurs, our business, financial condition, results of operations and prospects would likely suffer, possibly materially. In addition, the trading price of our common stock could decline due to any of these risks or uncertainties, and you may lose part or all of your investment.
Risks Related to our Business and Financial Condition
In the past, we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern and it is possible that conditions and events in the future may negatively impact our ability to continue as a going concern.
As of June 30, 2022, we had a working capital deficit of approximately $4.4 million. We reported a net loss of approximately $1,701,000 for the six months ended June 30, 2022. We reported a stockholders’ deficiency of $5,387,542 as of June 30, 2022. We had net loss of approximately $569,000 for the six months ended June 30, 2021. At December 31, 2021, we had a stockholders’ deficiency of $4,097,889. These factors initially raise substantial doubt about our ability to continue as a going concern but this doubt has been alleviated.
During the third quarter of 2022, we entered into a loan agreement with an unrelated third party, resulting in net proceeds to the Company of $139,400. During the second quarter of 2022, we entered into two loan agreements with two unrelated third parties, resulting in net proceeds to the Company of $585,900. During the first quarter of 2022, we entered into a loan agreement with an unrelated third party, resulting in net proceeds to the Company of $333,000. During the fourth quarter of 2021, we engaged in multiple short term funding arrangements. We entered into three demand notes of $12,000 each with three related parties. On October 28, 2021, we entered into a promissory note of $150,000 with our Vice President of Business Development. Additionally, on November 3, 2021, we entered into a loan agreement with an unrelated third party, resulting in net proceeds to the Company of $403,200.
In the future, reports from our independent registered public accounting firm may also contain statements expressing substantial doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.
Our results of operations may be negatively impacted by the COVID-19 pandemic.
The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption. It has already disrupted global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19 and its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 has continued to disrupt business activity globally. New strains and variants of the coronavirus continue to spread around the world. The ongoing rollout of vaccines around the globe is encouraging, but their long-term impact on the political environment, business environment, and the Company is still uncertain.
Effects of the COVID-19 pandemic that may negatively impact our business in future periods include but are not limited to: limitations on the ability of our customers to conduct their business, purchase our products and services, and make timely payments; curtailed consumer spending; deferred purchasing decisions; delayed consulting services implementations; and decreases in cybersecurity services and software license revenues driven by channel partners. As a result of the COVID-19 pandemic, industry conventions and conferences that we anticipated participating in have been and continue to be canceled or altered. We believe this will negatively impact our 2022 results and has negatively impacted our ability to grow our business as quickly as we originally anticipated.
We are continuing to adapt our operations to meet the challenges of this uncertain and rapidly evolving situation, including remote working arrangements for our employees, limiting non-essential business travel, and utilizing virtual sales and marketing events. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition.
If we are unable to raise sufficient capital, we will be unable to fully fund our operations and to otherwise execute our business plan.
Until such time, if ever, that we can generate substantial revenues, we expect to finance our cash needs primarily through equity offerings and debt financings. Our ability to raise capital, whether through equity or through debt, is based, in part, on market events and conditions out of our control. We do not have any future committed source of external funds.
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If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce, or terminate our future product and service development or commercialization efforts.
Our efforts to commercialize our Nodeware solution may not be successful.
We have one patent granted and one patent pending relating to our Nodeware solution. The efforts we have taken to protect our intellectual property may not be sufficient or effective. Additionally, there is no guarantee that our Nodeware solution will perform as expected or as needed.
In order to protect our interest in Nodeware, we sell licenses permitting customers’ access. Licenses are protected through our EULA (end user licensing agreement), reseller/partner contracts, and through the cloud platform it resides in, enabling us to manage subscriptions, use and distribution of the platform. We face a risk of reputational harm and potential intellectual property theft if a licensee mistakenly or intentionally misuses our products. Licensing may also add an expense to our overall cost structure that is not supported by the market for like products.
If we do not successfully develop enhancements or new software, or scale our platform effectively, our operating results and our business may be harmed.
The cybersecurity market is characterized by rapid technological advances, customer price sensitivity, short product and service life cycles, intense competition, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards and regulatory mandates. Any of these factors could create downward pressure on pricing and gross margins, and could adversely affect our renewal rates, as well as our ability to attract new customers. Our future success will depend on our ability to enhance existing software, introduce new software on a timely and cost-effective basis, meet changing customer needs, integrate, and extend our core technology into new applications, and anticipate and respond to emerging cybersecurity threats. We must also continually change and improve our software and services in response to changes in operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools and computer language technology. In addition, our future growth depends upon our ability to continue to meet the expanding needs of our customers and to scale our software and services to meet these expanding needs and expanding customer base. As a result, we must continue to dedicate significant financial and other resources to our research and development efforts.
We may not be able to anticipate future market needs and opportunities, develop enhancements or new software to meet such needs or opportunities, or scale our platforms to maintain the performance of our software and services, in a timely manner or at all. To the extent that we do not successfully develop enhancements or new software, or scale our platform effectively, our operating results and our business may be harmed.
If we are unable to protect our intellectual property rights, our business could be harmed, or we could be required to incur significant expenses to enforce our rights.
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 patented, patent-pending and confidentiality procedures, trademarks, and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks. Despite our efforts, the steps we have taken to protect our intellectual property rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain. Enforcing our intellectual property rights, if necessary, is difficult, time-consuming, resource-intensive, expensive, and uncertain. Litigation may become necessary and, if so, it may come at a substantial cost and cause diversion of management’s resources, which could harm our business.
We may need to defend against intellectual property infringement claims or misappropriation claims, which may be time-consuming, resource-intensive, and expensive.
Although we have not in the past been subject to claims that any of our products or services infringe intellectual property rights of a third-party, we could be subject to such claims in the future. It is possible that litigation could result. We do not know whether we will prevail in such proceedings given the highly complex, technical issues and inherent uncertainties in intellectual property litigation. Enforcing our intellectual property rights, if necessary, is difficult, time-consuming, resource-intensive, expensive, and uncertain.
If a challenge to our intellectual property rights results in an adverse outcome, then we could be required to stop the use of our products, services, or technology, pay damages for infringement, and expend resources developing products, services, or technology that are non-infringing.
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We experience fluctuations in quarterly and annual operating results.
Our quarterly and annual operating results have fluctuated in the past and likely will fluctuate in the future. The demand for our products is driven largely by the demand for cybersecurity solutions. Accordingly, the cybersecurity industry is affected by market conditions that are often outside our control. Our results of operations may fluctuate significantly from period to period due to a number of factors, including general economic, industry and market conditions, the introduction or adoption of new technologies that compete with our software and services, the length and expense of our sales cycle for our software and services, the loss of a key customer and publicity regarding security breaches generally and the level of perceived threats to IT security. As a result of these factors and other risks discussed in this section, or the cumulative effect of some of these factors, may result in fluctuations in our operating results.
In addition, we recognize revenues from subscriptions over the term of the relevant service period, which is typically one year. As a result, most of our reported revenues in each quarter are derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a shortfall in demand for our solutions in any period may not significantly reduce our revenues for that period, but could negatively affect revenues in future periods. Accordingly, the effect of significant downturns in bookings may not be fully reflected in our results of operations until future periods.
This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of securities analysts or investors, for a particular period. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the trading price of our common stock could fall and we could face costly lawsuits, including securities class action suits.
We do not maintain directors and officers liability insurance, which may subject us to significant exposure if one of our directors or officers is sued.
As of the date of this Registration Statement, we do not maintain directors and officers liability insurance. In addition to protecting the individual director or officer against personal losses, it can also cover the legal fees and costs an organization may incur as a result of the lawsuit.
If a legal action is commenced against one of our directors or officers, including, but not limited to, an action alleging a violation of securities law, we may incur the legal fees and costs associated with defending against the action, which may harm our business. In addition, a potential action could be time-consuming, resource-intensive, expensive, and uncertain.
We currently accrue a liability for a discontinued Simple IRA plan.
Through December 31, 2012, we offered a Simple (Savings Incentive Match Plan for Employees) IRA plan as a retirement plan for eligible employees and offered a voluntary match. We did not make all required voluntary matches prior to terminating the Simple IRA plan and we have accrued liability for the voluntary match portion of the Simple IRA plan, including interest, which was $280,958 as of June 30, 2022. There can be no assurance that the accrued liability amount will be sufficient to satisfy the Company’s potential liability.
We have used and may use our existing credit facility to finance our growth.
We have an accounts receivable credit facility with a financial institution, which enables us to sell accounts receivable to the financial institution with full recourse against us. The fee charged is prime plus 3.6% (effective rate of 8.35% at June 30, 2022) against the average daily outstanding balance of funds advanced. We also granted the financial institution a first priority interest in accounts receivable and a blanket lien. The fee charged is based, in part, on market events and conditions out of our control. The terms of the credit facility are subject to change.
During the six months ended June 30, 2022 and 2021, the Company sold approximately $2,036,000 and $1,778,000, respectively, of our accounts receivable to the financial institution.
During the years ended December 31, 2021 and 2020, we sold approximately $3,630,000 and $1,750,000, respectively, of our accounts receivable to the financial institution.
Because of the high relative cost, use of the credit facility, in the aggregate, may harm our business.
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 the six months ended June 30, 2022, sales to this customer, including sales under subcontracts for services to several entities, accounted for 65.5% of total sales (58.1% in 2021) and 20.7% of accounts receivable at June 30, 2022. Through the 12 months ending December 31, 2021, sales to this customer, including sales under subcontracts, accounted for 59.5% of total sales and 15.3% of accounts receivable. During 2020, sales to this customer, including sales under subcontracts, accounted for 61.2% of total sales and 38.8% of accounts receivable. The loss of this customer could have a significant impact on our revenues and harm our business and results of operations.
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We rely on our channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.
Our success significantly depends upon establishing and maintaining relationships with a variety of channel partners and we anticipate that we will continue to depend on these partners in order to grow our business.
For the twelve months ended December 31, 2021, approximately 89% of our business comes from our channel sales and approximately 11% from direct sales to end customers, and the percentage of revenues derived from channel partners may increase in future periods. Our agreements with our channel partners are generally non-exclusive and do not prohibit them from working with our competitors or offering competing solutions, and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors, do not effectively market and sell our software and services, or fail to meet the needs of our customers, then our ability to grow our business and sell our software and services may be adversely affected. In addition, the loss of one or more of our larger channel partners, who may cease marketing our software and services with limited or no notice, and our possible inability to replace them, could adversely affect our sales. Moreover, our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our software and services, which can be complex. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our software and services or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations. Even if we are successful, these relationships may not result in greater customer usage of our software and services or increased revenues.
In addition, the financial health of our channel partners and our continuing relationships with them are important to our success. Some of these channel partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency and/or the inability of such distributors to obtain credit to finance purchases of our software and services. In addition, weakness in the end-user market could negatively affect the cash flows of our channel partners who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Our business could be harmed if the financial condition of some of these channel partners substantially weakened and we were unable to timely secure replacement channel partners.
We are highly leveraged, which increases our operating deficit and makes it difficult for us to grow.
At June 30, 2022, we had current liabilities of approximately $5.3 million and long-term liabilities of $2.1 million and stockholders’ deficiency of $5,387,542. At June 30, 2022, we had a working capital deficit of approximately $4.4 million and a current ratio of 0.16. At December 31, 2021, we had current liabilities of approximately $4.1 million and long-term liabilities of $1.5 million and stockholders’ deficiency of $4,097,889. At December 31, 2020, we had a working capital deficit of approximately $3.1 million and a current ratio of .25.
Working capital shortages may impair our business operations and growth strategy, and accordingly, our business, operations.
Potential acquisitions and expansions into new markets may result in significant transaction expense and expose us to risks associated with entering new markets and integrating new or acquired operations.
We may encounter risks associated with entering new markets in which we have limited or no experience. New operations require significant capital expenditures and may initially have a negative impact on our short-term cash flow, net income and results of operations and may not become profitable when projected or ever. In addition, our industry is highly fragmented and we expect to consider acquisition opportunities from time to time when we believe they would enhance our business and financial performance.
Acquisitions may impose significant strains on our management, operating systems and financial resources, and could experience unanticipated integration issues. The pursuit and integration of acquisitions may require substantial attention from our senior management, which will limit the amount of time they have available to devote to our existing operations. Our ability to realize the expected benefits from any future acquisitions depends in large part on our ability to integrate and consolidate the new operations with our existing operations in a timely and effective manner. Future acquisitions also could result in the incurrence of substantial amounts of indebtedness and contingent liabilities (including environmental, employee benefits and safety and health liabilities), accumulation of goodwill that may become impaired, an increase in amortization expenses related to intangible assets, and potential penalties or other break fees if such negotiated acquisitions are not consummated. Any significant diversion of management’s attention from our existing operations, the loss of key employees or customers of any acquired business, any major difficulties encountered in the integration of acquired operations or any associated increases in indebtedness, liabilities or expenses could have a material adverse effect on our business, financial condition or results of operations.
We may not realize the anticipated synergies and cost savings from acquisitions.
We may grow our business by acquiring or investing in other 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. However, the integration of future acquisitions may not result in the realization of the full benefits of the revenue and cost synergies that we expected at the time or currently expect within the anticipated time frame or at all. Moreover, we may incur substantial expenses or unforeseen liabilities in connection with the integration of acquired businesses. While we anticipate that certain expenses will be incurred, such expenses are difficult to estimate accurately and may exceed our estimates. Accordingly, the expected benefits may be offset by costs or delays incurred in integrating the businesses. Failure of acquisitions to meet our expectations and be integrated successfully could have a material adverse effect on our financial condition and results of operations.
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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 software 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 the 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. We do not maintain key-person insurance for any member of our senior management team. From time to time, there may be changes in our senior management team resulting from the termination or departure of executives. Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of the services of our senior management or other key employees for any reason could significantly delay or prevent the achievement of our development and strategic objectives and harm our business, financial condition and results of operations.
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 believe that our growth will depend, to a significant extent, on our success in recruiting and retaining a sufficient number of qualified sales personnel and their ability to obtain new customers, manage our existing customer base and expand the sales of our software and services. We plan to continue to expand our sales force and make a significant investment in our sales and marketing activities. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the competitive markets where we do business. Competition for highly skilled personnel is frequently intense and we may not be able to compete for these employees. If we are unable to recruit and retain a sufficient number of productive sales personnel, sales of our software and services and the growth of our business may be harmed. Additionally, if our efforts do not result in increased revenues, our operating results could be negatively impacted due to the upfront operating expenses associated with expanding our sales force.
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If we are required to collect higher sales and use or other taxes on the software and services we sell, we may be subject to liability for past sales and our future sales may decrease.
Taxing jurisdictions, including state and local entities, have differing rules and regulations governing sales and use or other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our SaaS solutions in various jurisdictions is unclear. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to state and international jurisdictions for which we may not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our software and services or otherwise harm our business and operating results.
Risks Related to our Industry
As a provider of cybersecurity software and services, we are subject to a heightened threat of cyberattacks intended to 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 software and services, including 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. Due to the significant military action against Ukraine launched by Russia, the risk of such cyber-attacks has increased.
For example, because Nodeware is a network vulnerability management solution, 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 solution, 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.
Our information technology systems may be subject to intentional disruption or other security incidents that could result in liability and adversely impact our reputation and future sales.
We and our service providers face threats from a variety of sources, including attacks on our networks and systems from numerous sources, including traditional “hackers,” sophisticated nation-state and nation-state supported actors, other sources of malicious code (such as viruses and worms), and phishing attempts. We and our service providers could be a target of cyber-attacks or other malfeasance designed to impede the performance of our software and services, penetrate our network security or the security of our cloud platform or our internal systems, misappropriate proprietary information and/or cause interruptions to our services. Our software, platforms, and system, and those of our service providers, may also suffer security incidents as a result of non-technical issues, including intentional or inadvertent acts or omissions by our employees or service providers. With the increase in personnel working remotely during the current COVID-19 pandemic, we and our service providers are at increased risk for security breaches. Due to the significant military action against Ukraine launched by Russia, the risk of such cyber-attacks, malfeasance, security incidents, and security breaches has increased. The conditions caused by the Russian invasion of Ukraine could also result in disruption or other security incidents for our service providers.
We are taking steps to monitor and enhance the security of our software and services, cloud platform, and other relevant systems, IT infrastructure, networks, and data; however, the unprecedented scale of remote work may require additional personnel and resources, which nevertheless cannot be guaranteed to fully safeguard our software and services, our cloud platform, or any systems, IT infrastructure networks, or data upon which we rely. Further, because our operations involve providing cybersecurity software and services to our customers, we may be targeted for cyber-attacks and other security incidents. A breach in our data security or an attack against our service availability, or that of our third-party service providers, could impact our networks or networks secured by our software and services, creating system disruptions or slowdowns and exploiting security vulnerabilities of our software and services, and the information stored on our networks or those of our third-party service providers could be accessed, publicly disclosed, altered, lost, or stolen, which could subject us to liability and cause us financial harm. If an actual or perceived disruption in the availability of our software and services or the breach of our security measures or those of our service providers occurs, it could adversely affect the market perception of our software and services, result in a loss of competitive advantage, have a negative impact on our reputation, or result in the loss of customers, channel partners and sales, and it may expose us to the loss or alteration of information, litigation, regulatory actions and investigations and possible liability. Any such actual or perceived security breach or disruption could also divert the efforts of our technical and management personnel. We also may incur significant costs and operational consequences of investigating, remediating, eliminating and putting in place additional tools and devices designed to prevent actual or perceived security incidents, as well as the costs to comply with any notification obligations resulting from any security incidents. In addition, any such actual or perceived security breach could impair our ability to operate our business and provide software and services to our customers. If this happens, our reputation could be harmed, our revenues could decline and our business could suffer.
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Although we maintain insurance coverage that may be applicable to certain liabilities in the event of a security breach or other security incident, we cannot be certain that our insurance coverage will be adequate for liabilities that actually are incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material and adverse effect on our business, including our financial condition, operating results and reputation.
If our software and services fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.
If our software and services fail to detect vulnerabilities in our customers’ IT infrastructures, or if our software and services fail to identify and respond to new and increasingly complex methods of attacks, our business and reputation may suffer. There is no guarantee that our software and services will detect all vulnerabilities. Additionally, our cybersecurity software and services may falsely detect vulnerabilities or threats that do not actually exist. For example, some of our software and services rely on information on attack sources aggregated from third-party data providers who monitor global malicious activity originating from a variety of sources, including anonymous proxies, specific IP addresses, botnets and phishing sites. If the information from these data providers is inaccurate, the potential for false indications of security vulnerabilities increases. These false positives, while typical in the industry, may impair the perceived reliability or usability of our software and services and may therefore adversely impact market acceptance of our software and services and could result in negative publicity, loss of customers and sales, increased costs to remedy any incorrect information or problem, or claims by aggrieved parties. Similar issues may be generated by the misuse of our tools to identify and exploit vulnerabilities.
Further, our software and services sometimes are tested against other security products, and may fail to perform as effectively, or to be perceived as performing as effectively, as competitive products for any number of reasons, including misconfiguration. To the extent current or potential customers, channel partners, or others believe there has been an occurrence of an actual or perceived failure of our software and services to detect a vulnerability or otherwise to function as effectively as competitive products in any particular test or indicates our software and services do not provide significant value, our business, competitive position, and reputation could be harmed.
In addition, our software and services do not currently extend to cover mobile devices or personal devices that employees may bring into an organization. As such, our software and services would not identify or address vulnerabilities in mobile devices, such as mobile phones or tablets, or personal devices, and our customers’ IT infrastructures may be compromised by attacks that infiltrate their networks through such devices.
An actual or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our software and services, could adversely affect the market’s perception of our cybersecurity software and services.
If our solutions fail to help our customers achieve and maintain compliance with regulations and industry standards, our revenues and operating results could be harmed.
We generate a portion of our revenues from software and services that help organizations achieve and maintain compliance with regulations and industry standards. For example, some of our customers subscribe to our software and services to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council, or the PCI Council, which apply to companies that store cardholder data. Industry organizations like the PCI Council may significantly change their security standards with little or no notice, including changes that could make their standards more or less onerous for businesses. Governments may also adopt new laws or regulations, or make changes to existing laws or regulations, that could impact the demand for or value of our solutions.
If we are unable to adapt our software and services to changing regulatory standards in a timely manner, or if our solutions fail to assist with or expedite our customers’ compliance initiatives, our customers may lose confidence in our solutions and could switch to products offered by our competitors. In addition, if regulations and standards related to data security, vulnerability management and other IT, security and compliance requirements are relaxed or the penalties for non-compliance are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our solutions. In any of these cases, our revenues and operating results could be harmed.
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Our cybersecurity software and services are delivered from a third-party vendor, and any disruption of service at their facilities would interrupt or delay our ability to deliver our software and services to our customers which could reduce our revenues and harm our operating results.
Our existing data center facilities providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with the facilities providers on commercially reasonable terms or if in the future we add additional data center facility providers, we may experience costs or downtime in connection with the loss of an existing facility or the transfer to, or addition of, new data center facilities.
Any disruptions or other performance problems with our software and services could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenues, cause us to issue credits to customers, subject us to potential liability and cause customers to terminate their subscriptions or not renew their subscriptions.
If the market for cloud solutions for IT, security and compliance does not evolve as we anticipate, our revenues may not grow and our operating results would be harmed.
Our success depends to a significant extent on the willingness of organizations to increase their use of cloud solutions for their IT, security, and compliance. To date, some organizations have been reluctant to use cloud solutions because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with these solutions. If other cloud service providers experience security incidents, loss of customer data, disruptions in service delivery or other problems, the market for cloud solutions as a whole, including our solutions, may be negatively impacted. Moreover, many organizations have invested substantial personnel and financial resources to integrate on-premise software into their businesses, and as a result may be reluctant or unwilling to migrate to a cloud solution, such as Nodeware. Organizations that use on-premise security products, such as network firewalls, security information and event management products or data loss prevention solutions, may also believe that these products sufficiently protect their IT infrastructure and deliver adequate security. Therefore, they may continue spending their IT security budgets on these products and may not adopt our software and services in addition to or as a replacement for such products.
If customers do not recognize the benefits of our cloud software and our services over traditional on-premise enterprise software products, and as a result we are unable to increase sales of subscriptions to our software and services, then our revenues may not grow or may decline, and our operating results would be harmed.
We use third-party software and data that may be difficult to replace or cause errors or failures of our software and services that could lead to lost customers or harm to our reputation and our operating results.
We license third-party software as well as security and compliance data from various third parties to deliver our software and services. In the future, this software or data may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software or data could result in delays in the provisioning of our software and services until equivalent technology or data is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in or failures of this third-party software or data could result in errors or defects in our software and services or cause our software and services to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.
We will need to maintain our relationships with third-party software and data providers, and to obtain software and data from such providers that do not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver effective solutions to our customers and could harm our operating results.
Our software contains third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our software and services.
Our software contains software licensed to us by third-parties under so-called “open source” licenses, including the GNU General Public License, the GNU Lesser General Public License, the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming that what we believe to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms. If we combine our proprietary software with open source software in certain ways, we could, in some circumstances, be required to release the source code of our proprietary software to the public. Disclosing the source code of our proprietary software could make it easier for cyber attackers and other third parties to discover vulnerabilities in or to defeat the protections of our solutions, which could result in our solutions failing to provide our customers with the security they expect from our services. This could harm our business and reputation. Disclosing our proprietary source code also could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of sales for us. Any of these events could have a material adverse effect on our business, operating results and financial condition.
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Our software and services could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our software and services.
We may collect, store, process and use our customers’ employees or customers personally identifiable information and other data in our transactions with them, and we may rely on third parties that are not directly under our control to do so as well. While we take reasonable measures intended to protect the security, integrity and confidentiality of the personal information and other sensitive information we collect, store or transmit, we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third parties will not gain unauthorized access to this information. If we or our third-party service providers were to experience a breach, disruption or failure of systems compromising our customers’ data, or if one of our third-party service providers or partners were to access our customers’ personal data without our authorization, our brand and reputation could be adversely affected, use of our software and services could decrease and we could be exposed to a risk of loss, litigation and regulatory proceedings.
Despite our compliance efforts, we may fail to achieve compliance with applicable privacy or data protection laws and regulations as they evolve, or adhere to contractual obligations regarding the collection, processing, storage and transfer of data (including data from our customers, prospective customers, partners and employees), either due to internal or external factors such as resource limitations or a lack of vendor cooperation. Any actual or perceived failure to comply with these laws or obligations could result in enforcement action against us, including fines, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to any existing customers and prospective customers), any of which could harm our business, results of operations, and financial condition. Further, privacy concerns may inhibit market adoption of our software and services, particularly in certain industries and foreign countries.
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 59% of our sales in 2021 and 61% of our sales in 2020 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.
We operate in a highly competitive environment and, as a result, we may not be able to compete effectively or maintain or increase our sales.
We operate in a highly competitive environment with numerous competitors, some of which have greater resources or better brand recognition than we do. This competitive environment subjects us to various risks, including the ability to provide our software and services at competitive prices that allow us to maintain our profitability. Because of this competitive environment, we may have limited ability to increase prices in response to increased costs without losing competitive position which may adversely affect our margins and financial performance. In addition, price reductions by our competitors may result in the reduction of our prices and a corresponding reduction in our profitability. As a result, we may face periods of intense competition in the future, which could have a material adverse effect on our profitability and results of operations.
Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, revenues may vary from period to period, which may cause our operating results to fluctuate and could harm our business.
The timing of sales of our software and services can be difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large transactions. We sell our cybersecurity software and services primarily to IT departments that are managing a growing set of user and compliance demands, which has increased the complexity of customer requirements to be met and confirmed during the sales cycle and prolonged our sales cycle. Further, the length of time that potential customers devote to their testing and evaluation, contract negotiation and budgeting processes varies significantly, which has also made our sales cycle long and unpredictable. The length of the sales cycle for our software and services typically ranges from six to twelve months but can be more than eighteen months. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result we could lose other sales opportunities or incur expenses that are not offset by an increase in revenues, which could harm our business.
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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:
| · | 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. |
We rely on software-as-a-service vendors to operate certain functions of our business and any failure of such vendors to provide services to us could adversely impact our business and operations.
We rely on third-party software-as-a-service vendors to operate certain critical functions of our business, including financial management and human resource management. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated, all of which could harm our business.
Risks Relating to our Common Stock and to this Offering
Upon exercise of our outstanding options or warrants and conversion of our convertible notes we will be obligated to issue a substantial number of additional shares of common stock which will dilute our present stockholders.
We are obligated to issue additional shares of our common stock in connection with our outstanding options, warrants, and convertible notes. As of September 6, 2022, there were options, warrants, convertible notes outstanding, convertible into 200,050, 60,953 and 208,717 shares of common stock, respectively, at prices ranging from $1.00 to $12.25 per share. The exercise, conversion or exchange of warrants or convertible securities, including for other securities, will cause us to issue additional shares of our common stock and will dilute the percentage ownership of our stockholders. In addition, we have in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to the securities held by other stockholders not participating in such exchange.
There is no assurance that once listed on the Nasdaq Capital Market we will not continue to experience volatility in our share price.
The OTCQB, where our common stock is currently quoted, is an inter-dealer, over-the-counter market that provides significantly less liquidity than the Nasdaq Capital Market. Our stock is thinly traded due to the limited number of shares available for trading on the OTCQB Venture Market thus causing large swings in price. As such, investors and potential investors may find it difficult to obtain accurate stock price quotations, and holders of our common stock may be unable to resell their securities at or near their original offering price or at any price. Our public offering price per common unit may vary from the market price of our common stock after the offering. If an active market for our stock develops and continues, our stock price may nevertheless be volatile. If our stock experiences volatility, investors may not be able to sell their common stock at or above the public offering price per common unit. Sales of substantial amounts of our common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short period of time. As a result, our stockholders could suffer losses or be unable to liquidate their holdings. No assurance can be given that the price of our common stock will become less volatile when listed on the Nasdaq Capital Market.
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Any of the following factors could affect the market price of our common stock:
| · | The sale of large numbers of shares of common stock by former directors and their donees and associates; |
| · | The continued COVID-19 pandemic and its adverse impact upon the capital markets; |
| · | The loss of one or more members of our management team; |
| · | Our failure to generate material revenues; |
| · | Regulatory changes including new laws and rules which adversely affect companies in our line of business; |
| · | Our public disclosure of the terms of any financing which we consummate in the future; |
| · | Our failure to become profitable; |
| · | Our failure to raise working capital; |
| · | Acquisitions we may consummate; |
| · | Announcements by us or our competitors of significant contracts, new services, acquisitions, commercial relationships, joint ventures or capital commitments; |
| · | Cancellation of key contracts; |
| · | Our failure to meet financial forecasts we publicly disclose; |
| · | Short selling activities; or |
| · | Changes in market valuations of similar companies. |
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.
Concentration of ownership among our existing executive officers, directors and holders of 10% or more of our outstanding common stock may prevent new investors from influencing significant corporate decisions.
As of September 6, 2022, our executive officers and directors beneficially owned, in the aggregate, approximately 30% of our outstanding common stock. In addition, there are a number of holders of 10% or more of our outstanding common who are not our officers and directors. As a result, such persons, acting together, have significant ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
Sales of large blocks of our common stock over a short time could have a significant adverse effect on our common stock price. If our existing stockholders and investors seek to sell a substantial number of shares of our common stock, such selling efforts may cause significant declines in the market price of our common stock. The existence of an overhang, which is the potential dilution in the value of our common stock due to outstanding convertible notes, warrants and stock options, whether or not sales have occurred or are occurring, also could make our ability to raise additional financing through the sale of equity or equity-linked securities more difficult in the future at a time and price that we deem reasonable or appropriate. If our existing stockholders and investors seek to sell a substantial number of shares of our common stock, such selling efforts may cause significant declines in the market price of our common stock.
Our common stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our common stock.
Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.
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Because we do not intend to pay cash dividends on our shares of common stock, any returns will be limited to the value of our shares.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the increase, if any, of our share price.
If securities analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about our business or if they publish negative evaluations of our stock, the price and trading volume of our stock could decline.
The trading market for our common stock will rely, in part, on the research and reports that industry or financial analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by industry or financial analysts. If no, or few, analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock or publish inaccurate or unfavorable research about our business, or provide more favorable relative recommendations about our competitors, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price and trading volume to decline.
Risks Related to this Offering and our Reverse Stock Split
Investors in this offering will experience immediate and substantial dilution in net tangible book value.
The public offering price will be substantially higher than the net tangible book value per share of our outstanding shares of common stock. As a result, investors in this offering will incur immediate dilution of $2.97 per share based on the assumed public offering price of $5.00 per share of common stock, the mid-point of the estimated offering price range described on the cover of this prospectus. Investors in this offering will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion over the use of proceeds from this offering. We intend to use the net proceeds from this offering for marketing and sales, development costs, repayment of debt, working capital, among other things. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our operating results or enhance the value of our securities.
Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors, including amount of cash used in our operations, which can be highly uncertain, subject to substantial risks and can often change. Our management will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds of this offering.
The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
The redeemable warrants are speculative in nature.
The redeemable warrants offered in this offering do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of our common stock at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the redeemable warrants may exercise their right to acquire the common stock and pay an exercise price of $5.00 per share (equal to 100% of the public offering price of one common unit based on an assumed initial offering price of $5.00 per common unit, the mid-point of the anticipated price range), prior to five years from the date of issuance, after which date any unexercised redeemable warrants will expire and have no further value. We may also redeem the redeemable warrants under certain circumstances.
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There is no established market for the redeemable warrants to purchase shares of our common stock being offered in this offering.
There is no established trading market for the redeemable warrants. Although we have applied to list the warrants on the Nasdaq Capital Market there can be no assurance that there will be an active trading market for the redeemable warrants. Without an active trading market, the liquidity of the redeemable warrants will be limited.
The pre-funded warrants will not be listed or quoted on any exchange.
There is no established public trading market for the pre-funded warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the pre-funded warrants on any national securities exchange or other nationally recognized trading system, including Nasdaq. Without an active market, the liquidity of the pre-funded warrants will be limited.
Except as otherwise provided in the redeemable warrants and pre-funded warrants, holders of redeemable warrants and pre-funded warrants purchased in this offering will have no rights as stockholders until such holders exercise their redeemable warrants or pre-funded warrants and acquire our common stock.
Except as otherwise provided in the redeemable warrants and pre-funded warrants, until holders of redeemable warrants or pre-funded warrants acquire our common stock upon exercise of the redeemable warrants or pre-funded warrants, holders of redeemable warrants and pre-funded warrants will have no rights with respect to our common stock underlying such redeemable warrants and pre-funded warrants. Upon exercise of the redeemable warrants and pre-funded warrants, the holders will be entitled to exercise the rights of a holder of our common stock only as to matters for which the record date occurs after the exercise date.
Provisions of the redeemable warrants offered by this prospectus could discourage an acquisition of us by a third party.
In addition to the discussion of the provisions of our Certificate of Incorporation, as amended, and our Amended and Restated Bylaws, certain provisions of the redeemable warrants offered by this prospectus could make it more difficult or expensive for a third party to acquire us. The redeemable warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the redeemable warrants. These and other provisions of the redeemable warrants offered by this prospectus could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to you.
The reverse stock split may decrease the liquidity of the shares of our common stock.
The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split. In addition, the reverse stock split may increase the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.
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Even if the reverse stock split achieves the requisite increase in the market price of our common stock, we cannot assure you that we will be able to continue to comply with the minimum bid price requirement of Nasdaq.
Even if the reverse stock split achieves the requisite increase in the market price of our common stock to be in compliance with the minimum bid price of the Nasdaq, there can be no assurance that the market price of our common stock following the reverse stock split will remain at the level required for continuing compliance with that requirement. It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split. If the market price of our common stock declines following the effectuation of the reverse stock split, the percentage decline may be greater than would occur in the absence of a reverse stock split. In any event, other factors unrelated to the number of shares of our common stock outstanding, including negative financial or operational results, could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain the Nasdaq’s minimum bid price requirement.
Even if the reverse stock split increases the market price of our common stock and we meet the initial listing requirements of the Nasdaq, there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq.
Nasdaq requires that the trading price of its listed stocks remain above one dollar in order for the stock to remain listed. If a listed stock trades below one dollar for more than 30 consecutive trading days, then it is subject to delisting from Nasdaq. In addition, to maintain a listing on Nasdaq, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements. If we are unable to satisfy these requirements or standards, we could be subject to delisting, which would have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with the listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the minimum bid price requirement, or prevent future non-compliance with the listing requirements.
Even if we meet the initial listing requirements of Nasdaq, there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq.
Nasdaq has a number of continued listing standards that we will be required to comply with in order to maintain a listing of our common stock on Nasdaq. Even if we meet the initial listing requirements of Nasdaq, we cannot assure you that we will be able to comply with the other standards that we are required to meet in order to maintain a listing of our common stock on Nasdaq. If after listing we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum stockholder’s equity requirement, Nasdaq may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair our stockholders’ ability to sell or purchase our common stock when they wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any action taken by us would result in our common stock becoming listed again, or that any such action would stabilize the market price or improve the liquidity of our common stock.
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USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be approximately $13,246,000 after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We currently estimate that we will use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:
Proceeds: |
|
|
| |
Gross Proceeds |
| $ | 15,000,000 |
|
Underwriting Discounts and Commissions (1) |
|
| (1,200,000 | ) |
Estimated Fees and Expenses |
|
| (554,000 | ) |
Net Proceeds |
| $ | 13,246,000 |
|
|
|
|
|
|
Uses: |
|
|
|
|
Marketing and Sales |
|
| 2,500,000 |
|
Development costs |
|
| 500,000 |
|
Repayment of debt(2 ) (3) (4) |
|
| 2,162,850 |
|
Working Capital and other general corporate purposes |
|
| 8,083,150 |
|
Total Uses |
| $ | 13,246,000 |
|
(1) | Includes a non-accountable expense allowance to Aegis equal to 1.0% of the gross proceeds received in this offering |
(2) | Includes repayment of promissory notes in the aggregate amount of $100,000, plus interest, to Mr. Reeve, our Board Chairman. See “Certain Relationships and Related Party Transactions.” |
(3) | Includes repayment of four promissory notes in the aggregate of $1,268,858, plus interest, to Mast Hill Fund, L.P. and Talos Victory Fund, LLC. The promissory notes were entered into on November 3, 2021, February 15, 2022, April 12, 2022, and May 31, 2022. The funds from the associated loans were used to substantially enhance our marketing of CyberLabs’s Nodeware solution, in order to significantly increase its growth. |
(4) | Includes repayment of two promissory notes in the aggregate of $415,000, plus interest, to two third-party creditors. |
Our expected use of net proceeds from this offering and our existing cash and cash equivalents represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. As a result, we cannot predict with any certainty our use of the net proceeds from this offering or the amounts that we will actually spend on each area of use set forth above. Our management will retain broad discretion over the allocation of the net proceeds from this offering. Accordingly, we will have discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the proceeds of this offering.
Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities. We anticipate that the proceeds from this offering will enable us to become cash flow from operations positive.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2022:
| · | on an actual basis adjusted for the proposed reverse stock split of the outstanding common stock of the Company at an assumed 50-to-1 ratio; |
|
|
|
| · | on a pro forma as adjusted basis, after giving effect to (1) the sale by us of 3,000,000 of common units in this offering at the assumed public offering price of $5.00 per common unit, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the receipt by us of the proceeds of such sale; and (2) the reduction of $1,676,521 of short term debt through the use of $2,162,850 of cash proceeds, and an effect to equity as a result of a write off of a debt discount of $486,329. |
The as-adjusted information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should consider this table in conjunction with “Use of Proceeds” above as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company” and our financial statements and the notes to those financial statements for the year ended December 31, 2021 included elsewhere in this prospectus.
|
| As of June 30, 2022 |
| |||||
|
| Historical |
|
| Proforma As Adjusted |
| ||
Cash and cash equivalents |
| $ | 1,594 |
|
| $ | 11,084,744 |
|
Total Current Liabilities |
|
| 5,314,974 |
|
|
| 3,638,453 |
|
Total Long-Term Liabilities |
|
| 2,069,687 |
|
|
| 2,069,687 |
|
Stockholders’ Equity (Deficit): |
|
|
|
|
|
|
|
|
Common Stock, $0.001 par value; 60,000,000 authorized; 33,561,124 shares issued and outstanding as of June 30, 2022, and 3,671,222 issued and outstanding as adjusted |
|
| 33,560 |
|
|
| 3,671 |
|
Additional paid-in capital |
|
| 31,747,693 |
|
|
| 45,023,582 |
|
Accumulated deficit |
|
| (37,168,795 | ) |
|
| (37,655,124 | ) |
Total Stockholders’ Equity (Deficit) |
| $ | (5,387,542 | ) |
| $ | 7,372,129 |
|
A 50% increase (decrease) in the assumed public offering price of $5.00 per common unit would increase (decrease) cash and cash equivalents, working capital, total assets, and total stockholders’ (deficit) equity by approximately $6.9 million, assuming that the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions.
The above discussion and table are based on 3,671,222 shares outstanding as of June 30, 2022 after giving effect to our planned reverse stock split at an assumed 50-to-1 ratio. The discussion and table do not include, as of that date:
| · | 210,502 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $3.95 per share; |
| · | 60,953 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $8.25 per share |
| · | 91,930 shares of our common stock that are reserved for equity awards that may be granted under our existing equity incentive plans; and |
| · | 207,093 shares of our common stock issuable upon conversion of convertible notes. |
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DETERMINATION OF OFFERING PRICE
The offering price of the common units has been negotiated between the underwriter and us considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business.
MARKET FOR OUR COMMON STOCK AND REDEEMABLE WARRANTS
Our common stock is presently traded on the over-the-counter market and quoted on the OTCQB market under the symbol “IMCI.” We have applied to list our common stock and redeemable warrants on the Nasdaq Capital Market under the symbols “IMCI” and “IMCIW,” respectively. No assurance can be given that our application will be approved. On September 6, 2022, the last reported sale price of our common stock was approximately $0.09 per share, without giving effect to the proposed reverse stock split. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not complete this offering. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system.
Dividend Policy
We have never declared or paid a cash dividend on our common stock and we currently anticipate that we will retain future earnings for the development, operations and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. 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.
Holders
At September 6, 2022, we had 206 record stockholders and estimate that we had approximately 1,200 beneficial stockholders.
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DILUTION
If you invest in our units in this offering, your interest will be diluted to the extent of the difference between the assumed public offering price per share of common stock that is part of the common unit (without assigning any value to the redeemable warrants, and assuming the exercise of any pre-funded warrants sold in this offering) and the as adjusted net tangible book value per share of common stock immediately after this offering.
Our net tangible book value is the amount of our total tangible assets less our total liabilities. Our net tangible book value as of June 30, 2022 was $(5,808,766), or $(8.65) per share of common stock.
As adjusted net tangible book value is our net tangible book value after taking into account the issuance and sale by us of 3,000,000 units in this offering (assuming the exercise of any pre-funded warrants sold in the offering, and without assigning any value to the redeemable warrants) at the assumed public offering price of $5.00 per unit, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the receipt by us of the proceeds of such sale. Our as adjusted net tangible book value as of June 30, 2022 would have been approximately $7,437,000 or $2.03 per share. This amount represents an immediate increase in as adjusted net tangible book value of approximately $13,246,000 per share to our existing stockholders, and an immediate dilution of $10.68 per share to new investors participating in this offering. Dilution per share to new investors is determined by subtracting as adjusted net tangible book value per share after this offering from the public offering price per share paid by new investors.
The following table illustrates this per share dilution:
Assumed public offering price per share (attributing no value to the redeemable warrants) |
| $ | 5.00 |
|
Net tangible book value per share as of June 30, 2022 |
| $ | (8.65 | ) |
Increase in as adjusted net tangible book value per share after this offering |
| $ | 10.68 |
|
As adjusted net tangible book value per share after giving effect to this offering |
| $ | 2.03 |
|
Dilution in as adjusted net tangible book value per share to new investors |
| $ | 2.97 |
|
A 50% increase (decrease) in the assumed public offering price of $5.00 per common unit would increase (decrease) the as adjusted net tangible book value per share by $12.56 ($8.80), and the dilution per share to new investors in this offering by $3.59 ($2.35), assuming the number of offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
The information above assumes that the underwriter does not exercise its over-allotment option. If the underwriter exercises its over-allotment option in full, the as adjusted net tangible book value will increase to $2.31 per share, representing an immediate increase to existing stockholders of $10.96 per share and an immediate dilution of $2.69 per share to new investors.
The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding warrants having a per share exercise or conversion price less than the per share offering price to the public in this offering.
We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
The above discussion and table are based on 671,223 shares outstanding as of June 30, 2022 after giving effect to our planned reverse stock split at an assumed 50-to-1 ratio. The discussion and table do not include, as of that date:
| · | 210,050 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $3.95 per share; |
| · | 60,953 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $8.25 per share |
| · | 91,930 shares of our common stock that are reserved for equity awards that may be granted under our existing equity incentive plans; and |
| · | 207,093 shares of our common stock issuable upon conversion of convertible notes. |
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OUR BUSINESS
Overview of Infinite Group
Headquartered in Pittsford, New York, Infinite Group is a developer of cybersecurity software and related cybersecurity consulting, advisory, and managed information security services. We principally sell our software and services through indirect channels such as Managed Service Providers (“MSPs”), Managed Security Services Providers (“MSSPs”), agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the cybersecurity market at a time when competition and consolidation in these markets are on the rise. Our strategy to differentiate our cybersecurity software and services from our competitors is to combine customized software and professional services, and grow our business by designing, developing, and marketing cybersecurity software-as-a-service (“SaaS”) solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI CyberLabs (“CyberLabs”), to fill technology gaps we identify, and then we bring these software and services to market through our existing channel partner and customer relationships. Our software and services are designed to simplify and manage the security needs of our customers and channel partners in a variety of environments. We focus on the small and medium-sized enterprises market. We support our channel partners by providing recurring-revenue business models for both services and through our cybersecurity SaaS solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions.
As part of these software and service offerings we:
| · | Internally developed and brought to market Nodeware®, a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware provides an economical solution for small and medium-sized enterprises as compared to more costly solutions focused on enterprise-sized customers, and is designed to accommodate the varying network needs of our end customers’ organizations and networks. Nodeware’s flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. We intend to continue to develop our intellectual property to serve as the core to our proprietary software and services. In addition to our proprietary software and services we also act as a master distributor for other cybersecurity software, principally Webroot, a cloud-based endpoint security platform solution, where we market to and provide support for over 225 small channel partners across North America. For the six months ended June 30, 2022, our software revenue was approximately $532,000, with approximately 29% of that being related to Nodeware. For the twelve months ended December 31, 2021, our software revenue was approximately $1,011,000, with approximately 17% of that being related to Nodeware; |
| · | Provide cybersecurity consulting and advisory services to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology. As part of our consulting and advisory services, we are contracted to support existing information technology and executive teams at both the customer and channel partner level, and provide security leadership and guidance. We validate overall corporate and infrastructure cybersecurity with the goal of maintaining and securing the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from threats and incidents. For the six months ended June 30, 2022, our cybersecurity consulting services revenue, excluding software sales, was approximately $627,000. For the twelve months ended December 31, 2021, our cybersecurity consulting services revenue, excluding software sales, was approximately $1,769,000; and |
| · | Provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, by providing in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment. For the six months ended June 30, 2022, our managed support services revenue was approximately $2,205,000. For the twelve months ended December 31, 2021, our managed support services revenue was approximately $4,325,000. |
Sales and Marketing Strategy
During 2021, approximately 89% of our business comes from our channel sales and approximately 11% from direct sales to end customers. Managed support services accounts for approximately 60% of total sales, cybersecurity software and services accounts for approximate 38% of total sales and other consulting services accounts for approximately 2% of total sales.
Virtually all managed information security support services revenue is derived from one customer, a major independent agency of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments as a subcontractor through our channel partner, Peraton. We are working to expand our managed information security support services business with our channel partner Peraton, and to potentially grow the current federal enterprise customer and to expand to other Peraton customers.
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We sell our cybersecurity software and services, including Nodeware, through our channel partners, which include direct channel partners, Telarus, TD SYNNEX, and Staples, and through our direct cybersecurity services teams. Our cybersecurity services include Chief Information Security Team as a Service (CISOTaaS ™), PenLogic™ penetration testing services, security assessments, incident response and others, and are provided through our channel partners and direct to end customers as a cybersecurity solution to the technical services they provide. Our channel partners utilize our expertise in cybersecurity to bring additional services to their end customers that are beyond their normal scope of offerings, and building our network of channel partners allows us the ability to efficiently gain access to a greater number of customers. We continue to drive development of our cybersecurity business through channel and direct marketing, social media programs, and fostering our extensive cybersecurity industry relationships. We are not reliant on any one customer for our cybersecurity software and services sales given that we work with a number of channel partners and direct customers. In addition to our cybersecurity software and services, we provide from time to time other information technology consulting services to existing clients.
Recent Developments
During the six months ended June 30, 2022, we had sales of approximately $3,364,000 million, an operating loss of approximately $1,295,000 and a net loss of approximately $1,701,000. During the year ended December 31, 2021, we had sales of approximately $7.2 million, an operating loss of approximately $1.4 million and a net loss of approximately $1.6 million, These losses were due primarily to increased investment in sales and marketing for Nodeware and related services, together with increased costs associated with our preparations to list on Nasdaq and with assessing potential acquisition targets.
During the year ended December 31, 2021, we had sales of approximately $7.2 million, an operating loss of approximately $1.4 million and a net loss of approximately $1.6 million, due primarily to increased investment in sales and marketing for Nodeware and related services, together with increased costs associated with our preparations to list on Nasdaq and with assessing potential acquisition targets. As a result of growing demand and accelerated growth in the cybersecurity market, we continue to grow our team of cybersecurity sales and technical consultants internally and leverage contractors when needed to fill short term gaps. For the six months ended June 30, 2022, we added 3 new employees, primarily to the sales and marketing team. We added 12 new employees, primarily in the areas of sales, marketing, and technical consulting for cybersecurity services in 2021. We had full year sales of approximately $7.2 million in 2020 and $7.1 million in 2019, generating operating income of approximately $1,000 and $329,000 and net income of approximately $676,000 and $48,000, respectively.
On August 8, 2022, the Company, as borrower, entered into a financing arrangement (the “Loan Agreement”) with Celtic Bank (the “Lender”), a Utah corporation. Pursuant to the Loan Agreement, the Lender agreed to lend the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the Loan Agreement, payments are due beginning August 15, 2022, and shall consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher. Subsequent payments shall also consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher, with the final payment due on February 6, 2024. The Loan is subject to customary events of default.
On July 29, 2022, the Company and Andrew Hoyen (“Hoyen Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Hoyen Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Hoyen Lender (the “Hoyen Note”). The Hoyen Note and the Hoyen Modification was approved by the disinterested members of our Board of Directors. The Hoyen Modification extends the due date of the Hoyen Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Hoyen Modification, the Company agreed to repay to Lender $16,000 of the accrued interest on the Hoyen Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 8,000 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Note was $10,930 as of July 29, 2022. Except as set forth in the Hoyen Modification, the terms of the Hoyen Note remain the same.
On June 30, 2022, and September 6, 2022 the Company and Donald W. Reeve (“Reeve Lender”), a director of the company, entered into note modification agreements (each a “Reeve Modification” and collectively, the “Reeve Modifications”) with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The 2020 Note, the 2021 Note and the Reeve Modifications were each approved by the disinterested members of our Board of Directors. The Reeve Modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note of $100,000 to January 1, 2023. The Reeve Modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616 will be due. Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.
In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware Cloud security solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing channel partner relationships.
On November 3, 2021, we entered into a financing arrangement (the “Bridge Loan”) with Mast Hill Fund, L.P. (“Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, the Mast Hill agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 28,000 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On February 15, 2022, we entered into a second financing arrangement (the “Second Bridge Loan”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 18,500 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On April 12, 2022, we entered into a third financing arrangement (the “Third Bridge Loan”) with Talos Victory Fund, LLC (“Talos” and together with Mast Hill, the “Lenders”) on substantially the same terms as our financing arrangements with Mast Hill. In exchange for a promissory note, the Talos agreed to lend the Company $296,000, which bears interest at a rate of eight percent (8%) per annum, less $29,600 original issue discount. As additional consideration for the financing, the Company issued Talos a 5-year warrant to purchase 14,800 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On May 31, 2022, we entered into a fourth financing arrangement (the “Fourth Bridge Loan” and together with the Bridge Loan, Second Bridge Loan, and Third Bridge Loans, the “Loans”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 17,750 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on the one-year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lenders have the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $5.00 per share. On April 29, 2022, Mast Hill exercised the warrant issued to them on November 3, 2021 in full on a cashless basis and acquired 17,205 shares of Common Stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for more information regarding the Loans.
On December 15, 2021, our Board approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock and recommended that the stockholders of the Company authorize the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On January 26, 2022, the company’s stockholders voted to authorize the reverse stock split. As of the date of this report, the Board has not set a record date or a ratio for the reverse stock split. The reverse stock split will not impact the number of authorized shares of common stock which will remain at 60,000,000 shares. Unless otherwise noted and other than in our financial statements and the notes thereto, the share and per share information in this prospectus reflects a proposed reverse stock split of the outstanding common stock and treasury stock of the Company at an assumed 50-to-1 ratio to occur immediately following the effective date but prior to the closing of the offering.
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Business Strategy
We have a threefold business strategy composed of:
| · | providing differentiated cybersecurity software and services to small to mid-sized enterprises who lack the internal resources to focus on cybersecurity related matters by combining customized software and professional services; |
| · | designing, developing, and marketing cybersecurity SaaS solutions, including our Nodeware solution; and |
| · | identifying other cybersecurity companies to acquire as part of a roll-up strategy. |
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the market at a time when competition and consolidation in these markets is on the rise. Our software and services are designed to simplify the security needs of our customers and channel partners, with a focus on the small to mid-sized enterprises, and we believe our ability to integrate our product and service offerings differentiates them from our competitors. In addition, we support our channel partners by providing recurring-revenue business models for both services and our cybersecurity SaaS solutions.
Cybersecurity is a constantly evolving field, so we devote significant efforts in developing proprietary software and services to meet our customer and channel partners’ evolving needs. These efforts have resulted in the development of our patented and patent-pending Nodeware solution. We expect to continue to make significant investments in developing other intellectual property to serve as the core to other proprietary software and services.
Historically, a significant portion of our revenues has been derived through our managed support services, however, we believe our cybersecurity SaaS solutions, including Nodeware, present an opportunity for significant growth. We believe that Nodeware’s ability to be deployed in an underserved market segment, across a wide variety of networks and the ability to integrate it into existing and new cybersecurity software and services, will allow us to significantly grow this segment of our business. Similarly, we believe Nodeware’s SaaS recurring revenue business model and its flexibility as a standalone or integrated solution makes it an attractive part of our channel partners’ portfolio of products. Accordingly, in 2021 and 2022, we made significant investments in Nodeware sales and marketing to grow our team of cybersecurity sales and technical consultants. As a result, we believe we are seeing the pipeline growth expected from focused efforts, which we anticipate will convert to revenue growth in 2022, 2023 and beyond.
We believe the market for cybersecurity services for small and medium-sized enterprises is fragmented and does not currently meet the needs of this customer base. The market is fragmented and is beginning to consolidate, which is why we are seeking to strategically acquire other cybersecurity technology and services companies.
The following sections define specific components of our business strategy.
Nodeware
Nodeware is a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware’s flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware assesses vulnerabilities in a computer network using proprietary 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. As described below, Nodeware has one patent and one patent pending. We intend to develop other intellectual property that serve as the core to other proprietary software and services to market through a channel of domestic and international partners and distributors.
Nodeware provides an economical solution for small and medium-sized enterprises as compared to costly solutions focused on enterprise sized customers, and is designed to accommodate the varying network needs of our end customers’ organizations and networks. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. Nodeware creates an opportunity for our channel partners to sell and use a product that provides greater visibility into the network security of an end customer. Since 2018, we have continued to expand our portfolio of channel partners, which now includes Telarus, TD SYNNEX, Staples, and a growing list of MSPs, MSSPs, agents and distributors and government contractors.
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In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of Nodeware, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements across other current future subsidiaries as IGI’s roll up of cybersecurity companies comes to fruition. This also enhances our ability to bring new cloud and SaaS cybersecurity related solutions to market through our growing channel partner relationships.
Cybersecurity Services
In addition to Nodeware, we provide cybersecurity consulting services that include incident response, security awareness training, cybersecurity risk management, IT governance and compliance, security assessment services, (CISOTaaS ™) and PenLogic™ penetration testing services offerings to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology, in North America. Our cybersecurity consulting projects leverage different technology platforms and processes, such as Nodeware, to create documentation and processes that a customer can use to continually improve overall IT governance and corporate security. We validate overall network and infrastructure security with the goal of maintaining the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from cybersecurity threats and incidents. We continue to enhance our cybersecurity services based on feedback from customers and changes in the market.
Managed Support Services
We also provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, where we assume the responsibility for providing a defined set of cybersecurity services. These services typically include in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment.
Intellectual Property
We believe that our intellectual property is an asset that will contribute to the growth and profitability of our business. We rely on a combination of patented, patent-pending and confidentiality procedures, trademarks and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks.
In May 2016, we filed a provisional patent application for our proprietary product, Nodeware, and launched it commercially in November 2016. In May 2017, we filed a utility patent application for Nodeware: U.S. Patent No. 10,999,307, was issued on May 4, 2021, for NETWORK ASSESSMENT SYSTEMS AND METHODS THEREOF U.S. Patent Application Serial No. 15/600,297, filed May 19, 2017, claiming priority of U.S. Provisional Patent Application Serial No. 62/338,904, filed May 19, 2016. The patent will remain in effect for four years from the date of issue and may be extended for up to twenty years from the filing date. Therefore, the expiration date of the subject patent, assuming all milestones to extend are met, is July 19, 2037.
In December 2019, we filed a second provisional patent application and in December 2020 we filed the subsequent action on the patent on Nodeware. In 2020 and 2021, we created updates and improvements to the platform in response to COVID-19 needs and impact such as a downloadable Windows executable version along with Windows, Mac, and Linux Agents that could be downloaded to a remote PC or server. A number of enhancements related to data management, threat intelligence, and user functionality were part of these updates.
The efforts we have taken to protect our intellectual property may not be sufficient or effective. As a result of this uncertainty and overall significance to the financial statements, these costs have been expensed.
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 and can mature into a patent once that office determines that the claimed invention meets the standards for patentability.
Our current patent and trademark portfolio consists of a patent for the Nodeware solution and process for scanning for vulnerabilities and a pending patent covering the methodologies associated with identifying and cataloging the assets on or across any physical or cloud network, together with a registered trademark for the “Nodeware” name and other trademarks and tradenames associated with our company and products. We intend to continue to work to enhance our intellectual property position on the Nodeware solution and in other appropriate cybersecurity technology we generate.
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Research and Development
Our research and development efforts are focused on ensuring our software and services continually adapt to ever-evolving cybersecurity threats, developing new and improved functionality to meet our customers’ needs, and to enable robust and efficient integration with other industry solutions. Our research and development team is responsible for the design, development, testing and quality of our software, including Nodeware, and works to ensure that our software is available, reliable and stable.
We believe the timely development of new features and the enhancement of our existing solution(s) that address continuously evolving cybersecurity risks is essential to maintaining our competitive position. Our research and development team works closely with our channel partners, customers, and internal teams to collect user feedback to enhance our development process to continually incorporate suggestions and feedback. We also believe our research and development teams’ focus on developing new products will help us expand our business and improve our market position. We invest substantial resources in research and development to ensure that the functionalities of Nodeware can be robustly and efficiently integrated with other industry solutions because we believe this is key to our ability to expand the presence of Nodeware and our other software and services in the cybersecurity market. We utilize an agile development process to deliver numerous releases, fixes and feature updates on a regular basis and capitalize qualifying costs of developing larger scale projects. Our research and development team is primarily based in Pittsford, New York, and we maintain additional research and development capabilities in certain other locations who supplement our core team.
In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing direct customer and channel partner relationships. We believe a continued focus on intellectual property development creates differentiation in the market for cybersecurity.
Costs incurred prior to reaching technological feasibility are expensed as incurred, and subsequently they are capitalized until product launch.
Certifications
We possess certifications with our business and technology partners and our technical support personnel maintain a number of relevant certifications and qualifications in certain software applications and in the cybersecurity space. We believe having these certifications and qualifications demonstrates to our channel partners and customers that we have the appropriate level of expertise to support their needs. These certifications are examples of our concerted effort to grow and expand our cybersecurity specialization, and include the following:
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 cybersecurity 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 cybersecurity group have this certification.
CEH - Certified Ethical Hacker. CEH and CEH Master programs are 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 cybersecurity group have this certification.
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CISA - Cybersecurity and Infrastructure Agency leads the national effort to understand, manage, and reduce risk to our cyber and physical infrastructure.
CRISC - Certified in Information Systems and Risk Controls and is a certification in enterprise risk management.
CMMC-AB RP - Cybersecurity Maturity Model Certification is a unified standard for implementing cybersecurity across the defense industrial base, which includes over 300,000 companies in the supply chain.
OSCP - Offensive Security Certified Professional is a certification program that focuses on hands-on offensive information security skills.
GIAC - Global Information Assurance Certification is an information security certification entity that specializes in technical and practical certification for cybersecurity professionals.
Penetration Tester (GPEN)
Certified Intrusion Analyst (GCIA)
Certified Incident Handler (GCIH)
Certified Enterprise Defender (GCED)
Security Essentials (GSEC)
Python Coder (GPYC)
CompTIA Security+ (SEC+) is a global certification that validates the baseline skills in order to perform core security functions.
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 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.
Regulations
We follow standard regulations and standards as part of our ongoing processes: NYS Shield Act, Sarbanes Oxley , National Institute of Standards and Technology Cybersecurity Framework, and Payment Card Industry (“PCI”) level 4 self-assessment.
Competition
We face competition from many companies in the evolving cybersecurity market. We compete with other MSPs and IT professional services firms who have cybersecurity offerings, MSSPs, and cybersecurity product and software developers operating in the North American market. We have competitors who are both publicly listed and private companies, and that are regional and national in coverage. Many of our larger competitors have substantially greater capital resources, research and development staff, sales, and marketing resources, facilities, and experience than we do. We obtain a portion of our business based on proposals submitted in response to requests from potential and current clients, who will typically also receive proposals from our competitors. Specifically, Nodeware faces direct competition from companies such as Rapid 7, Qualys, and Tenable in the vulnerability management market.
Facilities
Our principal offices are located at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534, where we lease approximately 7,181 square feet of office space under a lease that expires in 2029. Because approximately 85% of the workforce is remote, we felt it was prudent to reduce the size of our current facility. As a result, we entered into a new lease commencing June 1, 2022, for a smaller footprint than provided for under our previous lease.
We do not own or operate, and have no plans to establish, any manufacturing facilities.
Employees
As of September 6, 2022, we have 58 full-time employees, including 38 in information technology services, 4 in executive management, 4 in accounting, finance and administration, 2 in software development and 10 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 between 2 and 10 employees in sales, technical support, marketing and cybersecurity consulting to meet growing demands.
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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.
Company Information Available on the Internet
We maintain a website at https://igicybersecurity.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 prospectus and is not incorporated by reference into this prospectus.
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, New York 14534, and our phone number is (585) 385-0610. Our business is in the field of delivering cybersecurity services, licensing, and selling our cybersecurity solutions, including Nodeware, and distributing third party software licenses.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
You should read the following discussion and analysis of our financial condition and results of operations together with our historical audited annual financial statements as of and for the years ended December 31, 2021 and 2020, and unaudited interim financial statements as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 and the related notes appearing elsewhere in this prospectus. Among other things, those historical financial statements include more detailed information regarding the basis of presentation for the financial data than are included in the following discussion. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. 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. See the “Cautionary Statement Regarding Forward-Looking Statements” above. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus. The following discussion and analysis of our financial condition and results of operations is presented without giving effect to the proposed reverse stock split.
Business Overview
Headquartered in Pittsford, New York, Infinite Group is a developer of cybersecurity software and related cybersecurity consulting, advisory and managed information security services. We principally sell our software and services through indirect channels such as MSPs, MSSPs, agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the cybersecurity market at a time when competition and consolidation in these markets are on the rise. Our strategy to differentiate our cybersecurity software and services from our competitors is to combine customized software and professional services, and grow our business by designing, developing, and marketing cybersecurity SaaS solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI CyberLabs, to fill technology gaps we identify, and then we bring these software and services to market through our existing channel partner and customer relationships. Our software and services are designed to simplify and manage the security needs of our customers and channel partners in a variety of environments. We focus on the small and medium-sized enterprises market. We support our channel partners by providing recurring-revenue business models for both services and through our cybersecurity SaaS solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions.
Business Strategy
We have a threefold business strategy composed of:
| · | providing differentiated cybersecurity software and services to small to mid-sized enterprises who lack the internal resources to focus on cybersecurity related matters by combining customized software and professional services; |
| · | designing, developing, and marketing cybersecurity SaaS solutions, including our Nodeware solution; and |
| · | identifying other cybersecurity companies to acquire as part of a roll-up strategy. |
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the market at a time when competition and consolidation in these markets is on the rise.
Our software and services are designed to simplify the security needs of our customers and channel partners, with a focus on the small to mid-sized enterprises, and be believe our ability to integrate our product and service offerings differentiates them from our competitors. In addition, we support our channel partners by providing recurring -revenue business models for both services and our cybersecurity SaaS solutions.
Cybersecurity is a constantly evolving field, so we devote significant efforts in developing proprietary software and services to meet our customer and channel partners’ evolving needs. These efforts have resulted in the development of our patented and patent-pending Nodeware solution. We expect to continue to make significant investments in developing other intellectual property to serve as the core to other proprietary software and services.
Historically, a significant portion of our revenues has been derived through our managed support services, however, we believe our cybersecurity SaaS solutions, including Nodeware, present an opportunity for significant growth. We believe that Nodeware’s ability to be deployed across a wide variety of networks and the ability to integrate it into existing and new cybersecurity solutions, will allow us to significantly grow this segment of our business. Similarly, we believe Nodeware’s SaaS recurring revenue business model and its flexibility as a standalone or integrated solution makes it an attractive part of our channel partners’ portfolio of products. Accordingly, in 2021 and 2022, we made significant investments in IGI and CyberLabs sales and marketing to grow our team of cybersecurity sales and technical consultants. As a result, we believe we are seeing the pipeline growth expected from focused efforts, which we anticipate will convert to revenue growth in 2022, 2023 and beyond.
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We believe the market for cybersecurity services for small and medium-sized enterprises is fragmented and does not currently meet the needs of this customer base. The market is fragmented and is beginning to consolidate, which is why we are seeking to strategically acquire other cybersecurity technology and services companies.
Recent Developments
On August 8, 2022, the Company, as borrower, entered into a financing arrangement (the “Loan Agreement”) with Celtic Bank (the “Lender”), a Utah corporation. Pursuant to the Loan Agreement, the Lender agreed to lend the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the Loan Agreement, payments are due beginning August 15, 2022, and shall consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty-day period, whichever is higher. Subsequent payments shall also consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728.00 over a sixty-day period, whichever is higher, with the final payment due on February 6, 2024. The Loan is subject to customary events of default.
On July 29, 2022, the Company and Andrew Hoyen (“Hoyen Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Hoyen Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Hoyen Lender (the “Hoyen Note”). The Hoyen Note and the Hoyen Modification was approved by the disinterested members of our Board of Directors. The Hoyen Modification extends the due date of the Hoyen Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Hoyen Modification, the Company agreed to repay to Lender $16,000 of the accrued interest on the Hoyen Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 8,000 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Note was $10,930 as of July 29, 2022. Except as set forth in the Hoyen Modification, the terms of the Hoyen Note remain the same.
On June 30, 2022, and September 6, 2022 the Company and Donald W. Reeve (“Reeve Lender”), a director of the company, entered into note modification agreements (each a “Reeve Modification” and collectively, the “Reeve Modifications”) with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The 2020 Note, the 2021 Note and the Reeve Modifications were each approved by the disinterested members of our Board of Directors. The Reeve Modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note of $100,000 to January 1, 2023. The Reeve Modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616 will be due. Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.
In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware Cloud security solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing channel partner relationships.
On November 3, 2021, we entered into a financing arrangement (the “Bridge Loan”) with Mast Hill Fund, L.P. ( “Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, the Mast Hill agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 28,000 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On February 15, 2022, we entered into a second financing arrangement (the “Second Bridge Loan”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 18,500 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On April 12, 2022, we entered into a third financing arrangement (the “Third Bridge Loan”) with Talos Victory Fund, LLC (“Talos” and together with Mast Hill, the “Lenders”) on substantially the same terms as our financing arrangements with Mast Hill. In exchange for a promissory note, the Talos agreed to lend the Company $296,000, which bears interest at a rate of eight percent (8%) per annum, less $29,600 original issue discount. As additional consideration for the financing, the Company issued Talos a 5-year warrant to purchase 14,800 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. On May 31, 2022, we entered into a fourth financing arrangement (the “Fourth Bridge Loan” and together with the Bridge Loan, Second Bridge Loan, and Third Bridge Loans, the “Loans”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 17,750 shares of Company common stock at a fixed price of $8.00 per share, subject to price adjustments for certain actions. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on the one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lenders have the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $5.00 per share. On April 29, 2022, Mast Hill exercised the warrant issued to them on November 3, 2021 in full on a cashless basis and acquired 17,205 shares of Common Stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for more information regarding the Loans.
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On December 15, 2021, our board of directors (the “Board”) approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock and recommended that the stockholders of the Company authorize the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On January 26, 2022, the company’s stockholders voted to authorize the reverse stock split. As of the date of this report, the Board has not set a record date or a ratio for the reverse stock split. The reverse stock split will not impact the number of authorized shares of common stock which will remain at 60,000,000 shares. Unless otherwise noted and other than in our financial statements and the notes thereto, the share and per share information in this prospectus reflects a proposed reverse stock split of the outstanding common stock and treasury stock of the Company at an assumed 50-to-1 ratio to occur immediately following the effective date but prior to the closing of the offering.
Results of Operations
Comparison of the three and six months ended June 30, 2022 and 2021
The following discussion analyzes our results of operations for the years ended June 30, 2022 and 2021. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.
The following table compares our statements of operations data for the years ended June 30, 2022 and 2021. Certain trends suggested by this table are not indicative of future operating results
|
| Three Months Ended June 30, |
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| 2022 vs 2021 |
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| |||||||||||
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| As a % of |
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| As a % of |
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| Amount of |
|
| % Increase |
| ||||||||
|
| 2022 |
|
| Sales |
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| 2021 |
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| Sales |
|
| Change |
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| (Decrease) |
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|
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| ||||||
Sales |
| $ | 1,696,492 |
|
|
| 100.0 | % |
| $ | 1,797,504 |
|
|
| 100.0 | % |
| $ | (101,012 | ) |
|
| (5.6 | )% |
Cost of sales |
|
| 1,059,639 |
|
|
| 62.5 |
|
|
| 1,109,223 |
|
|
| 61.7 |
|
|
| (49,584 | ) |
|
| (4.5 | ) |
Gross profit |
|
| 636,853 |
|
|
| 37.5 |
|
|
| 688,281 |
|
|
| 38.3 | % |
|
| (51,428 | ) |
|
| (7.5 | ) |
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
General and administrative |
|
| 613,317 |
|
|
| 36.2 |
|
|
| 541,711 |
|
|
| 30.1 |
|
|
| 71,606 |
|
|
| 13.2 |
|
Selling |
|
| 612,957 |
|
|
| 36.1 |
|
|
| 507,042 |
|
|
| 28.2 |
|
|
| 105,915 |
|
|
| 20.9 |
|
Total cost and expenses |
|
| 1,226,274 |
|
|
| 72.3 |
|
|
| 1,048,753 |
|
|
| 58.3 |
|
|
| 177,521 |
|
|
| 16.9 |
|
|
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|
|
|
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|
|
|
|
|
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|
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|
|
|
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Operating loss |
|
| (589,421 | ) |
|
| (34.7 | ) |
|
| (360,472 | ) |
|
| (20.1 | ) |
|
| (228,949 | ) |
|
| (63.5 | ) |
Interest expense (net) |
|
| (243,779 | ) |
|
| (14.4 | ) |
|
| (56,031 | ) |
|
| (3.1 | ) |
|
| (187,748 | ) |
|
| (335.1 | ) |
Net loss |
| $ | (833,200 | ) |
|
| (49.1 | )% |
| $ | (416,503 | ) |
|
| (23.2 | )% |
| $ | (416,697 | ) |
|
| (100.0 | )% |
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Net loss per share - basic and diluted |
| $ | (0.03 | ) |
|
|
|
|
| $ | (0.01 | ) |
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|
|
|
| $ | (0.02 | ) |
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| Table of Contents |
|
| Six Months Ended June 30, |
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| 2022 vs 2021 |
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| As a % of |
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| As a % of |
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| Amount of |
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| % Increase |
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| 2022 |
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| Sales |
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| 2021 |
|
| Sales |
|
| Change |
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| (Decrease) |
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Sales |
| $ | 3,363,562 |
|
|
| 100.0 | % |
| $ | 3,621,846 |
|
|
| 100.0 | % |
| $ | (258,284 | ) |
|
| (7.1 | )% |
Cost of sales |
|
| 2,180,879 |
|
|
| 64.8 |
|
|
| 2,182,138 |
|
|
| 60.2 |
|
|
| (1,259 | ) |
|
| (0.1 | ) |
Gross profit |
|
| 1,182,683 |
|
|
| 35.2 |
|
|
| 1,439,708 |
|
|
| 39.8 | % |
|
| (257,025 | ) |
|
| (17.9 | ) |
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|
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|
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|
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General and administrative |
|
| 1,217,300 |
|
|
| 36.2 |
|
|
| 1,006,103 |
|
|
| 27.8 |
|
|
| 211,197 |
|
|
| 21.0 |
|
Selling |
|
| 1,260,582 |
|
|
| 37.5 |
|
|
| 894,767 |
|
|
| 24.7 |
|
|
| 365,815 |
|
|
| 40.9 |
|
Total cost and expenses |
|
| 2,477,882 |
|
|
| 73.7 |
|
|
| 1,900,870 |
|
|
| 52.5 |
|
|
| 577,012 |
|
|
| 30.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
| (1,295,199 | ) |
|
| (38.5 | ) |
|
| (461,162 | ) |
|
| (12.7 | ) |
|
| (834,037 | ) |
|
| (180.9 | ) |
Interest expense (net) |
|
| (406,235 | ) |
|
| (12.1 | ) |
|
| (107,568 | ) |
|
| (3.0 | ) |
|
| (298,667 | ) |
|
| (277.7 | ) |
Net loss |
| $ | (1,701,434 | ) |
|
| (50.6 | )% |
| $ | (568,730 | ) |
|
| (15.7 | )% |
| $ | (1,132,704 | ) |
|
| (199.2 | )% |
Sales
Our managed support service sales increased by 5.5% from $1,057,431 during the three months ended June 30, 2021 to $1,115,607 during the corresponding period of 2022. For the six month period ended June 30, managed support service sales increased 3.6% from $2,128,331 in 2021 to $2,204,614 for the same period in 2022. Managed support service sales comprised approximately 66% of our sales in both the three and six months ended June 30, 2022, and approximately 59% for the same two periods in 2021. The increase in our managed support service sales during the three and six months ended June 30, 2022 was due to additional projects requested by Perspecta, offset by the continued decline of virtualization subcontract projects assigned to us by VMWare due to projects coming to a conclusion in 2021. The decline in virtualization subcontract projects has been a trend occurring since 2015 that we expect to continue for the duration of 2022.
Our cybersecurity projects and software sales, primarily to SMEs, decreased by 15.7% to $580,885 during the three months ended June 30, 2022, from $689,073 during the corresponding period of 2021. These same sales decreased by 16.7% to $1,158,948 during the six months ended June 30, 2022, from $1,391,515 for the six-month period ended June 30, 2021, respectively. The decrease is primarily due to a temporary decline in the number of cybersecurity projects, the mix of recurring versus one-time projects, and the completion of those projects for revenue recognition. This was offset primarily by the growth of 76% in Nodeware revenue for the six-month period ended June 30, 2022 over 2021. We expect the revenue to grow due to increased projects in the sales pipeline and completion of projects in the coming months.
Other IT consulting services sales declined during the three months ended June 30, 2022, decreasing by $51,000 from the same period in 2021. These same sales declined during the six months ended June 30, 2022 by $102,000 from the same period in 2021. The decline in other IT consulting services sales for the three and six months ended June 30, 2022 was due to the termination of a consulting contract, which occurred during the second quarter of 2021.
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Cost of Sales and Gross Profit
Cost of sales principally represents compensation expense for our employees. Cost of sales decreased by 4.5% to $1,059,639 during the three months ended June 30, 2022 from $1,109,223 during the corresponding period of 2021. The decrease in cost of sales during the three months ended June 30, 2022 from 2021 was due to a reduction in headcount of marketing and sales personnel. Cost of sales decreased slightly during the six months ended June 30, 2022 from the same period in 2021, by 0.1%, decreasing from $2,182,138 to $2,180,879.
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 of $613,317 for the three months ended June 30, 2022 increased 13% from $541,711 for the same quarter of 2021. For the six months ended June 30, 2022, general and administrative costs were 21% higher than the same period in 2021, increasing to $1,217,300 from $1,006,103. These were primarily due to the increases to professional fees for legal, accounting and consulting services of approximately $108,000, for the comparative three-month periods, and $198,000 for the comparative six month period.
Selling Expenses
Selling expenses of $612,957 for the three months ended June 30, 2022 increased 21% from $507,042 for the same quarter of 2021. The increase in selling expenses is due to the hiring of additional salespeople during 2021 to sell our cybersecurity services and software, and investments in consultants and partners to identify and sell more of our services and software. The increase in selling expenses from the hiring of new personnel was approximately $109,000 higher for the three months ended June 30, 2022 as compared to 2021 and spending on consulting partners was approximately $22,000 higher for the same respective periods. For the six months ended June 30, 2022, Selling expenses of $1,260,582 increased 41% from $894,767 for the same period in 2021. This increase is primarily related to the hiring of additional salespeople during 2021 as well as investment in consultants and partners.
Operating Income (Loss)
For the three months ended June 30, 2022 and 2021, operating loss was $589,421 and $360,472, respectively, for an increase in the loss by $228,949. For the six months ended June 30, 2022, the operating loss was $1,295,199, an increase in the loss by $834,037 from $461,162 in the same period of 2021. The increase in our operating loss from the previous year is principally attributable to the decrease in sales, growth of our sales team and the associated costs, and investment in the growth of our business as well as professional fees incurred for the six months ended June 30, 2022 as compared to 2021, as discussed above.
Interest Expense
Net interest expense of $243,779 for the three months ended June 30, 2022, increased 335% from expense of $56,031 for the same quarter of 2021. Net interest expense of $406,235 for the six months ended June 30, 2022, increased 278% from expense of $107,571 for the same period of 2021. The increase in interest expense is primarily attributable to the bridge loans taken in the last three quarters.
Net Loss
For the three months ended June 30, 2022 and 2021, net loss was $833,200 and $416,503, respectively, an increase in the loss by $416,696. For the six months ended June 30, 2022 and 2021, net loss was $1,701,434 and $568,730, respectively. The increase in both comparable periods is attributable primarily to the selling, general and administrative, and interest items discussed above.
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Liquidity and Capital Resources
At June 30, 2022, we had cash of $1,594. At June 30, 2022, we had a working capital deficit of approximately $4,400,000 and a current ratio of 0.16.
During 2022, our primary source of liquidity is cash provided by collections of accounts receivable and our factoring line of credit. We maintain an accounts receivable financing line of credit with an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain of our on-going costs and expenses. At June 30, 2022, based on eligible accounts receivable, we had $1,000 available under this arrangement. We expect sales during 2022 to generate additional accounts receivable eligible for factoring, that will support our operations. We pay fees based on the length of time that the invoice remains unpaid.
At June 30, 2022, we had current notes payable of $229,000 to related parties. $100,000 of this debt was extended from September 1, 2022 and is now due on January 1, 2023. The remaining $129,000 are in the form of demand notes with an interest rate of 6%.
At June 30, 2022, we had current notes payable of approximately $944,000 to third parties, which includes convertible notes payable of approximately $150,000. 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.
Also included in the current notes payable are three Bridge Loans with Mast Hill Fund, L.P., which each bear interest at a rate of 8%. We plan to use the proceeds from the Bridge Loans to substantially enhance our marketing of CyberLab’s Nodeware solution, in order to significantly increase its growth. A total of approximately $658,000 was recorded as deferred note costs associated with these transactions. At June 30, 2022, the unamortized balance of the deferred notes costs was approximately $385,000. See Note 6 of the 2021 Audited Financial Statements for more information regarding the first Bridge Loan. See our Form 8-K from February 15, 2022 for more information regarding the second Bridge Loan. See our Form 8-K from May 31, 2022 for more information regarding the third Bridge Loan. The gross notes payable to Mast Hill amount at June 30, 2022 was approximately $971,000.
Notes payable also includes a bridge loan from Talos Victory Fund, LLC., with an initial principal amount of $296,000, which bears interest at a rate of 8%. A total of approximately $129,000 was recorded as deferred note costs associated with the loan. As of June 30, 2022, the unamortized balance of the deferred note cost was approximately $101,000. See our Form 8-K from April 12, 2022, for more information regarding this loan. The gross note payable to Talos amount at June 30, 2022 was approximately $296,000.
We entered into unsecured lines of credit financing agreements (the “LOC Agreements”) with two related parties in previous years. The LOC Agreements provide for working capital of up to $100,000 through July 31, 2022 and $75,000 through January 2, 2023. At June 30, 2022, we had approximately $15,000 of availability under the LOC Agreements.
During the 2021, we issued demand notes to two board members for $55,000 in total. The demand notes bear a 6% interest rate. These were outstanding as of June 30, 2022.
At June 30, 2022, we had $765,000 of current maturities of long-term obligations to third parties. This is comprised of various notes including long-term notes to third parties of $265,000 due on January 1, 2018 (plus accrued interest of approximately $234,200), and approximately $500,000 due on December 31, 2021 which have not been renewed or amended.
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At June 30, 2022, we had $225,000 of current maturities of long-term obligations to related parties. $200,000 is due on January 1, 2023. $25,000 is due on June 30, 2023.
We plan to renegotiate the terms of the various notes payable, seek funds to repay the notes or use a combination of both alternatives. We cannot provide assurance that we will be able to repay current notes payable or obtain extensions of maturity dates for long-term notes payable when they mature or that we will be able to repay or otherwise refinance the notes at their scheduled maturities.
We have a 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 balance was $499,000 at June 30, 2022.
The following table sets forth our cash flow information for the periods presented:
|
| Six Months Ended June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net cash used by operating activities |
| $ | (636,906 | ) |
| $ | (12,380 | ) |
Net cash used by investing activities |
|
| (111,347 | ) |
|
| (129,897 | ) |
Net cash provided by financing activities |
|
| 650,415 |
|
|
| 113,930 |
|
Net decrease in cash |
| $ | (97,838 | ) |
| $ | (28,347 | ) |
Cash Flows Used by Operating Activities
Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. We bill our clients weekly or monthly after services are performed as well as collect down payments depending on the contract terms. The cash impact of our net loss of $1,701,434 for the six months ended June 30, 2022, was offset in part by non-cash expenses and credits of $425,359. In addition, the cash impact of our net loss was further offset by a decrease in accounts receivable and other assets of $94,288, a decrease in accrued payroll, deferred revenue and other expenses payable of $4,784, and an increase in accounts payable of $549,665 resulting in cash used by operating activities of $636,906.
We have increased our marketing of Nodeware to our IT channel partners who resell to their customers. We have made investments in our cyber security team for penetration testing, CISOTaaS and other services. 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 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, incremental borrowings and funds from the planned offering described above, as needed.
Cash Flows Used by Investing Activities
In the quarters ended June 30, 2022 and 2021, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The slight decrease from 2021 was primarily due to less development activities in 2022 that were capitalized. We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business. We do not anticipate our continued investment to be significant.
Cash Flows Provided by Financing Activities
During the six months ended June 30, 2022, we received $865,455 from various bridge loans from the Mast Hill Fund L.P. and Talos Victory Fund, LLC. This is comprised of gross proceeds of $1,021,000 less debt issuance costs of $155,545. We also paid principal of $215,040 of principal on the Mast Hill Fund L.P. bridge loan established in November 2021.
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Credit Resources
We maintain an accounts receivable financing line of credit from an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain costs and expenses. At June 30, 2022, we had financing availability, based on eligible accounts receivable, of approximately $1,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately $16,000 of available credit under various lines of credit as of June 30, 2022.
During May 2019, we originated a line of credit note payable for a $500,000 with a related party and borrowed $499,000 and have $1,000 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 June 30, 2021, we had $15,000 available under these financing agreements. The maturity date of the $75,000 line of credit is January 2023, whereas the maturity date of the $100,000 line of credit has been extended to July 2023.
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 for at least the next 12 months. The funds from the equity raise will allow us to support and accelerate the internal growth of our operations and offer additional opportunities if they arise.
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: issuance of equity; cash from collections of accounts receivable; additional borrowing from related and third parties; use of our existing accounts receivable credit facility; or a refinancing of our accounts receivable credit facility.
Comparison of the years ended December 31, 2021 and 2020
The following discussion analyzes our results of operations for the years ended December 31, 2021 and 2020. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.
The following table compares our statements of operations data for the years ended December 31, 2021 and 2020. Certain trends suggested by this table are not indicative of future operating results.
|
| Years Ended December 31, |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| 2021 vs. 2020 |
| ||||||||||
|
|
|
|
| As a % of |
|
|
|
| As a % of |
|
| Amount of |
|
| % Increase |
| |||||||
|
| 2021 |
|
| Sales |
|
| 2020 |
|
| Sales |
|
| Change |
|
| (Decrease) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Sales |
| $ | 7,224,242 |
|
|
| 100.0 | % |
| $ | 7,219,446 |
|
|
| 100.0 | % |
| $ | 4,796 |
|
|
| 0.1 | % |
Cost of sales |
|
| 4,489,306 |
|
|
| 62.1 |
|
|
| 4,177,268 |
|
|
| 57.9 |
|
|
| 312,038 |
|
|
| 7.5 |
|
Gross profit |
|
| 2,734,936 |
|
|
| 37.9 |
|
|
| 3,042,178 |
|
|
| 42.1 |
|
|
| (307,242 | ) |
|
| (10.1 | ) |
General and administrative |
|
| 2,159,378 |
|
|
| 29.9 |
|
|
| 1,696,415 |
|
|
| 23.5 |
|
|
| 462,963 |
|
|
| 27.3 |
|
Selling |
|
| 1,983,127 |
|
|
| 27.5 |
|
|
| 1,344,472 |
|
|
| 18.6 |
|
|
| 638,655 |
|
|
| 47.5 |
|
Total operating expenses |
|
| 4,142,505 |
|
|
| 57.3 |
|
|
| 3,040,887 |
|
|
| 42.1 |
|
|
| 1,101,618 |
|
|
| 36.2 |
|
Operating income (loss) |
|
| (1,407,569 | ) |
|
| (19.5 | ) |
|
| 1,291 |
|
|
| 0.0 |
|
|
| (1,408,860 | ) |
|
| (109,129.4 | ) |
Other income |
|
| 120,505 |
|
|
| 1.7 |
|
|
| 967,007 |
|
|
| 13.4 |
|
|
| (846,502 | ) |
|
| (87.5 | ) |
Interest expense, net |
|
| (281,749 | ) |
|
| (3.9 | ) |
|
| (292,302 | ) |
|
| (4.0 | ) |
|
| 10,553 |
|
|
| (3.6 | ) |
Net income (loss) |
| $ | (1,568,813 | ) |
|
| (21.7 | )% |
| $ | 675,996 |
|
|
| 9.4 | % |
| $ | (2,244,809 | ) |
|
| (332.1 | )% |
Net income (loss) per share - basic |
| $ | (0.05 | ) |
|
|
|
|
| $ | 0.02 |
|
|
|
|
|
| $ | (0.07 | ) |
|
|
|
|
Net income (loss) per share diluted |
| $ | (0.05 | ) |
|
|
|
|
| $ | 0.02 |
|
|
|
|
|
| $ | (0.07 | ) |
|
|
|
|
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| Table of Contents |
Our managed support service sales decreased by 7.4% from $4,669,570 during the twelve months ended December 31, 2020 to $4,325,067 during the corresponding period of 2021. VMWare represented a decrease of approximately $232,000 and Managed Information Security Services decreased by approximately $113,000. Managed support service sales accounted for approximately 60% of our sales in 2021 and approximately 65% for the same period in 2020. The decline in our managed support service sales during 2021 was due to the continued declines of virtualization subcontract projects assigned to us by VMWare and existing projects coming to a conclusion. The decline in virtualization subcontracting projects has been a trend occurring since 2015 and we discontinued the business in 2021. We expect our Managed Information Security Services sales to remain steady in 2022.
Our cybersecurity software and services sales, primarily to SMEs, increased by 22.2% to $2,793,057 during the twelve months ended December 31, 2021 from $2,285,876 during the corresponding period of 2020. The increase in cybersecurity software and services sales during 2021 was attributable to increased sales efforts of our sales team in finding new customers. We expect our cybersecurity software and services business to continue to grow due to our expanding salesforce, channel and marketing programs.
Other IT consulting services sales decreased by $145,000 or 54.9% during the twelve months ended December 31, 2021 as compared to 2020. The decline in other IT consulting services sales was due to the termination of a consulting contract, which occurred during the first half of 2021.
Cost of Sales and Gross Profit
Cost of sales principally represents the compensation expense for our employees (primarily the cost of our IT services group). In smaller amounts, we also incurred cost of sales for third party software licenses for our commercial SME partners. Cost of sales increased by 7.5% to $4,489,306 during the twelve months ended December 31, 2021 from $4,177,268 during the corresponding period of 2020. The increase in cost of sales during the twelve months ended December 31, 2021 from 2020 was due to an increase in salaried employees amounting to an increase of approximately $368,000 to support our cybersecurity software and services team, partially offset by a reduction in headcount of hourly employees in supporting our managed support services (approximately $73,000).
Gross profit decreased by 10.1% to approximately $2,734,936 for 2021. The primary driver of the reduction in gross profit was the increase in cost of sales in 2021 from 2020 due to the cost of the three new salaried employees to support our cybersecurity software and services team.
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 by $462,963 in 2021 due primarily to increases in salaries and benefits of approximately $165,000, consulting expenses of approximately $137,000, and legal fees of approximately $161,000. Corporate marketing expenses decreased by approximately $54,000.
Selling Expenses
The increase of $638,655 in selling expenses to $1,983,127 in 2021 was principally due to the increase of employee salaries, commissions and benefits totaling approximately $403,000 due primarily to the growth to the cyber security and CyberLabs leadership and sales teams. The remaining increase is attributable to several smaller items including amortization of development labor, marketing and consulting fees.
Operating Income (Loss)
The decrease of approximately $1,408,860 in our operating income for 2021 was attributable to a decrease in gross profit of $307,242, an increase in our general and administrative expenses of $462,963 and our selling expenses of $638,655. The decrease in our operating income from the previous year is principally attributable to the growth of our sales team and the associated costs as well as consulting and legal fees incurred for the twelve months ended December 31, 2021 as compared to 2020.
Other Income
In 2021, we settled the long-term debt agreement with the Pension Benefit Guaranty Corporation (“PBGC”) for $200,000 on the outstanding principal of $246,000 and accrued interest of approximately $74,500. We recorded a gain of approximately $120,500 at that time of forgiveness. In 2020, we received a Paycheck Protection Plan (“PPP”) loan which was subsequently forgiven in the 4th quarter of 2020. We recorded $963,516 of other income at that time of forgiveness. These events are non-recurring.
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Interest Expense, net
Interest expense decreased by approximately $10,553 and includes interest on indebtedness, amortization of loan fees, cost of stock options as part of debt agreements and fees for financing accounts receivable invoices. The decrease in interest expense is principally attributable to stock option costs from 2020 which did not occur in 2021. The decrease in interest expense is primarily attributable to the non-cash options expense issued for loan financing consideration of approximately $69,300 during 2020 offset by the associated interest of approximately $54,000 from the Mast Hill Bridge Loan in 2021.
Net Income (loss)
The decrease in net income (loss) is attributable primarily to the selling, general and administrative items discussed above for 2021 as compared to 2020 due to our focus on growing and developing the Cybersecurity Services and CyberLabs segments.
Liquidity and Capital Resources
At December 31, 2021, we had cash of $99,432 available for working capital needs and planned capital asset expenditures and a working capital deficit of approximately $3,062,000 with a current ratio of 0.25.
During 2021, our primary source of liquidity is cash provided by collections of accounts receivable and our factoring line of credit. We maintain an accounts receivable financing line of credit with an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain of our on-going costs and expenses. At December 31, 2021, based on eligible accounts receivable, we had $66,000 available under this arrangement. We expect sales during 2022 to generate additional accounts receivable eligible for factoring, that will support our operations. We pay fees based on the length of time that the invoice remains unpaid.
At December 31, 2021, we had current notes payable of $229,000 to related parties. $100,000 of this debt is due on June 1, 2022. The remaining $129,000 are in the form of demand notes with an interest rate of 6%.
At December 31, 2021, we have current notes payable of approximately $384,000 to third parties, which includes convertible notes payable of approximately $150,000. 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.
Also included in the current notes payable is the Bridge Loan with Mast Hill Fund, L.P., which bears interest at a rate of 8%. We plan to use the proceeds from the Bridge Loan to substantially enhance our marketing of CyberLabs’s Nodeware solution, in order to significantly increase its growth. A total of approximately $272,000 was recorded as deferred note costs associated with this transaction. At December 31, 2021, the unamortized balance of the deferred note costs was approximately $227,000. See Note 6 of the 2021 Audited Financial Statements for more information.
At December 31, 2021, we also have an accrued liability for the voluntary match portion of a former simple IRA plan, including interest, of approximately $275,000. We do not anticipate distributing this liability in the next year or two. Interest will continue to accrue.
We have $765,000 of current maturities of long-term obligations to third parties. This is composed of two notes including long-term notes to third parties of $265,000 due on January 1, 2018, which has not been renewed or amended, and $500,000 due on December 31, 2021. The accrued interest on these notes and current maturities is approximately $281,000 at December 31, 2021. These notes have not been paid. We plan to renegotiate the terms of the notes payable, offset with amounts owed to us, seek funds to repay the notes or use a combination of the alternatives.
We have $190,000 of current maturities of long-term obligations to related parties. This is composed of the scheduled payment of $100,000 to an officer of the company on June 1, 2022 and a scheduled payment of $90,000 on July 1, 2022. The accrued interest of these notes is approximately $33,700 at December 31, 2021.
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.
Our ability to raise the additional capital is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of development and business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price that is favorable to us. In addition, our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the recent or future disruptions to and volatility in the financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic or otherwise. With regards to our existing debt, if the equity raise is not successful, we plan to restructure the debt, convert debt to equity or pay down appropriate debt. We may also increase ownership via exercising of stock options and the potential sale of restricted stock. If adequate funds are not available when needed, we may need to significantly reduce our operations while we seek strategic alternatives, which could have an adverse impact on our ability to achieve our intended business objectives including new software initiatives.
We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.
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Cash Flows
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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Net cash used in operating activities |
| $ | (544,817 | ) |
| $ | (413,755 | ) |
Net cash used in investing activities |
|
| (243,034 | ) |
|
| (303,540 | ) |
Net cash provided by financing activities |
|
| 854,970 |
|
|
| 743,210 |
|
Net increase in cash |
| $ | 67,119 |
|
| $ | 25,915 |
|
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 loss of $1,568,813 for 2021 was increased by non-cash expenses for depreciation, amortization, bad debt expense, amortization of debt discount and stock-based compensation of $364,857 and decreased for non-cash adjustments for forgiveness of debt of $120,505. In addition, an increase in accounts payable and accrued expenses of $626,328 was offset by increases in accounts receivable and other assets of $153,316 resulted in net cash used in operating activities of $544,817.
We are increasing our marketing of Nodeware to our IT channel partners who resell to their customers. We are making investments in our cyber security team for penetration testing, CISOTaaS and other services. 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, the equity raise and incremental borrowings, as needed.
Cash Flows Used in Investing Activities
In 2020 and 2021, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The slight decrease from 2020 was primarily due to less development activities in 2021 that were capitalized. We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business. We do not anticipate our continued investment to be significant.
Cash Flows Provided by Financing Activities
During 2021, we received $378,040 from a bridge loan from the Mast Hill Fund L.P. We borrowed $249,000 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 2019 and 2020, we borrowed $250,000 from the $500,000 credit note. We also borrowed $329,000 from other related parties during 2021, of which $100,000 was extinguished with common stock. During 2021, we paid $200,000 to the PBGC to settle all outstanding indebtedness and terminate all commitments and obligations under its original promissory note dated October 17, 2011, and the First Amended Agreement dated March 15, 2015. The Company recorded a gain of $120,505 as part of the transaction. We also received $98,930 from the exercising of stock options during 2021.
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. If the equity raise is successful, we plan to pay down a portion of the debt.
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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, 2021, we had financing availability, based on eligible accounts receivable, of approximately $66,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately $16,000 of available credit under various lines of credit as of December 31, 2021.
During May 2019, we originated a line of credit note payable for a $500,000 with a related party and borrowed $499,000 and have $1,000 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, 2021, we had $15,000 available under these financing agreements which mature in July 2022 and January 2023, respectively.
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 for at least the next 12 months. The funds from the equity raise will allow us to support and accelerate the internal growth of our operations and offer additional opportunities if they arise.
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: issuance of equity: cash from collections of accounts receivable; additional borrowing from related and third parties; 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 including Capitalization of Software for Resale and management’s assessment of going concern.
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| Table of Contents |
MANAGEMENT AND BOARD OF DIRECTORS
Executive Officers and Directors
The following table sets forth certain information about our executive officers and directors as of September 6, 2022:
Name |
| Age |
| Position(s) |
Executive Officers: |
|
|
|
|
James A. Villa |
| 65 |
| Chief Executive Officer and Director |
Andrew T. Hoyen |
| 51 |
| President, Chief Operating Officer and Director |
Richard W. Glickman |
| 60 |
| Vice President of Finance and Chief Accounting Officer |
Non-Employee Directors: |
|
|
|
|
Donald W. Reeve |
| 76 |
| Chairman of the Board |
Kenneth Edwards |
| 64 |
| Director Nominee* |
Teresa Bair |
| 50 |
| Director Nominee* |
*This individual has indicated his or her assent to occupy such position on the effective date of the registration statement, of which this prospectus is a part.
Executive Officers
James A. Villa is our 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. Previously, Mr. Villa served as 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. Mr. Villa holds a bachelor’s degree in electrical engineering from Clarkson University, where he studied computer science and power transmission and distribution. Mr. Villa also has software and technology experience having acted as an IT and business consultant.
Andrew T. Hoyen is our President, Chief Operating Officer and a director. He was initially 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, In September 2020, he was named President in addition to his role as Chief Operating Officer. Mr. Hoyen is responsible for developing and implementing our strategic direction through improved operations, M&A, sales and marketing, product development, and overall collaboration across the enterprise. Previously, he has served in a variety of executive roles at Toyota Material Handling North America, Eastman Kodak Company, and their spin-off, Carestream Health that have enabled him to fit the roles he has played at IGI. 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.
Richard W. Glickman is our Vice President of Finance and Chief Accounting Officer. He became Vice President of Finance and Chief Accounting Officer in February 2019. Mr. Glickman is responsible for accounting, financial reporting, financial analyses, and various special projects. Previously, since 2015, he was Chief Financial Officer for American Rock Salt Company. Prior to that, from 2013 to 2015, he was Chief Financial Officer for HCR Home Care. Prior to that, from 2001 to 2013, he served in various roles in accounting, financial operations, and strategic projects for Time Warner Cable. He holds a Bachelor of Science in accounting from State University of New York at Buffalo and a Master of Business Administration degree from University of Rochester.
Non-Employee Directors
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. Mr. Reeve serves on the Board of Directors of ESL Federal Credit Union, a full-service financial institution. He also serves on the Board of Directors of Veterans Outreach Center of Rochester, a non-profit organization dedicated to advocating for and serving veterans. 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.
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| Table of Contents |
Director Nominees
Kenneth Edwards is a nominee for director. Since 2016, he has been Chief Financial Officer of EdisonLearning, Inc., an education management company. Previously, from July 2016 until September 2017, Mr. Edwards served as Managing Director for CFO Strategies, LLC, an outsourced chief financial officer and controller services company. From 2007 to July 2016, he served as Audit Partner of Cohn Reznick, a public accounting firm, and from 2002 to 2007, he was an owner of Edwards & Company CPA, PC, a public accounting firm. From 1986 to 1993 and again from 2000 to 2002, he held various positions with BDO Seidman, a public accounting firm. From 1997 to 2000, he served as Chief Financial Officer of Menu Direct, Inc., a specialty food manufacturer, and from 1993 to 1997 he held finance-related roles with Home State Holdings, Inc., an insurance holding company that focused on property and casualty insurance. Prior to that, he served as Audit Manager for Coopers & Lybrand, a public accounting firm. Mr. Edwards serves on the Board of Directors of SilverSun Technologies, Inc. (Nasdaq: SSNT), a provider of transformational business technology solutions and services. Mr. Edwards holds a Bachelor of Arts degree in accounting and finance from Goshen College. He is a certified public accountant. Mr. Edwards brings to the board over 40 years of experience in the accounting and finance industry.
The Board believes that Mr. Edwards’s extensive experience as a CPA makes him well-qualified to help guide the Audit Committee of the Board. The Board has determined that Mr. Edwards meets the current independence and experience requirements contained in the listing standards of The Nasdaq Capital Markets and is an audit committee financial expert as defined in Securities and Exchange Commission regulations.
Teresa Bair is a nominee for director. Since October 2021, she has been Chief Legal Officer, Chief Compliance Officer and Corporate Secretary of Kura Oncology, Inc. (Nasdaq: KURA), an oncology-focused biotechnology company. Previously, from June 2015 until October 2021, Ms. Bair held various legal positions with Athenex, Inc. (Nasdaq: ATNX), an oncology-focused biotechnology company. At Athenex, she served as General Counsel and Corporate Secretary from June 2020 until October 2020, Senior Vice President, Administration and Legal Affairs and Corporate Secretary from December 2018 until June 2020, and Vice President, Corporate Development and Legal Affairs and Corporate Secretary from June 2015 until December 2018. Prior to that, she was as a Partner with Harris Beach, PLLC, a full-service law firm, advising business clients, including Fortune 500 companies, across diverse industries on commercial litigation matters. Ms. Bair serves on the Board of Directors of BirchBioMed Inc., a clinical-stage anti-scarring biomedical company. Ms. Bair holds a Bachelor of Science degree in business administration from Bowling Green State University and a Juris Doctor degree from State University of New York at Buffalo School of Law. Ms. Bair brings to the board over 25 years of in-house and law firm experience, including significant experience in public company compliance and corporate governance.
The Board believes that Ms. Bair’s extensive experience as an attorney makes her well-qualified to help guide the Nominating and Corporate Governance Committee of the Board. The Board has determined that Ms. Bair meets the current independence and experience requirements contained in the listing standards of The Nasdaq Capital Markets.
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| Table of Contents |
CORPORATE GOVERNANCE
Composition of our Board of Directors; Independence
Our current Board of Directors consists of Donald W. Reeve, James Villa, and Andrew Hoyen. Mr. Villa and Mr. Hoyen are not considered independent based on the listing standards of Nasdaq. We are not currently listed on a national securities exchange or in an inter-dealer quotation system that requires a majority of the Board be independent. We have nominated Kenneth Edwards and Teresa Bair, each of whom is considered independent under the Nasdaq listing standards, for appointment to the Board. We expect that these nominees will commence service on the Board at the time of effectiveness of the registration statement of which this prospectus forms a part. As required under applicable Nasdaq rules, we anticipate that our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.
Committees
Our Board intends to have three standing committees upon the effectiveness of this registration statement: Audit Committee; Compensation Committee; and a Nominating and Corporate Governance Committee. Each of these committees will consist solely of independent directors including Mr. Reeve and our two director nominees who will join the Board and these committees upon the effectiveness of this registration statement. We will adopt written charters for each of these committees that will be available on our website. Our Board may establish other committees as it deems necessary or appropriate from time to time.
Audit Committee
The Audit Committee will be responsible for, among other matters:
| · | appointing, compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm; |
| · | discussing with our independent registered public accounting firm the independence of its members from its management; |
| · | reviewing with our independent registered public accounting firm the scope and results of their audit; |
| · | approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; |
| · | overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; |
| · | reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal and regulatory requirements; |
| · | coordinating the oversight by our board of directors of our code of ethics and our disclosure controls and procedures; |
| · | establishing procedures for the confidential and/or anonymous submission of concerns regarding accounting, internal controls or auditing matters; and |
| · | reviewing and approving related-person transactions. |
Nasdaq rules require us to have one independent Audit Committee member upon the listing of our common stock, a majority of independent directors within 90 days of the date of this prospectus and all independent Audit Committee members within one year of the date of this prospectus. Upon the effectiveness of this registration statement, Kenneth Edwards (Chair), Donald W. Reeve, and Teressa Bair will serve on the Audit Committee and meet the definition of “independent director” for purposes of serving on our Audit Committee under Rule 10A-3 under the Exchange Act and Nasdaq rules. Kenneth Edwards qualifies as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K.
Compensation Committee
The Compensation Committee will be responsible for, among other matters:
| · | reviewing key employee compensation goals, policies, plans and programs; |
| · | reviewing and approving the compensation of our directors and executive officers; |
| · | reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and |
| · | appointing and overseeing any compensation consultants or advisors. |
Upon the effectiveness of this registration statement, Donald W. Reeve (Chair), Kenneth Edwards, and Teresa Bair will serve on the Compensation Committee and meet the definition of “independent director” for purposes of serving on our Compensation Committee under Nasdaq rules.
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Compensation Committee Interlocks and Insider Participation
None of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more officers serving as a member of our board of directors.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee will be responsible for assisting the Board in identifying qualified individuals to become directors, in determining the composition of the Board, in monitoring compliance with our Code of Ethics and in monitoring the process to assess Board effectiveness. Upon the effectiveness of this registration statement, Teresa Bair (Chair), Kenneth Edwards, and Donald W. Reeve will serve on the Nominating and Corporate Governance Committee.
Board Diversity
While we do not have a formal policy on diversity, the Board considers diversity to include the skill set, background, reputation, type and length of business experience of the Board members as well as a particular nominee’s contributions to that mix. The Board believes that diversity brings a variety of ideas, judgments and considerations that benefit the Company and its stockholders. Although there are many other factors, the Board seeks individuals with experience on operating and growing businesses. Additionally, we plan on fully complying with Nasdaq’s Board Diversity Rules, as described in Nasdaq rules 5605(f) and 5606.
Board Leadership Structure
Donald W. Reeve serves as the Chairman of the Board and actively interfaces with management, the Board and counsel regularly. We believe that separating the roles of Chairman and Chief Executive Officer is in the best interests of the Company and its stockholders at this time because it allows the Chief Executive Officer to focus on generating sales, overseeing sales and marketing, and managing the Company while leveraging the experience and perspectives of the Chairman, and it offers an additional channel of communication for other directors, investors and employees.
Board Risk Oversight
The Company’s risk management function is overseen by the Board. The Company’s management keeps the Board apprised of material risks and provides its directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us, and how management addresses those risks. If an identified risk poses an actual or potential conflict with management, the Company’s independent directors may conduct the assessment and investigate it accordingly.
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.igicybersecurity.com under Business Conduct Guidelines. Upon effectiveness of this registration statement, the Board intends to adopt a revised Code of Business Conduct and Ethics consistent with Nasdaq listing requirements and that applies to our directors, officers and employees. A copy of this code will be available on our website. We intend to disclose on our website any amendments to the Code of Business Conduct and Ethics and any waivers of the Code of Business Conduct and Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions.
Director and Officer Indemnification Agreements
Upon effectiveness of this registration statement, we intend to enter into new indemnification agreements with all of our directors and executive officers. In general, these agreements provide that we will indemnify the executive officer or director to the fullest extent permitted by law for claims arising in his or her capacity as an executive officer or director of our company or in connection with his or her service at our request for another corporation or entity. The indemnification agreements also provide for procedures that will apply in the event that an executive officer or director makes a claim for indemnification and establish certain presumptions that are favorable to the executive officer or director.
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EXECUTIVE AND DIRECTOR COMPENSATION
2021 Summary Compensation Table
The Summary Compensation Table below includes, for each of the years ended December 31, 2021 and 2020, 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, 2021 (together, the “Named Executive Officers”).
Name and Principal Position |
| Year |
| Salary |
|
| Option Awards (1) |
|
| All Other Compensation |
|
| Total |
| ||||
James Villa |
| 2021 |
| $ | 240,475 |
|
| $ | 0 |
|
|
| 0 |
|
| $ | 240,475 |
|
Chief Executive Officer |
| 2020 |
| $ | 237,560 |
|
| $ | 0 |
|
|
| 0 |
|
| $ | 237,560 |
|
Andrew Hoyen |
| 2021 |
| $ | 227,163 |
|
| $ | 0 |
|
|
| 0 |
|
| $ | 227,163 |
|
President and Chief Operating Officer |
| 2020 |
| $ | 213,765 |
|
| $ | 0 |
|
|
| 0 |
|
| $ | 213,765 |
|
Richard Glickman |
| 2021 |
| $ | 110,652 |
|
| $ | 1,240 | (1) |
|
| 0 |
|
| $ | 111,892 |
|
VP Finance and Chief Accounting Officer |
| 2020 |
| $ | 103,948 |
|
| $ | 1,783 | (1) |
|
| 0 |
|
| $ | 105,731 |
|
_________________
1. The amounts in this column do not reflect option awards actually received by our Named Executive Officers, but instead reflect the aggregate grant date fair value for stock option awards computed in accordance with FASB ASC 718. 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.
Outstanding Equity Awards at December 31, 2021
The following table provides information with respect to the value of all unexercised options previously awarded to our Named Executive Officers as of December 31, 2021.
Option Awards
Name |
| Number of Securities Underlying Unexercised Options - Exercisable |
|
| Number of Securities Underlying Unexercised Options - Unexercisable |
|
| Option Exercise Price |
|
| Option Expiration Date | ||||
James Villa |
|
| 10,000 |
|
|
| - |
|
| $ | 5.75 |
|
| 1/20/2024 | |
|
|
| 5,000 |
|
|
| - |
|
| $ | 2.50 |
|
| 12/22/2024 | |
|
|
| 5,000 |
|
|
| - |
|
| $ | 6.00 |
|
| 11/16/2025 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Andrew Hoyen |
|
| 8,000 |
|
|
| - |
|
| $ | 2.00 |
|
| 7/31/2022 | |
|
|
| 2,000 |
|
|
| - |
|
| $ | 2.00 |
|
| 7/17/2022 | |
|
|
| 4,000 |
|
|
| - |
|
| $ | 2.00 |
|
| 12/09/2024 | |
|
|
| 5,000 |
|
|
| - |
|
| $ | 2.50 |
|
| 12/22/2024 | |
|
|
| 5,000 |
|
|
| - |
|
| $ | 1.00 |
|
| 6/1/2026 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Richard Glickman |
|
| 4,000 |
|
|
| - |
|
| $ | 1.00 |
|
| 7/23/2024 | |
|
|
| 1,000 |
|
|
| - |
|
| $ | 2.00 |
|
| 12/9/2024 | |
|
|
| 500 |
|
|
| - |
|
| $ | 6.00 |
|
| 7/12/2025 | |
|
|
| 500 |
|
|
| - |
|
| $ | 4.50 |
|
| 1/3/2026 | |
Employment Agreements
We do not have any employment agreements with any of the Named Executive Officers.
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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.
Director Compensation Fiscal Year Ending December 31, 2021 | ||||||||||||||||||||||||||||
Name |
| Fees earned or paid in cash |
|
| Stock Award |
|
| Option Award |
|
| Non-Equity Incentive Plan Compensation |
|
| Change in Pension Value and Nonqualified Deferred Compensation Earnings |
|
| All Other Compensation |
|
| Total |
| |||||||
Donald W. Reeve |
| $ | 12,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| $ | 12,000 |
|
At December 31, 2021, Donald W. Reeve held exercisable options for:
| · | 12,000 shares of our common stock at an exercise price of $2.50 per share which expires on November 30, 2024; |
| · | 10,000 shares of common stock at an exercise price of 7.50 per share which expires on September 4, 2023; and |
| · | 5,000 shares of common stock at an exercise price of $2.50 per share which expires on December 22, 2024. |
Equity compensation plan information as of December 31, 2021
The Company’s Board and stockholders approved a stock option plan adopted in 2005. Since this plan has expired, no additional options may be granted under this plan. At December 31, 2021, there are options for 19,800 common shares outstanding under this plan.
The 2009 Stock Option Plan (“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. The 2009 Plan expired on February 3, 2019, and as of December 31, 2021, there were outstanding options to acquire 24,400 shares of common stock under the 2009 Plan. 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. Since this plan has expired, no additional options may be granted under this plan.
The 2019 Stock Option Plan (“2019 Plan”) 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 30,000 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, 2021, there were outstanding options to acquire 27,470 shares under the 2019 Plan and 2,530 shares were available under our 2019 Plan. The 2019 Plan was replaced by our 2021 Plan (defined below) upon approval by our stockholders at our Annual Meeting on January 26, 2022, as described below.
The 2020 stock option plan (“2020 Plan”) was established in April 2020 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 2020 Plan up to 30,000 shares of common stock were authorized for option grants. Generally, the 2020 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, 2021, there were outstanding options to acquire 28,900 shares under the 2020 Plan and 1,100 shares were available under our 2020 Plan. The 2020 Plan was replaced by our 2021 Plan upon approval by our stockholders at our Annual Meeting on January 26, 2022, as described below.
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The Infinite Group, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) was approved and adopted by our Board on December 15, 2021, subject to stockholder approval. The 2021 Plan was submitted to our stockholders for their approval at our 2021 Annual Meeting on January 26, 2022, and our stockholder approved the plan at the Annual Meeting. The 2021 Plan became effective upon stockholder approval, and no awards may be granted under the 2021 Plan after the date the 2021 Plan was approved by our stockholders. The 2021 Plan replaces the 2019 Plan and the 2020 Plan (the “Prior Plans”), and no further awards may be granted under the Prior Plans. The purpose of the 2021 Plan is to promote stockholder value and our future success by providing appropriate retention and performance incentives to employees and non-employee directors of the Company or its affiliates, and any other individuals who perform services for the Company or its affiliates. Generally, the 2021 Plan is administered by the compensation committee of the Board and provides that the maximum number of shares of Common Stock available for grant and issuance under the 2021 Plan is (a) 90,000, plus (b) any shares of Common Stock that are subject to options granted under the Prior Plans that expire, are forfeited or canceled or terminate for any other reason without the issuance of shares under the Prior Plans on or after January 26, 2022, plus (c) any shares of Common Stock that are subject to options granted under the Prior Plans that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any option under the Prior Plans on or after January 26, 2022.
The following table summarizes, as of December 31, 2021, 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) |
|
| 19,800 |
|
| $ | 5.00 |
|
|
| - |
|
Equity compensation plans not previously approved by security holders (2) |
|
| 80,770 |
|
| $ | 4.50 |
|
|
| 3,630 |
|
Individual option grants that have not been approved by security holders (3) |
|
| 114,530 |
|
| $ | 4.00 |
|
|
| - |
|
Total |
|
| 215,100 |
|
| $ | 4.00 |
|
|
| 3,630 |
|
(1) | Consists of grants under our 2005 Stock Option Plans of which all are exercisable at December 31, 2021. |
|
|
(2) | Consists of grants under our 2009 Plan, 2019 Plan and 2020 Plan of which 80,270 are exercisable at December 31, 2021. |
|
|
(3) | Consists of individual option grants approved by the Board of which 99,530 were exercisable at December 31, 2021. |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of transactions since January 1, 2021, to which we have been a party in which any of our executive officers, directors, director nominees or beneficial holders of more than five percent of our capital stock had or will have a direct or indirect material interest.
During 2021, the Company borrowed $249,000 on a 2019 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 balance at December 31, 2021 was $499,000.
On May 25, 2021, the Company issued a short-term note payable to a board member for $100,000. The note bears a 6% interest rate and was originally due on June 1, 2022. The Company also issued two demand notes on September 16, 2021, payable to two board members with $30,000 payable to Donald Reeve, and $25,000 payable to Andrew Hoyen, totaling $55,000. The demand notes bear a 6% interest rate.
On October 14, 2021, the Company entered into two demand notes of $12,000 and on October 15, 2021, a third for $12,000 each with James Villa, Andrew Hoyen and Donald Reeve, respectively. Subsequently Mr. Reeve was paid back the $12,000 on November 16, 2021.
On October 28, 2021, the Company entered into a demand note of $150,000 with its Vice President of Business Development, Richard Popper. The interest rate for this note is 6%. On November 2, 2021, the Company entered into a subscription agreement with its Vice President of Business Development, Richard Popper. Pursuant to the subscription agreement, Mr. Popper agreed to purchase an aggregate amount of 20,000 shares of the Company’s common stock, par value $0.001 per share, at $5.00 per share, in exchange for the conversion and cancellation of an aggregate of $100,000 principal amount of the demand note. The closing of the subscription agreement occurred concurrently with the execution of the subscription agreement. The closing price of the Company common stock on November 2, 2021, was $8.50 per share.
On June 30, 2022, and September 6, 2022 the Company and Donald W. Reeve, a director of the Company, entered into note modification agreements with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note of $100,000 to January 1, 2023. The modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616 will be due. Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.
On July 29, 2022, the Company and Andrew Hoyen, a director and executive officer of the Company, entered into a note modification agreement (the “Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Lender (the “Note”). The Note and the Modification Agreement was approved by the disinterested members of our Board of Directors. The Modification Agreement extends the due date of the Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Modification Agreement, the Company agreed to repay to Lender $16,000 of the accrued interest on the Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 400,000 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Note was $10,930 as of July 29, 2022. Except as set forth in the Modification Agreement, the terms of the Note remain the same.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of our common stock, our only class of voting securities, as of the record date by 1) each person known to us to be the beneficial owner of more than 5% of our outstanding shares; 2) each director; 3) each Named Executive Officer named in the Summary Compensation Table above; and 4) all directors and executive officers as a group. The percentages shown in the table are based on 679,223 shares of common stock issued and outstanding as of September 6, 2022.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of the Record Date, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.
Beneficial ownership as set forth below is based on our review of our record stockholders list and public ownership reports filed by certain stockholders of the Company and may not include certain securities held in brokerage accounts or beneficially owned by the stockholders described below.
We believe that, except as otherwise noted and subject to applicable community property laws, each person named in the following table has sole investment and voting power with respect to the shares of common stock shown as beneficially owned by such person. Unless otherwise indicated, the address for each of the individuals listed in the table 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 |
|
| 6,800 | (1) |
|
| 1.0 | % |
Andrew Hoyen |
|
| 40,735 | (2) |
|
| 5.8 | % |
Donald W. Reeve |
|
| 59,630 | (3) |
|
| 8.4 | % |
James Villa |
|
| 149,075 | (4) |
|
| 18.6 | % |
All Directors and Officers (4 persons) as a group |
|
| 256,240 | (5) |
|
| 30.0 | % |
|
|
|
|
|
|
|
|
|
5% Stockholders: |
|
|
|
|
|
|
|
|
Paul J. Delmore |
|
| 50,904 | (6) |
|
| 7.5 | % |
One America Place |
|
|
|
|
|
|
|
|
600 West Broadway, 28th Floor |
|
|
|
|
|
|
|
|
San Diego, CA 92101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry A. Hoyen |
|
| 58,000 | (7) |
|
| 7.9 | % |
Marblehead, OH 43440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Leonardo |
|
| 50,000 |
|
|
| 7.4 | % |
Rochester, NY 14608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Popper |
|
| 35,750 | (8) |
|
| 5.3 | % |
(1) | Includes 6,000 shares subject to currently exercisable options. |
|
|
(2) | Includes 5,000 shares, which are issuable upon the conversion of a note in the principal amount of $25,000 through September 6, 2022; and 14,000 shares subject to currently exercisable options. |
|
|
(3) | Includes 27,000 shares subject to currently exercisable options. |
|
|
(4) | Includes 102,835 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 $110,787 through September 6, 2022; and 20,000 shares subject to currently exercisable options. |
|
|
(5) | Assumes that all currently exercisable options, which total 67,000 shares, and convertible securities, which total 107,835 shares, owned by members of the group have been exercised. |
|
|
(6) | 47,200 shares owned of record by Upstate Holding Group, LLC, an entity wholly-owned by Mr. Delmore. |
|
|
(7) | Consists of 58,000 shares subject to currently exercisable options. |
|
|
(8) | Includes 1,500 shares subject to currently exercisable options. |
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DESCRIPTION OF SECURITIES
We are offering units in this offering at an assumed initial offering price of $5.00 per unit. Units consist of common units and pre-funded units. We are also offering to purchasers whose purchase of units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded units in lieu of common units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock. The purchase price of each pre-funded unit is equal to the price per common unit being sold to the public in this offering, minus $0.001.
We are also registering the shares of common stock issuable upon exercise of the pre-funded warrants and the redeemable warrants. These securities are being issued pursuant to an underwriting agreement between us and the underwriter. You should review the underwriting agreement and the forms of pre-funded warrant and redeemable warrant, each filed as exhibits to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the pre-funded warrants and redeemable warrants.
General
Our authorized capital stock consists of 60,000,000 shares of common stock, $0.001 par value per share, and 1,000,000 shares of preferred stock, $0.01 par value per share. As of September 6, 2022, there are 679,223 shares of common stock outstanding, and zero shares of preferred stock outstanding. In addition, as of September 6, 2022, there were outstanding options to purchase 200,050 shares of common stock, outstanding warrants to purchase 60,953 shares of common stock, and notes convertible into 208,717 shares of common stock after giving effect to our planned reverse stock split at an assumed 50-to-1 ratio.
This description is intended as a summary and is qualified in its entirety by reference to our Certificate of Incorporation, as amended, and Amended and Restated Bylaws, which are filed, or incorporated by reference, as exhibits to the registration statement of which this prospectus forms a part.
Common Units
Each common unit consists of one share of our common stock and three redeemable warrants. Our common units will not be certificated, and the shares of our common stock and the redeemable warrants part of such common units are immediately separable and will be issued separately in this offering.
Pre-funded Units
Each pre-funded unit will consist of one pre-funded warrant and three redeemable warrants. Our pre-funded units will not be certificated, and the pre-funded warrant and the redeemable warrants part of such pre-funded units are immediately separable and will be issued separately in this offering.
Common Stock
Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, and do not have cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for dividend payments. All outstanding, shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. The holders of common stock have no preferences or rights of cumulative voting, conversion, or pre-emptive or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. In the event of any liquidation, dissolution or winding-up of our affairs, holders of common stock will be entitled to share ratably in any of our assets remaining after payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding shares of preferred stock, if any.
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Redeemable Warrants
Overview. The following summary of certain terms and provisions of the redeemable warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us the Warrant Agent, and the form of redeemable warrant, both of which are filed as exhibits to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the warrant agent agreement, including the annexes thereto, and the form of redeemable warrant.
The redeemable warrants issued in this offering entitle the registered holder to purchase one share of our common stock at a price equal to $5.00 per share (equal to 100% of the public offering price of one common unit based on an assumed initial offering price of $5.00 per common unit, the mid-point of the anticipated price range), subject to adjustment as discussed below, immediately following the issuance of such redeemable warrant and terminating at 5:00 p.m., New York City time, five years after the closing of this offering or when redeemed.
The exercise price and number of shares of common stock issuable upon exercise of the redeemable warrants may be adjusted in certain circumstances within the two (2) years from issuance, including in the event of a stock dividend or recapitalization, reorganization, merger, or consolidation. In addition, the redeemable warrants will be adjusted for issuances of common stock at prices below its exercise price under certain circumstances, provided however that in no event will the exercise price be adjusted to a price below $2.50 per share (equal to 50% of the public offering price of one common unit based on an assumed initial offering price of $5.00 per common unit). As described in this prospectus, we intend to apply to list the warrants on the Nasdaq Capital Market under the symbol “IMCIW.”
Additionally, on the date that is 90 calendar days immediately following the initial issuance date of the redeemable warrants, the exercise price of the redeemable warrants will be reduced to the reset price, provided that such value is less than the exercise price in effect on that date. The reset price is equal to the greater of (a) 50% of the initial exercise price or (b) 100% of the lowest daily volume weighted average price per share of common stock occurring during the 90 calendar days following the issuance date of the redeemable warrants. The lowest reset price is $2.50 per share (equal to 50% of the public offering price of one unit based on an assumed initial offering price of $5.00 per unit).
Exercisability. The redeemable warrants are exercisable at any time after their original issuance and at any time up to the date that is five (5) years after their original issuance or until redeemed. The redeemable warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the Company or its designee, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. Under the terms of the Warrant Agreement, we must use our best efforts to maintain the effectiveness of the registration statement and current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. If we fail to maintain the effectiveness of the registration statement and current prospectus relating to the common stock issuable upon exercise of the redeemable warrants, the holders of the warrants shall have the right to exercise the redeemable warrants solely via a cashless exercise feature provided for in the warrants, until such time as there is an effective registration statement and current prospectus.
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Exercise Limitation. A holder may not exercise any portion of a redeemable warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of the outstanding common stock after exercise, as such percentage ownership is determined in accordance with the terms of the redeemable warrant, except that upon prior notice from the holder to us, the holder may waive such limitation up to a percentage not in excess of 9.99%.
Exercise Price. The exercise price per whole share of common stock purchasable upon exercise of the redeemable warrants is $5.00 per share (based on an assumed public offering price of $5.00 per common unit) or 100% of public offering price of the units. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders and in the event that the volume weighted average price of the Company’s common stock trades below the exercise price during the 90-day period following this offering, provided however that in no event will the exercise price be adjusted to a price below $2.50 per share (equal to 50% of the public offering price of one unit based on an assumed initial offering price of $5.00 per unit).
Redemption . We may redeem the outstanding warrants at a price of $0.01 per warrant share upon certain conditions where the price of our common stock has equaled or exceeded $[ ] per share (as adjusted for share splits, share dividends, recapitalizations and similar events) for a 30 consecutive trading day period. We must give notice of our intent for redemption at least 30 days prior to the date of redemption. Upon our notice to warrant holders of our intent to call the warrants for redemption, each holder will have five trading days during which it may exercise its warrant prior to the planned redemption date; if such holder does not exercise prior to the redemption date, the warrants held by such holder will be redeemed and the warrantholder will have no other rights other than the right to receive the nominal redemption price of $0.01 per warrant share upon surrender of the warrant.
Fractional Shares. No fractional shares of common stock will be issued upon exercise of the redeemable warrants. If, upon exercise of a redeemable warrant, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, pay a cash adjustment in respect of such fraction in an amount equal to such fraction multiplied by the exercise price. If multiple redeemable warrants are exercised by the holder at the same time, we shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Transferability. Subject to applicable laws, the redeemable warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange Listing. We intend to apply to list our warrants on the Nasdaq Capital Market under the symbol “IMCIW.” No assurance can be given that our listing application will be approved.
Warrant Agent; Global Certificate. The warrants will be issued in registered form under a warrant agent agreement between the Warrant Agent and us. The warrants shall initially be represented only by one or more global warrants deposited with the Warrant Agent, as custodian on behalf of The Depository Trust Company (DTC) and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.
Fundamental Transactions. In the event of a fundamental transaction, as described in the redeemable warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation, a tender offer approved or recommended by our board, or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the redeemable warrants will be entitled to receive the kind and amount of securities, cash or other property that the holders would have received had they exercised the redeemable warrants immediately prior to such fundamental transaction. Notwithstanding the foregoing, in the event of a fundamental transaction, the holders of the redeemable warrants have the right to require us or a successor entity to redeem the redeemable warrants for cash in the amount of the Black-Scholes Value (as defined in each redeemable warrant) of the unexercised portion of the redeemable warrants concurrently with or within 30 days following the consummation of a fundamental transaction.
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Rights as a Stockholder. The warrant holders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their redeemable warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the redeemable warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
Governing Law. The redeemable warrants are governed by New York law.
Underwriter’s Warrants. The registration statement of which this prospectus is a part also registers for sale the Underwriter’s Warrants, as a portion of the underwriting compensation payable to the underwriter in connection with this offering. The Underwriter’s Warrants will be exercisable beginning on a date which is six months from the commencement of sales under the registration statement of which this prospectus is a part at an exercise price of $6.25 (125% of the assumed public offering price of the units) and will expire five years from the date of such commencement of sales. Please see “Underwriting-Underwriter’s Warrants” for a description of the warrants we have agreed to issue to the underwriter in this offering, subject to the completion of the offering.
Pre-funded Warrants
Overview. The following summary of certain terms and provisions of the pre-funded warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us the Warrant Agent, and the form of pre-funded warrant, both of which is filed as an exhibit to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the pre-funded warrant.
The term “pre-funded” refers to the fact that the purchase price of our common stock in this offering includes almost the entire exercise price that will be paid under the pre-funded warrants, except for a nominal remaining exercise price of $0.001. The purpose of the pre-funded warrants is to enable investors that may have restrictions on their ability to beneficially own more than 4.99% (or, upon election of the holder, 9.99%) of our outstanding shares of common stock following the consummation of this offering the opportunity to make an investment in the Company without triggering their ownership restrictions, by receiving pre-funded warrants in lieu of our common stock which would result in such ownership of more than 4.99% (or 9.99%), and receive the ability to exercise their option to purchase the shares underlying the pre-funded warrants at such nominal price at a later date.
Duration. The pre-funded warrants offered hereby will entitle the holders thereof to purchase our shares of common stock at a nominal exercise price of $0.001 per share, commencing immediately on the date of issuance. There is no expiration date for the pre-funded warrants.
Exercise Limitation. A holder may not exercise any portion of a pre-funded warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of the outstanding common stock after exercise, as such percentage ownership is determined in accordance with the terms of the pre-funded warrant, except that upon prior notice from the holder to us, the holder may waive such limitation up to a percentage not in excess of 9.99%.
Exercise Price. The exercise price per whole share of common stock purchasable upon exercise of the pre-funded warrants is $0.001 per share. The exercise price and number of shares the pre-funded warrant is exercisable into are subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.
Fractional Shares. No fractional shares of common stock will be issued upon exercise of the pre-funded warrants. If, upon exercise of a pre-funded warrant, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, pay a cash adjustment in respect of such fraction in an amount equal to such fraction multiplied by the exercise price. If multiple pre-funded warrants are exercised by the holder at the same time, we shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
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Transferability. Subject to applicable laws, the pre-funded warrants may be offered for sale, sold, transferred or assigned without our consent.
Absence of Trading Market. There is no established trading market for the pre-funded warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the pre-funded warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the pre-funded warrants will be limited.
Fundamental Transactions. In the event of a fundamental transaction, as described in the pre-funded warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the pre-funded warrants will be entitled to receive the kind and amount of securities, cash or other property that the holders would have received had they exercised the pre-funded warrants immediately prior to such fundamental transaction.
Rights as a Stockholder. The warrant holders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their pre-funded warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the pore-funded warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
Governing Law. The pre-funded warrants are governed by New York law.
Preferred Stock
Our Certificate of Incorporation, as amended, authorizes our board, without further stockholder authorization, 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 September 6, 2022, there were no preferred shares issued or outstanding. Although we have no present plans to issue additional shares of preferred stock, the issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could decrease the amount of earnings and assets available for distribution to the holders of common stock, could adversely affect the rights and powers, including voting rights, of the common stock, and could have the effect of delaying, deterring or preventing a change of control of us or an unsolicited acquisition proposal.
Anti-Takeover Provisions of Delaware Law, our Certificate of Incorporation, as amended, and our Amended and Restated Bylaws
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly traded Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A business combination includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. An interested stockholder is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation’s voting stock, subject to certain exceptions. The statute could have the effect of delaying, deferring or preventing a change in control of our Company.
Board of Directors Vacancies
Our Certificate of Incorporation, as amended, and Amended and Restated Bylaws authorize our board of directors to fill vacant directorships in the interim between annual and special meetings of stockholders. In addition, the number of directors constituting our board of directors may be set by resolution of the majority of the incumbent directors in the interim between annual and special meetings of stockholders.
Stockholder Action; Special Meeting of Stockholders
Our Certificate of Incorporation, as amended, and Amended and Restated Bylaws provide that our stockholders may take action by written consent. Our Certificate of Incorporation, as amended, and Amended and Restated Bylaws further provide that special meetings of our stockholders may be called by a majority of the board of directors.
Authorized but Unissued Shares
Our authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval and may be used for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. If we issue such shares without stockholder approval and in violation of limitations imposed by The Nasdaq Capital Market or any stock exchange on which our stock may then be trading, our stock could be delisted.
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Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Issuer Direct.
Reverse Stock Split
On December 15, 2021, our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock. At our annual meeting on January 26, 2022, our stockholders approved the reverse stock split and authorized the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. The reverse stock split will not impact the number of authorized shares of common stock which will remain at 60,000,000 shares. Unless otherwise noted and other than in our financial statements and the notes thereto, the share and per share information in this prospectus reflects a proposed reverse stock split of the outstanding common stock and treasury stock of the Company at an assumed 50-to-1 ratio to occur immediately following the effective date but prior to the closing of the offering.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common units, common stock and redeemable warrants purchased in this offering, which we refer to collectively as our securities, but is for general information purposes only and does not purport to be a complete analysis of all the potential tax considerations. The holder of a common unit generally should be treated, for U.S. federal income tax purposes, as the owner of the underlying one share of common stock and three redeemable warrants each to purchase one share of common stock that underlie the common unit. As a result, the discussion below with respect to actual holders of common stock and redeemable warrants should also apply to holders of common units (as the deemed owners of the underlying common stock and redeemable warrants that comprise the units). This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income and estate tax consequences different from those set forth below. There can be no assurance that the Internal Revenue Service (the “IRS”) will not challenge one or more of the tax consequences described herein, and we have not obtained, and do not intend to obtain, an opinion of counsel or ruling from the IRS with respect to the U.S. federal income tax considerations relating to the purchase, ownership or disposition of our securities.
This summary does not address any alternative minimum tax considerations, any considerations regarding the tax on net investment income, or the tax considerations arising under the laws of any state, local or non-U.S. jurisdiction, or under any non-income tax laws, including U.S. federal gift and estate tax laws, except to the limited extent set forth below. In addition, this summary does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:
| · | banks, insurance companies or other financial institutions; |
| · | tax-exempt organizations or governmental organizations; |
| · | regulated investment companies and real estate investment trusts; |
| · | controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid U.S. federal income tax; |
| · | brokers or dealers in securities or currencies; |
| · | traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; |
| · | persons that own, or are deemed to own, more than five percent of our capital stock (except to the extent specifically set forth below); |
| · | tax-qualified retirement plans; |
| · | certain former citizens or long-term residents of the United States; |
| · | partnerships or entities or arrangements classified as partnerships for U.S. federal income tax purposes and other pass-through entities (and investors therein); |
| · | persons who hold our securities as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction or integrated investment; |
| · | persons who do not hold our securities as a capital asset within the meaning of Section 1221 of the Code; or |
| · | persons deemed to sell our securities under the constructive sale provisions of the Code. |
In addition, if a partnership (or entity or arrangement classified as a partnership for U.S. federal income tax purposes) holds our securities, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold our securities, and partners in such partnerships, should consult their tax advisors.
You are urged to consult your own tax advisors with respect to the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership and disposition of our securities arising under the U.S. federal estate or gift tax laws or under the laws of any state, local, non-U.S., or other taxing jurisdiction or under any applicable tax treaty.
Allocation of Purchase Price and Characterization of a Unit
No statutory, administrative or judicial authority directly addresses the treatment of a unit or instruments similar to a unit for U.S. federal income tax purposes and, therefore, that treatment is not entirely clear. The acquisition of a unit should be treated for U.S. federal income tax purposes as the acquisition of one share of common stock and three redeemable warrants each to purchase one share of common stock. For U.S. federal income tax purposes, each holder of a unit must allocate the purchase price paid by such holder for such unit between such one share of common stock and three redeemable warrants each to purchase one share of common stock based on their relative fair market values at the time of issuance. Under U.S. federal income tax law, each investor must make his or her own determination of such value based on all the relevant facts and circumstances. Therefore, we strongly urge each investor to consult his or her tax adviser regarding the determination of value for these purposes. The price allocated to each share of common stock and each redeemable warrant should be the stockholder’s tax basis in such share or redeemable warrant, as the case may be. Any disposition of a unit should be treated for U.S. federal income tax purposes as a disposition of the one share of common stock and three redeemable warrants each to purchase one share of common stock comprising the unit, and the amount realized on the disposition should be allocated between the one share of common stock and three redeemable warrants each to purchase one share of common stock based on their respective relative fair market values (as determined by each such unit holder on all the relevant facts and circumstances) at the time of disposition. The separation of the common stock and redeemable warrants comprising units should not be a taxable event for U.S. federal income tax purposes.
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The foregoing treatment of the common stock and redeemable warrants and a holder’s purchase price allocation are not binding on the IRS or the courts. Because there are no authorities that directly address instruments that are similar to the units, no assurance can be given that the IRS or the courts will agree with the characterization described above or the discussion below. Accordingly, each prospective investor is urged to consult its own tax advisors regarding the tax consequences of an investment in a unit (including alternative characterizations of a unit). The balance of this discussion assumes that the characterization of the units described above is respected for U.S. federal income tax purposes.
Consequences to U.S. Holders
The following is a summary of the U.S. federal income tax consequences that will apply to a U.S. holder of our securities. For purposes of this discussion, you are a U.S. holder if, for U.S. federal income tax purposes, you are a beneficial owner of our securities, other than a partnership, that is:
| · | an individual citizen or resident of the United States; |
| · | a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United States, any State thereof or the District of Columbia; |
| · | an estate whose income is subject to U.S. federal income tax regardless of its source; or |
| · | a trust (x) whose administration is subject to the primary supervision of a U.S. court and which has one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) who have the authority to control all substantial decisions of the trust or (y) which has made a valid election to be treated as a “United States person.” |
Distributions
As described in the section titled “Market for Our Common Stock-Dividend Policy,” we have never declared or paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future. However, if we do make distributions on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, the excess will constitute a return of capital and will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of stock as described below under “Sale, Exchange or Other Taxable Disposition of Common Stock.”
Dividend income may be taxed to an individual U.S. holder at rates applicable to long-term capital gains, provided that a minimum holding period and other limitations and requirements are satisfied. Any dividends that we pay to a U.S. holder that is a corporation will qualify for a deduction allowed to U.S. corporations in respect of dividends received from other U.S. corporations equal to a portion of any dividends received, subject to generally applicable limitations on that deduction. U.S. holders should consult their own tax advisors regarding the holding period and other requirements that must be satisfied in order to qualify for the reduced tax rate on dividends or the dividends-received deduction.
Constructive Distributions
The terms of the redeemable warrants allow for changes in the exercise price of the warrants under certain circumstances. A change in exercise price of a redeemable warrant that allows holders to receive more shares of common stock on exercise may increase a holder’s proportionate interest in our earnings and profits or assets. In that case, such holder may be treated as though it received a taxable distribution in the form of our common stock. A taxable constructive stock distribution would generally result, for example, if the exercise price is adjusted to compensate holders for distributions of cash or property to our stockholders.
Not all changes in the exercise price that result in a holder’s receiving more common stock on exercise, however, would be considered as increasing a holder’s proportionate interest in our earnings and profits or assets. For instance, a change in exercise price could simply prevent the dilution of a holder’s interest upon a stock split or other change in capital structure. Changes of this type, if made pursuant to bona fide reasonable adjustment formula, are not treated as constructive stock distributions for these purposes. Conversely, if an event occurs that dilutes a holder’s interest and the exercise price is not adjusted, the resulting increase in the proportionate interests of our stockholders could be treated as a taxable stock distribution to our stockholders
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Any taxable constructive stock distributions resulting from a change to, or a failure to change, the exercise price of the redeemable warrants that is treated as a distribution of common stock would be treated for U.S. federal income tax purposes in the same manner as distributions on our common stock paid in cash or other property, resulting in a taxable dividend to the recipient to the extent of our current or accumulated earnings and profits (with the recipient’s tax basis in its common stock or redeemable warrants, as applicable, being increased by the amount of such dividend), and with any excess treated as a return of capital or as capital gain. U.S. holders should consult their own tax advisors regarding whether any taxable constructive stock dividend would be eligible for tax rates applicable to long-term capital gains or the dividends-received deduction described below under “Consequences to U.S. Holders-Distributions,” as the requisite applicable holding period requirements might not be considered to be satisfied.
Sale, Exchange or Other Taxable Disposition of Common Stock
A U.S. holder will generally recognize capital gain or loss on the sale, exchange, or other taxable disposition of our common stock. The amount of gain or loss will equal the difference between the amount realized on the sale and such U.S. holder’s tax basis in such common stock. The amount realized will include the amount of any cash and the fair market value of any other property received in exchange for such common stock. Gain or loss will be long-term capital gain or loss if the U.S. holder has held the common stock for more than one year. Long-term capital gains of non-corporate U.S. holders are generally taxed at preferential rates. The deductibility of capital losses is subject to certain limitations.
Sale, Exchange, Redemption, Lapse or Other Taxable Disposition of a redeemable Warrant
Upon a sale, exchange, redemption, lapse or other taxable disposition of a redeemable warrant, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized (if any) on the disposition and such U.S. holder’s tax basis in the warrant. The amount realized will include the amount of any cash and the fair market value of any other property received in exchange for the redeemable warrant. The U.S. holder’s tax basis in the redeemable warrant generally will equal the amount the holder paid for the warrant. Gain or loss will be long-term capital gain or loss if the U.S. holder has held the redeemable warrant for more than one year. Long-term capital gains of non-corporate U.S. holders are generally taxed at preferential rates. The deductibility of capital losses is subject to certain limitations.
Exercise of a redeemable Warrant
The exercise of a redeemable warrant for shares of common stock generally will not be a taxable event for the exercising U.S. holder, except with respect to cash, if any, received in lieu of a fractional share. A U.S. holder will have a tax basis in the shares of common stock received on exercise of a warrant equal to the sum of the U.S. holder’s tax basis in the redeemable warrant surrendered, reduced by any portion of the basis allocable to a fractional share, plus the exercise price of the warrant. A U.S. holder generally will have a holding period in shares of common stock acquired on exercise of a redeemable warrant that commences on the date of exercise of the warrant.
Consequences to Non-U.S. Holders
The following is a summary of the U.S. federal income tax consequences that will apply to a non-U.S. holder of our securities. A “non-U.S. holder” is a beneficial owner of our securities (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that, for U.S. federal income tax purposes, is not a U.S. holder.
Distributions
Subject to the discussion below regarding effectively connected income, any dividend, including any taxable constructive stock dividend resulting from certain adjustments, or failure to make adjustments, to the exercise price of a redeemable warrant (as described above under “Consequences to U.S. Holders-Constructive Distributions”), paid to a non-U.S. holder generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. In order to receive a reduced treaty rate, a non-U.S. holder must provide us with an IRS Form W-8BEN, IRS Form W-8BEN-E or other applicable IRS Form W-8 properly certifying qualification for the reduced rate. These forms must be updated periodically. A non-U.S. holder eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. If a non-U.S. holder holds our securities through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then may be required to provide certification to us or our paying agent, either directly or through other intermediaries.
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Dividends received by a non-U.S. holder that are effectively connected with its conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States) are generally exempt from such withholding tax if the non-U.S. holder satisfies certain certification and disclosure requirements. In order to obtain this exemption, the non-U.S. holder must provide us with an IRS Form W-8ECI or other applicable IRS Form W-8 properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated U.S. federal income tax rates applicable to U.S. holders, net of certain deductions and credits. In addition, dividends received by a corporate non-U.S. holder that are effectively connected with its conduct of a U.S. trade or business may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. Non-U.S. holders should consult their own tax advisors regarding any applicable tax treaties that may provide for different rules.
Gain on Sale, Exchange or Other Taxable Disposition of Common Stock or redeemable Warrants
Subject to the discussion below regarding backup withholding and foreign accounts, a non-U.S. holder generally will not be required to pay U.S. federal income tax on any gain realized upon the sale, exchange or other taxable disposition of our common stock or a redeemable warrant unless:
| · | the gain is effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, the gain is attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States); |
| · | the non-U.S. holder is a non-resident alien individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or |
| · | shares of our common stock or our redeemable warrants, as applicable, constitute U.S. real property interests by reason of our status as a “United States real property holding corporation” (a USRPHC) for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the non-U.S. holder’s disposition of, or the non- U.S. holder’s holding period for, our common stock or redeemable warrants, as applicable. |
We believe that we are not currently and will not become a USRPHC for U.S. federal income tax purposes, and the remainder of this discussion so assumes. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if the non-U.S. holder actually or constructively hold more than five percent of such regularly traded common stock at any time during the shorter of the five-year period preceding the non-U.S. holder’s disposition of, or the non-U.S. holder’s holding period for, our common stock. In addition, provided that our common stock is regularly traded on an established securities market, a redeemable warrant will not be treated as a U.S. real property interest with respect to a non-U.S. holder if such holder did not own, actually or constructively, warrants whose total fair market value on the date they were acquired (and on the date or dates any additional warrants were acquired) exceeded the fair market value on that date (and on the date or dates any additional warrants were acquired) of 5% of all our common stock.
If the non-U.S. holder is described in the first bullet above, it will be required to pay tax on the net gain derived from the sale, exchange or other taxable disposition under regular graduated U.S. federal income tax rates, and a corporate non-U.S. holder described in the first bullet above also may be subject to the branch profits tax at a rate of 30%, or such lower rate as may be specified by an applicable income tax treaty. An individual non-U.S. holder described in the second bullet above will be required to pay a flat 30% tax (or such lower rate specified by an applicable income tax treaty) on the gain derived from the sale, exchange, or other taxable disposition, which gain may be offset by U.S. source capital losses for the year (provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses). Non-U.S. holders should consult their own tax advisors regarding any applicable income tax or other treaties that may provide for different rules.
Federal Estate Tax
Common stock or redeemable warrants beneficially owned by an individual who is not a citizen or resident of the United States (as defined for U.S. federal estate tax purposes) at the time of their death will generally be includable in the decedent’s gross estate for U.S. federal estate tax purposes. Such shares, therefore, may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of dividends paid to you, your name and address and the amount of tax withheld, if any. A similar report will be sent to you. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in your country of residence.
Payments of dividends on or of proceeds from the disposition of our securities made to you may be subject to information reporting and backup withholding at a current rate of 30% unless you establish an exemption, for example, by properly certifying your non-U.S. status on an IRS Form W-8BEN or IRS Form W-8BEN-E or other applicable IRS Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that you are a U.S. person.
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Backup withholding is not an additional tax; rather, the U.S. federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance Act generally imposes withholding tax at a rate of 30% on dividends from the sale or other disposition of our securities paid to a “foreign financial institution” (as specially defined under these rules), unless such institution enters into an agreement with the U.S. government to, among other things, withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding the U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or otherwise establishes an exemption. FATCA also generally imposes a U.S. federal withholding tax of 30% on proceeds from the sale or other disposition of our securities paid to a “non-financial foreign entity” (as specially defined for purposes of these rules) unless such entity provides the withholding agent with a certification identifying certain substantial direct and indirect U.S. owners of the entity, certifies that there are none or otherwise establishes an exemption. The withholding provisions under FATCA generally apply to dividends paid by us. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph. Non-U.S. holders should consult their own tax advisors regarding the possible implications of this legislation on their investment in our securities.
Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, owning and disposing of our securities, including the consequences of any proposed changes in applicable laws.
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UNDERWRITING
Aegis Capital Corp. (“Aegis” or the “underwriter”) is acting as the sole underwriter and the investment banker of this public offering. Under the terms of an underwriting agreement, which is filed as an exhibit to the registration statement, the underwriter has agreed to purchase from us the number of common units and pre-funded units shown opposite its name below:
Underwriter |
| Number of Common Units |
|
| Number of Pre-funded Units |
| ||
Aegis Capital Corp. |
|
|
|
|
|
| ||
The underwriting agreement provides that the underwriter’s obligation to purchase the common units and pre-funded units depends on the satisfaction of the conditions contained in the underwriting agreement including:
| · | the representations and warranties made by us to the underwriter are true; |
| · | there is no material change in our business or the financial markets; and |
| · | we deliver customary closing documents to the underwriter. |
Underwriting Commissions and Discounts and Expenses
The following table shows the per share and total underwriting discounts and commissions we will pay to Aegis. These amounts are shown assuming both no exercise and full exercise of the underwriter’s option to purchase additional common units and/or pre-funded units.
|
| Per |
|
| Per Pre-Funded |
|
| Total |
|
|
| |||||
|
| Common Unit |
|
| Units |
|
| No Exercise |
|
| Full Exercise |
| ||||
Public offering price |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Underwriting discounts and commissions to be paid by us (7.0%) |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Non-accountable expense allowance (1.0%)(1) |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Proceeds, before expenses, to us |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
(1) | We have agreed to pay a non-accountable expense allowance to Aegis equal to 1.0% of the gross proceeds received in this offering. |
We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ , including a 1.0% non-accountable expense allowance. We have also agreed to reimburse the underwriter for certain of its expenses, including “roadshow”, diligence, and reasonable legal fees and disbursements, in an amount not to exceed $100,000 in the aggregate.
As additional compensation to Aegis, upon consummation of this offering, we will issue to Aegis or its designees warrants to purchase an aggregate number of shares of our common stock equal to 4.0% of the number of shares of common stock issued in this offering, at an exercise price per share equal to 125.0% of the public offering price (the “Underwriter’s Warrants”). The Underwriter’s Warrants and the underlying shares of common stock will not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the Underwriter’s Warrants by any person for a period of 180 days beginning on the date of commencement of sales of the offering in compliance with FINRA Rule 5110.
The Underwriter’s Warrants will be exercisable from the date that is six months from the commencement of the sales of the offering, and will expire five years after the commencement of sales of the offering in compliance with FINRA Rule 5110(g)(8)(A). Furthermore, (i) the Underwriter’s Warrants do not have more than one demand registration right at our Company’s expense in compliance with FINRA Rule 5110(g)(8)(B); (ii) the Underwriter’s Warrants do not have a demand registration right with a duration of more than five years from the commencement of sales of the public offering in compliance with FINRA Rule 5110(g)(8)(C); (iii) the Underwriter’s Warrants do not have piggyback registration rights with a duration of more than seven years from the commencement of sales of the public offering in compliance with FINRA Rule 5110(g)(8)(D); and (iv) the Underwriter’s Warrants have anti-dilution terms that are consistent with FINRA Rule 5110(g)(8)(E) and (F).
Over-Allotment Option
We have granted the underwriter an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriter to purchase up to an aggregate of 450,000 additional shares of common stock and/or pre-funded warrants, representing 15% of the shares and pre-funded warrants sold in the offering and/or up to 1,350,000 additional redeemable warrants, representing 15% of the redeemable warrants sold in the offering. The purchase price to be paid per additional share will be equal to the public offering price of one common unit, less the purchase price for the redeemable warrant included within the common unit and the underwriting discount. The purchase price to be paid per pre-funded warrant will be equal to the public offering price of one pre-funded unit, less the purchase price for the redeemable warrant included within the pre-funded unit and the underwriting discount. The purchase price to be paid per additional redeemable warrant will be $ . If this option is exercised in full to purchase shares of common stock and/or pre-funded warrants only, the total price to the public will be $ and the total net proceeds, before expenses, to us will be $ . If this option is exercised in full to purchase redeemable warrants only, the total price to the public will be $ and the total net proceeds, before expenses, to us will be $ .
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Stabilization
In accordance with Regulation M under the Exchange Act, the underwriter may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including short sales and purchases to cover positions created by short positions, stabilizing transactions, syndicate covering transactions, penalty bids and passive market making.
| · | Short positions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares or purchasing shares in the open market. |
| · | Stabilizing transactions permit bids to purchase the underlying security as long as the stabilizing bids do not exceed a specific maximum price. |
| · | Syndicate covering transactions involve purchases of our common stock in the open market after the distribution has been completed to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the underwriters’ option to purchase additional shares. If the underwriters sell more shares than could be covered by the underwriters’ option to purchase additional shares, thereby creating a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
| · | Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
| · | In passive market making, market makers in our common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchase shares of our common stock until the time, if any, at which a stabilizing bid is made. |
These activities may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result of these activities, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on Nasdaq or otherwise and, if commenced, may be discontinued at any time.
Neither we nor the underwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor the underwriter make any representation that Aegis will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
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Offering Price Determination
The public offering price was negotiated between Aegis and us. In determining the public offering price of our units, Aegis considered:
| · | the history and prospects for the industry in which we compete; |
| · | our financial information; |
| · | the ability of our management and our business potential and earning prospects; |
| · | the prevailing securities markets at the time of this offering; and |
| · | the recent market prices of, and the demand for, publicly traded shares of generally comparable companies, as well as the recent market price of our Company’s common stock. |
Indemnification
We have agreed to indemnify Aegis, its affiliates and each person controlling Aegis against any losses, claims, damages, judgments, assessments, costs, and other liabilities, as the same are incurred (including the reasonable fees and expenses of counsel), relating to or arising out of the offering, undertaken in good faith.
Discretionary Accounts
The underwriter has informed us that it does not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the shares of our common stock being offered in this offering.
Lock-Up Agreements
We have agreed that, the Company’s directors, executive officers, employees and shareholders holding at least ten percent (10%) of the outstanding common stock will enter into customary “lock-up” agreements in favor of the underwriter for a period of one hundred eighty (180) days from the closing date of the Offering; provided, however, that any sales by parties to the lock-ups shall be subject to the lock-up agreements and provided further, that none of such shares shall be saleable in the public market until the expiration of the one hundred eighty (180) day period described above.
Company Standstill
We have agreed that, for a period of eighteen (18) months from the closing date of the Offering, that without the prior written consent of Aegis, the Company will not (a) offer, sell, issue, or otherwise transfer or dispose of, directly or indirectly, any equity of the Company or any securities convertible into or exercisable or exchangeable for equity of the Company; (b) file or caused to be filed any registration statement with the Commission relating to the offering of any equity of the Company or any securities convertible into or exercisable or exchangeable for equity of the Company; or (c) enter into any agreement or announce the intention to effect any of the actions described in subsections (a) or (b) hereof. So long as none of such equity securities shall be saleable in the public market until the expiration of the eighteen (18) month period described above, the following matters shall not be prohibited by the Standstill: (i) the adoption of an equity incentive plan and the grant of awards or equity pursuant to any equity incentive plan, and the filing of a registration statement on Form S-8; and (ii) the issuance of equity securities in connection with an acquisition or a strategic relationship, which may include the sale of equity securities. In no event should any equity transaction during the Standstill period result in the sale of equity at an offering price to the public less than that of the Offering referred herein.
Tail Financing
Aegis shall be entitled to compensation with respect to any public or private offering or other financing or capital raising transaction of any kind (“Tail Financing”) to the extent that such financing or capital is provided to the Company by funds whom Aegis had contacted during the engagement period pursuant to the Letter of Engagement dated November 8, 2021 or introduced to the Company during the engagement period, if such Tail Financing is consummated at any time within the 5 month period following the expiration or termination of the Letter of Engagement dated November 8, 2021.
Other Relationships
Aegis has provided us and our affiliates with investment banking and financial advisory services, including serving as placement agent for private placements of securities, for which Aegis received customary fees. Aegis may in the future provide us and our affiliates with such services. Aegis may release, or authorize us to release, as the case may be, the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice.
In connection with our initial public offering, we will enter into an underwriting agreement with Aegis pursuant to which we will pay Aegis an aggregate of $ in commissions and non-accountable expenses ($ assuming the overallotment is exercised). In addition, we issued Aegis warrants to purchase 4% of the shares of our common stock issued in this offering at an exercise price per share equal to 125% of the public offering price.
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Offer restrictions outside the United States
Other than in the United States, no action has been taken by us or the underwriter that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who come into possession of this prospectus are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Electronic Distribution
A prospectus in electronic format may be made available on the websites maintained by the underwriter or selling group members, if any, participating in the offering. Aegis may allocate a number of shares to the selling group members, if any, for sale to their online brokerage account holders. Any such allocations for online distributions will be made by Aegis on the same basis as other allocations.
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LEGAL MATTERS
Certain legal matters in connection with the securities offered by this prospectus have been passed upon for the Company by Harter Secrest & Emery LLP, Rochester, New York and for the underwriter by Kaufman & Canoles, P.C., Richmond, Virginia.
EXPERTS
Our financial statements as of December 31, 2021 and December 31, 2020 have been included in reliance on the report of Freed Maxick CPAs, P.C., an independent registered public accounting firm.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the shares of common stock being offered by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference. All filings we make with the SEC are available on the SEC’s web site at www.sec.gov. You may also request a copy of these filings, at no cost, by writing us at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534 or contacting us at (585) 385-0610.
We are subject to the periodic reporting requirements of the Exchange Act, and we will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available on the website of the SEC referred to above. We maintain a website at www. igicybersecurity.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge or at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We have not incorporated by reference into this prospectus the information contained in, or that can be accessed through, our website, and you should not consider it to be a part of this prospectus.
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INDEX TO FINANCIAL STATEMENTS
INFINITE GROUP, INC.
Unaudited Financial Statements
For the Three and Six Months Ended June 30, 2022 and 2021
Financial Statements
For the Fiscal Years Ended December 31, 2021 and 2020
| F-1 |
| Table of Contents |
INFINITE GROUP, INC. | ||||||||
BALANCE SHEETS | ||||||||
|
|
|
|
| ||||
ASSETS | ||||||||
|
|
|
|
| ||||
|
| June 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (Unaudited) |
|
|
| |||
Current assets: |
|
|
|
|
|
| ||
Cash |
| $ |
|
| $ |
| ||
Accounts receivable, net of allowances of $ |
|
|
|
|
|
|
|
|
December 31, 2021, respectively |
|
|
|
|
|
| ||
Prepaid expenses and other current assets |
|
|
|
|
|
| ||
Total current assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Right of Use Asset Operating Lease, net |
|
|
|
|
|
| ||
Property and equipment, net |
|
|
|
|
|
| ||
Software, net |
|
|
|
|
|
| ||
Deposits |
|
|
|
|
|
| ||
Total assets |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | ||||||||
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ |
|
| $ |
| ||
Accrued payroll |
|
|
|
|
|
| ||
Accrued interest payable |
|
|
|
|
|
| ||
Accrued retirement |
|
|
|
|
|
| ||
Deferred revenue |
|
|
|
|
|
| ||
Accrued expenses other and other current liabilities |
|
|
|
|
|
| ||
Operating lease liability - Short-term |
|
|
|
|
|
| ||
Current maturities of long-term obligations |
|
|
|
|
|
| ||
Current maturities of long-term obligations - related parties |
|
|
|
|
|
| ||
Notes payable, net |
|
|
|
|
|
| ||
Notes payable - related parties |
|
|
|
|
|
| ||
Total current liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Long-term obligations: |
|
|
|
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|
|
|
|
Notes payable: |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
| ||
Related parties |
|
|
|
|
|
| ||
Operating lease liability - Long-term |
|
|
|
|
|
| ||
Total liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficiency: |
|
|
|
|
|
|
|
|
Common stock, $ |
|
|
|
|
|
| ||
Additional paid-in capital |
|
|
|
|
|
| ||
Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
Total stockholders' deficiency |
|
| ( | ) |
|
| ( | ) |
Total liabilities and stockholders' deficiency |
| $ |
|
| $ |
| ||
See notes to unaudited financial statements.
| F-2 |
| Table of Contents |
INFINITE GROUP, INC. | ||||||||||||||||||
STATEMENTS OF OPERATIONS (Unaudited) | ||||||||||||||||||
|
|
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|
|
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|
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|
|
|
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| ||||||
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross profit |
|
|
|
|
|
|
|
|
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|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Selling |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating income (loss) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Interest Income and Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Related parties |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) | ||
Other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) | ||
Total interest expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) | ||
Total other income (expense) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net loss per share – basic and diluted |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Weighted average shares outstanding – basic |
|
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|
|
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|
|
|
| ||||||
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
| ||
Weighted average shares outstanding – diluted |
|
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|
|
|
|
|
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|
|
|
| ||||||
|
|
|
|
|
|
|
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|
|
|
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|
|
|
| ||
See notes to unaudited financial statements. | ||||||||||||||||||
| F-3 |
| Table of Contents |
INFINITE GROUP, INC. | ||||||||||||||||||||
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY (Unaudited) | ||||||||||||||||||||
Three and Six Months Ended June 30, 2022 and 2021 | ||||||||||||||||||||
|
|
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|
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|
|
|
|
|
| |||||
Three and Six Months Ended June 30, 2022 | ||||||||||||||||||||
|
|
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|
| |||||
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
| |||||
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance - December 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
| 0 |
|
|
| 0 |
|
|
|
|
|
| 0 |
|
|
|
| ||
Warrants issued |
|
| 0 |
|
|
| 0 |
|
|
|
|
|
| 0 |
|
|
|
| ||
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants |
|
|
|
|
|
|
|
| ( | ) |
|
| 0 |
|
|
| 0 |
| ||
Stock based compensation |
|
| 0 |
|
|
| 0 |
|
|
|
|
|
| 0 |
|
|
|
| ||
Warrants issued |
|
| 0 |
|
|
| 0 |
|
|
|
|
|
| 0 |
|
|
|
| ||
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
Three and Six Months Ended June 30, 2021 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
| |||||
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
| |||||
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance - December 31, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
| 0 |
|
|
| 0 |
|
|
|
|
|
| 0 |
|
|
|
| ||
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
| 0 |
|
|
|
| ||||
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
| 0 |
|
|
|
| ||||
Stock based compensation |
|
| 0 |
|
|
| 0 |
|
|
|
|
|
| 0 |
|
|
|
| ||
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
See notes to unaudited financial statements.
| F-4 |
| Table of Contents |
INFINITE GROUP, INC. | ||||||||||
STATEMENTS OF CASH FLOWS (Unaudited) | ||||||||||
|
|
|
|
|
|
| ||||
|
| Six Months Ended June 30, |
| |||||||
|
| 2022 |
|
| 2021 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
| ||||
Net loss |
| $ | ( | ) |
| $ | ( | ) | ||
Adjustments to reconcile net loss to net cash used |
|
|
|
|
|
|
|
| ||
by operating activities: |
|
|
|
|
|
|
|
| ||
Stock based compensation |
|
|
|
|
|
| ||||
Depreciation and amortization |
|
|
|
|
|
| ||||
Amortization of debt discount |
|
|
|
|
|
| ||||
(Increase) decrease in assets: |
|
|
|
|
|
|
|
| ||
Accounts receivable |
|
|
|
|
|
| ||||
Prepaid expenses and other assets |
|
|
|
|
| ( | ) | |||
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
| ||
Accounts payable |
|
|
|
|
|
| ||||
Deferred revenue |
|
| ( | ) |
|
|
| |||
Accrued expenses |
|
|
|
|
|
| ||||
Accrued retirement |
|
|
|
|
|
| ||||
Net cash used by operating activities |
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
|
|
|
| ||
Purchase of property and equipment |
|
| ( | ) |
|
| ( | ) | ||
Capitalization of software development costs |
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
| ||
Net cash used by investing activities |
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
|
|
|
| ||
Gross proceeds from notes payable |
|
|
|
|
|
| ||||
Less debt issuance costs |
|
| ( | ) |
|
| 0 |
| ||
Proceeds from notes payable - related parties |
|
|
|
|
|
| ||||
Repayment of notes payable - short-term |
|
| ( | ) |
|
| 0 |
| ||
Proceeds from the exercise of common stock options |
|
|
|
|
|
| ||||
Repayment of long-term obligations |
|
|
|
|
| ( | ) | |||
|
|
|
|
|
|
|
|
| ||
Net cash provided by financing activities |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| ||
Net decrease in cash |
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
| ||
Cash - beginning of period |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| ||
Cash - end of period |
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
| ||
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
| ||
Cash payments for interest |
| $ |
|
| $ |
| ||||
Right of use assets obtained in exchange for new operating lease liabilities |
| $ |
|
| $ |
| ||||
See notes to unaudited financial statements.
| F-5 |
| Table of Contents |
INFINITE GROUP, INC.
Notes to Financial Statements - (Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements of Infinite Group, Inc. (“Infinite Group, Inc.” or the “Company”) included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S.) (“GAAP”) for interim financial information and with instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. The December 31, 2021 balance sheet has been derived from the audited financial statements at that date but does not include all disclosures required by GAAP. The accompanying unaudited financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (SEC). Results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2022.
Note 2. Management Plans - Capital Resources
The Company reported net losses of $
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's goal is to increase sales and generate cash flow from operations on a consistent basis. The Company’s business plans require improving the results of its operations in future periods. The Company has renegotiated the terms of certain obligations, using operational cash flow to pay down balances and extending terms, and provided financing with the issuance of new loans.
During April 2022, the Company entered into a financing arrangement with Talos Victory Fund, LLC, for $
During May 2022, the Company entered into a financing arrangement with Mast Hill Fund, L.P. for $
As previously reported, on January 31, 2022, the Company, entered into a Stock Purchase Agreement (the “Pratum Agreement”), by and among the Company, the David A. Nelson, Jr. Living Trust (“Seller”), David A. Nelson, Jr. (the “Beneficiary” and, together with Seller, the “Seller Parties”); and Pratum, Inc., an Iowa corporation (“Pratum”), whereby the Company agreed to acquire all of the issued and outstanding equity securities of the Company from the Seller Parties (the “Pratum Acquisition”). Pursuant to the terms of the Pratum Agreement, the Agreement could be terminated under certain circumstances, including, among other things, if the Pratum Acquisition does not close by March 31, 2022 (the “Outside Date”). On March 28, 2022, the Company, the Seller Parties, and Pratum entered into an agreement whereby the parties agreed to extend the Outside Date, as set forth in Section 2.1 of the Pratum Agreement, to May 15, 2022. On June 15, 2022, the Company, received notice of termination of the Pratum Agreement from the Seller Parties and Pratum pursuant to Section 8.1(a)(ii) of the Pratum Agreement on the basis that the Acquisition had not closed by the outside date of May 15, 2022, as amended.
During the first quarter of 2022, the Company filed an S-1 for a public offering of $15 million of common stock and redeemable warrants, which was expected to be used for the Pratum Acquisition and working capital needs. Following the termination of the Pratum Agreement the Company has been reevaluating its capital needs and structure of the offering. The completion of this offering is not a certainty. Should the offering not proceed or be further delayed, or should it occur in a reduced format, the Company anticipates that it will scale down spending to reduce costs and to increase cash flow while continuing to grow the operations at a slower pace.
The Company believes the capital resources generated by anticipated improving operational results due to reduction of expenses, increased bookings and deposits in our Services business, and an influx of new Nodeware orders under contract at June 30, 2022 as well as cash available under its factoring line of credit and from additional related parties and third-party loans, if needed, provide sources to fund its ongoing operations and to support the internal growth of the Company. The Company may need to extend existing debt agreements in order to provide resources for other purposes. 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 continue to evaluate alternatives which may include continuing to renegotiate the terms of other 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 remaining notes payable based on its cash flow. These plans, in management’s opinion, will allow the Company to meet its obligations for a reasonable period of time from the date the financial statements are available to be issued.
| F-6 |
| Table of Contents |
Note 3. Summary of Significant Accounting Policies
There are several accounting policies that the Company believes are significant to the presentation of its financial statements. These policies require management to make complex or subjective judgments about matters that are inherently uncertain. Note 3 to the Company’s audited financial statements for the year ended December 31, 2021 presents a summary of significant accounting policies as included in the Company’s Annual Report on Form 10-K as filed with the SEC.
Reclassifications – It is the Company’s policy to reclassify prior year amounts to conform with the current year presentation.
Fair Value of Financial Instruments - The carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate short-term maturity of these financial instruments. The carrying value of notes payable and convertible notes payable approximates the fair value based on rates currently available from financial institutions and various lenders.
Revenue
The Company’s total revenue recognized from contracts from customers was comprised of three major services: Managed support services, Cybersecurity projects, 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 June 30, 2022 or 2021 for contracts with an expected original duration of more than one year. The following table summarizes the revenue recognized by the major services:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Managed support services |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cybersecurity projects and software |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other IT consulting services |
|
| 0 |
|
|
|
|
|
| 0 |
|
|
|
| ||
Total sales |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Managed support services
Managed support services consist of revenue primarily from our subcontracts with Peraton (which purchased Perspecta in May 2021) 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.
Cybersecurity projects and software
Cybersecurity projects and software revenue includes the selling of licenses of Nodeware® and third-party software, principally Webroot™ as well as performing cybersecurity assessments, testing and consulting as a CISO (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, revenue 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 and testing services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For substantially all these contracts, revenue is recognized when the specific performance obligation is satisfied. If the contract has multiple performance obligations, the revenue is recognized when the performance obligations are satisfied. Depending on the nature of the service, the amounts recognized are based on an allocation of the transaction price to each performance obligation based on a relative standalone selling price of the products sold.
In substantially all agreements, a
| F-7 |
| Table of Contents |
Other IT consulting services
Other IT consulting services consists of services such as project management and general IT consulting services.
We generate revenue via fixed price service agreements. These are based on periodic billings of a fixed dollar amount for recurring services of a similar nature performed according to the contractual arrangements with clients. The revenues are recognized at time of service.
Based on historical experience, the Company believes that collection is reasonably assured.
During the three and six months ended June 30, 2022, sales to one client, including sales under subcontracts for services to several entities, accounted for
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. See Note 5 for further disclosure regarding capitalization of software for resale.
Leases - At contract inception, the Company determines whether the arrangement is or contains a lease and determines the lease classification. The lease term is determined based on the non-cancellable term of the lease adjusted to the extent optional renewal terms and termination rights are reasonably certain. Lease expense is recognized evenly over the lease term. Variable lease payments are recognized as period costs. The present value of remaining lease payments is recognized as a liability on the balance sheet with a corresponding right-of-use asset adjusted for prepaid or accrued lease payments. The Company uses its incremental borrowing rate for the discount rate, unless the interest rate implicit in the lease contract is readily determinable. The Company has adopted the practical expedients to not separate non-lease components from lease components and to not present short-term leases on the balance sheet. See Note 11 for further disclosure regarding lease accounting.
Note 4. Sale of Certain Accounts Receivable
The Company has available a financing line with a financial institution (the Purchaser), which enables the Company to sell accounts receivable to the Purchaser with full recourse against the Company. Pursuant to the provisions of FASB ASC 860, the Company reflects the transactions as a sale of assets and establishes an accounts receivable from the Purchaser for the retained amount less the costs and fees of the transaction and less any anticipated future loss in the value of the retained asset.
The retained amount is
The financing line provides the Company the ability to finance up to $
There were no gains or losses on the sale of the accounts receivable because all were collected. The cost associated with the financing line totaled $
Note 5. Capitalization of Software for Resale
As of June 30, 2022, there were $
| F-8 |
| Table of Contents |
Note 6. Deferred Revenue and Performance Obligations
Deferred Revenue
Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met.
Revenue recognized during the three months ended June 30, 2022 and 2021, that was included in the deferred revenue balances at the beginning of the respective periods, was approximately $
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to the remaining performance obligations represents all future, non-cancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods.
As of June 30, 2022, total remaining non-cancelable performance obligations under the Company’s contracts with customers was approximately $
Note 7. Debt Obligations
During the six months ended June 30, 2022, the Company entered into a financing arrangement (the “Second Mast Hill Loan”) with Mast Hill Fund, L.P. (“Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, Mast Hill agreed to lend the Company $
On April 12, 2022, the Company entered into a financing arrangement (the “Talos Loan”) with Talos Victory Fund, LLC (“Talos”), a Delaware limited liability company. In exchange for a promissory note, Talos agreed to lend the Company $
On May 27, 2022, the Company entered into a financing arrangement (the “Third Mast Hill Loan”) with Mast Hill. In exchange for a promissory note, Mast Hill agreed to lend the Company $
On June 30, 2022, the Company and Donald W. Reeve, a director of the Company, entered into two note modification agreements with respect to the Promissory Note originally dated December 30, 2020 and the Promissory Note originally dated
Note 8. Earnings per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company’s case, comprise shares issuable under convertible notes payable and stock options. The treasury stock method is used to calculate dilutive shares, which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options and warrants assumed to be exercised. In a loss period, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.
| F-9 |
| Table of Contents |
The following table sets forth the computation of basic and diluted net loss per share for the three months ended:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Numerator for basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Basic and diluted net loss per share |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from net loss per share calculation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Certain common shares issuable under stock options and convertible notes payable have been omitted from the diluted net loss per share calculation because their inclusion is considered anti-dilutive because the exercise prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.
Note 9. Stock Option Plans and Agreements
The Company has approved stock option plans and agreements covering up to an aggregate of
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.
Risk-free interest rate |
| % | ||
Expected dividend yield |
|
| % | |
Expected stock price volatility |
| % | ||
Expected life of options (years) |
|
|
| |
The Company recorded expense for options issued to employees and independent service providers of $51,708 and $
The Company issued
A summary of all stock option activity for the six months ended June 30, 2022 follows:
|
| Number of |
|
| Weighted |
|
| Remaining |
| Aggregate |
| |||
|
| Options |
|
| Average |
|
| Contractual |
| Intrinsic |
| |||
|
| Outstanding |
|
| Exercise Price |
|
| Term |
| Value |
| |||
Outstanding at December 31, 2021 |
|
|
|
| $ | .08 |
|
|
|
|
|
| ||
Granted |
|
|
|
|
| .13 |
|
|
|
|
|
| ||
Expired |
|
| ( | ) |
|
| .04 |
|
|
|
|
|
| |
Outstanding at June 30, 2022 |
|
|
|
| $ | .08 |
|
| 2.9 years |
| $ |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2022- vested or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expected to vest |
|
|
| $ | .07 |
|
| 2.9 years |
| $ |
| |||
Exercisable |
|
|
|
| $ | .07 |
|
| 2.9 years |
| $ |
| ||
Note 10. Warrants
On April 29, 2022, Mast Hill Fund, LP elected to purchase
| F-10 |
| Table of Contents |
Note 11. Lease
Beginning on August 1, 2016, the Company leased its headquarters facility under an operating lease agreement that was scheduled to expire on
Supplemental balance sheet information related to the leases on June 30, 2022 and December 31, 2021 is as follows:
Description |
| Classification |
| June 30, 2022 |
|
| December 31, 2021 |
| ||
|
|
|
|
|
|
|
|
| ||
Right of Use Asset - Lease, net |
| Other assets (non-current) |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Liability - Short Term |
| Accrued liabilities |
|
|
|
|
|
| ||
Operating Lease Liability - Long Term |
| Other long-term liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Total Operating Lease Liability |
|
|
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
|
|
Discount Rate - Operating Lease |
|
|
|
| % |
|
| % | ||
Note 12. Related Party Accrued Interest Payable
Included in accrued interest payable is amounts due to related parties of approximately $
Note 13. Subsequent Events
On July 29, 2022, the “Company and Andrew Hoyen (“Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Modification Agreement”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Lender (the “Hoyen Note”). The Note and the Modification Agreement was approved by the disinterested members of the Company’s Board of Directors. The Modification Agreement extends the due date of the Note to July 31, 2023, on which date the current outstanding principal balance of $
On August 10, 2022, the Company received funding from a loan agreement with Stripe and Celtic Bank. The loan amount was $139,400 plus a fixed fee of $
************
| F-11 |
| Table of Contents |
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, 2021 and 2020, and 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, 2021 and 2020, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
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 audit 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 audit 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| F-12 |
| Table of Contents |
As discussed in Note 2 to the financial statements, the Company has negative working capital, which raises substantial doubt about the entity’s ability to continue as a going concern. The ability to continue to meet its obligations as they become due is dependent on the Company generating operating cash flow to satisfy these obligations, managing the date these obligations are settled, and identifying alternative equity or long-term liability financing to replace the current obligations. The Company has concluded that management’s plans have alleviated this substantial doubt about the ability to continue as a going concern. We have identified this item as a critical audit matter because certain estimates and assumptions used by the Company in their plan to alleviate substantial doubt are subjective and required a high degree of auditor judgement.
Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedures we performed include: obtaining an understanding of the process and assumptions used by management to develop their plan, obtaining executed agreements and documents to support this plan where available, evaluating the reasonableness and consistency of methodology and assumptions applied by management based on historical facts, and evaluating the disclosures in the notes to the financial statements.
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.
/s/ Freed Maxick CPAs, P.C.
Rochester, New York
March 15, 2022, except for Note 14 as to which the date is April 1, 2022.
| F-13 |
| Table of Contents |
INFINITE GROUP, INC.
BALANCE SHEETS
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
ASSETS |
| |||||||
| Current assets: |
|
|
|
|
|
| ||
Cash |
| $ |
|
| $ |
| ||
Accounts receivable, net of allowances of $ |
|
|
|
|
|
| ||
Prepaid expenses and other current assets |
|
|
|
|
|
| ||
Total current assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Right of Use Asset Operating Lease, net |
|
|
|
|
|
| ||
| Property and equipment, net |
|
|
|
|
|
| ||
| Software, net |
|
|
|
|
|
| ||
| Deposits |
|
|
|
|
|
| ||
| Total assets |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIENCY | ||||||||
| Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ |
|
| $ |
| ||
Accrued payroll |
|
|
|
|
|
| ||
Accrued interest payable |
|
|
|
|
|
| ||
Accrued retirement |
|
|
|
|
|
| ||
Deferred revenue |
|
|
|
|
|
| ||
Accrued expenses other and other current liabilities |
|
|
|
|
|
| ||
Current maturities of long-term obligations |
|
|
|
|
|
| ||
Operating lease liability - Short-term |
|
|
|
|
|
| ||
Current maturities of long-term obligations - related parties |
|
|
|
|
|
| ||
Notes payable, net |
|
|
|
|
|
| ||
Notes payable - related parties |
|
|
|
|
|
| ||
Total current liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Long-term obligations: |
|
|
|
|
|
|
|
|
Notes payable: |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
| ||
Related parties |
|
|
|
|
|
| ||
Payroll taxes due 2022 |
|
|
|
|
|
| ||
Operating Lease liability - Long-term |
|
| 0 |
|
|
|
| |
Total liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stockholders' deficiency: |
|
|
|
|
|
|
|
|
Common stock, $ |
|
|
|
|
|
| ||
Additional paid-in capital |
|
|
|
|
|
| ||
Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
Total stockholders' deficiency |
|
| ( | ) |
|
| ( | ) |
| Total liabilities and stockholders' deficiency |
| $ |
|
| $ |
| ||
See notes to audited financial statements.
| F-14 |
| Table of Contents |
INFINITE GROUP, INC.
STATEMENTS OF OPERATIONS
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
| Sales |
| $ |
|
| $ |
| ||
| Cost of sales |
|
|
|
|
|
| ||
| Gross profit |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Costs and expenses: |
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
| ||
Selling |
|
|
|
|
|
| ||
| Total costs and expenses |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Operating income (loss) |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
| Other income - (see Note 6 & Note 7) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Interest income |
|
|
|
|
|
| ||
| Interest expense: |
|
|
|
|
|
|
|
|
Related parties |
|
| ( | ) |
|
| ( | ) |
Other |
|
| ( | ) |
|
| ( | ) |
Total interest expense |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | ( | ) |
| $ |
| |
|
|
|
|
|
|
|
|
|
| Net income (loss) per share basic and diluted |
| $ | ( | ) |
| $ |
| |
|
|
|
|
|
|
|
|
|
| Weighted average shares outstanding basic |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Weighted average shares outstanding diluted |
|
|
|
|
|
| ||
See notes to audited financial statements.
| F-15 |
| Table of Contents |
INFINITE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY'
|
| Years Ended December 31, 2021 and 2020 |
| |||||||||||||||||
|
|
|
| Additional |
|
|
|
|
| |||||||||||
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Balance - December 31, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock based compensation |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Net income |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance - December 31, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Stock based compensation |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Warrants issued |
|
| 0 |
|
|
|
|
|
|
|
|
| 0 |
|
|
|
| |||
| Net loss |
|
| 0 |
|
|
|
|
|
| 0 |
|
|
| ( | ) |
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance - December 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
See notes to audited financial statements.
| F-16 |
| Table of Contents |
INFINITE GROUP, INC. | ||||||||
| ||||||||
STATEMENTS OF CASH FLOWS | ||||||||
| ||||||||
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income (loss) |
| $ | ( |
|
| $ |
| |
Adjustments to reconcile net income (loss) to net cash |
|
|
|
|
|
|
| |
provided by (used in) operating activities: |
|
|
|
|
|
|
| |
Stock based compensation |
|
|
|
|
|
| ||
Depreciation and amortization |
|
|
|
|
|
| ||
Amortization of debt discount |
|
|
|
|
| 0 |
| |
Bad debt expense |
|
|
|
|
|
| ||
Forgiveness of note payable and interest |
|
| ( | ) |
|
| ( | ) |
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
| ( | ) | |
Prepaid expenses and other current assets |
|
| ( | ) |
|
| ( | ) |
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
| ||
Deferred revenue |
|
|
|
|
|
| ||
Accrued expenses and other current liabilities |
|
|
|
|
| ( | ) | |
Net cash used in operating activities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| ( | ) |
|
| ( | ) |
Capitalization of software development costs |
|
| ( | ) |
|
| ( | ) |
Net cash used in investing activities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from note payable |
|
|
|
|
|
| ||
Debt issuance costs |
|
| ( | ) |
|
| 0 |
|
Proceeds from notes payable - related parties |
|
|
|
|
|
| ||
Repayments of notes payable - related parties |
|
| 0 |
|
|
| ( | ) |
Repayments of note payable - short-term |
|
| 0 |
|
|
| ( | ) |
Repayment of long-term obligations |
|
| ( | ) |
|
| 0 |
|
Proceeds from the exercise of common stock options |
|
|
|
|
| 0 |
| |
Net cash provided by financing activities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Cash - beginning of year |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Cash - end of year |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash payments for: |
|
|
|
|
|
|
|
|
Interest |
| $ |
|
| $ |
| ||
Income taxes |
| $ | 0 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Warrant issued in conjunction with debts |
| $ |
|
| $ | 0 |
| |
Common stock issued to extinguish debt |
| $ |
|
| $ | 0 |
| |
Common stock issued for prepaid consulting agreement |
| $ |
|
| $ | 0 |
| |
See notes to audited financial statements.
| F-17 |
| Table of Contents |
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 industry. There were no significant sales from customers in foreign countries during 2021 and 2020. All assets are located in the United States.
NOTE 2. - MANAGEMENT PLANS
The Company reported operating loss of $
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's goal is to increase sales and generate cash flow from operations on a consistent basis. The Company’s business plans require improving the results of its operations in future periods. The Company has renegotiated the terms of some certain obligations, using operational cash flow to pay down balances and extending terms, and provided financing with the issuance of new loans.
During 2020, the Company paid off approximately $
During 2020, the Company paid off approximately $
During 2021, the Company has renegotiated the due dates of approximately $
During 2021, the Company settled the long-term debt agreement with the Pension Benefit Guaranty Corporation (“PBGC”) for $
During 2021, the Company received proceeds of $
| F-18 |
| Table of Contents |
During 2021, the Company entered into a financing arrangement with Mast Hill Fund, L.P. for $
During 2022, the Company entered into a financing arrangement with Mast Hill Fund, L.P. for $
During the first quarter of 2022, the Company filed an S-1 for a public offering of $
The Company believes the capital resources generated by the improving results of its operations as well as cash available under its factoring line of credit and from additional related parties and third-party loans, if needed, provide sources to fund its ongoing operations and to support the internal growth of the Company. The Company may need to extend existing debt agreements in order to provide resources for other purposes. 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 continue to evaluate alternatives which may include continuing to renegotiate the terms of other 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 remaining notes payable based on its cash flow. These plans, in management’s opinion, will allow the Company to meet its obligations for a reasonable period of time from the date the financial statements are available to be issued.
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 $
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 they are shown 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.
| F-19 |
| Table of Contents |
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 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 $
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 $
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, 2021, there is $
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 2021 and 2020.
| F-20 |
| Table of Contents |
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’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, 2021 or 2020 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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Managed support services |
| $ |
|
| $ |
| ||
Cybersecurity projects and software |
|
|
|
|
|
| ||
Other IT consulting services |
|
|
|
|
|
| ||
Total sales |
| $ |
|
| $ |
| ||
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 CISO (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. |
| F-21 |
| Table of Contents |
| · | 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 CISO 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 |
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 2021, sales to one client, including sales under subcontracts for services to several entities, accounted for
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, 2021 or 2020. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2021 and 2020, the Company recognized no interest and penalties.
| F-22 |
| Table of Contents |
The Company files U.S. federal tax returns and tax returns in various states. The tax years 2018 through 2021 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. The carrying amount of the Company’s term debt and notes payable approximates fair value because the effective yields on these obligations, which include contractual interest rates, taken together with other features such as concurrent issuance of warrants, are comparable to rates of returns for instruments of similar credit risk.
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, warrants 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, 2021 and 2020:
|
| Years ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Numerator for basic and diluted net income per share: |
|
|
|
|
|
| ||
Net income (loss) |
| $ | ( | ) |
| $ |
| |
Basic and diluted net income (loss) per share |
| $ | ( | ) |
| $ |
| |
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|
|
Weighted average common shares outstanding |
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Basic shares |
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| ||
Diluted shares |
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| ||
|
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|
|
Anti-dilutive shares excluded from net income per share |
|
|
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|
| ||
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.
| F-23 |
| Table of Contents |
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
The Company recognizes 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. Assets and liabilities are presented and disclosed separately, and the liabilities must be classified appropriately as current and noncurrent.
NOTE 4. - PROPERTY AND EQUIPMENT
Property and equipment consists of:
|
|
|
| December 31, |
| |||||
|
| Depreciable Lives |
| 2021 |
|
| 2020 |
| ||
| Software |
|
| $ |
|
| $ |
| |||
| Equipment |
|
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|
| |||
| Furniture and fixtures |
|
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| |||
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|
| ||
| Accumulated depreciation |
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
| $ |
|
| $ |
| ||
Depreciation expense was $
NOTE 5. - NOTES PAYABLE - CURRENT
Notes payable consist of:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
| Demand note payable, 10%, secured by software (A) |
| $ |
|
| $ |
| ||
| Convertible promissory note, 8%, due November 3, 2022 (B) |
|
|
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|
|
| ||
| Convertible notes payable, 6% |
|
|
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|
| ||
|
|
|
|
| ||||
| Less: Deferred financing costs (B) |
|
|
|
|
|
| ||
| Debt discounts - warrants (B) |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
| (A) | Demand Note payable, 10%, secured by Software - During 2015, the Company issued a note in connection with the purchase of Software. |
| F-24 |
| Table of Contents |
| (B) | Convertible promissory note, 8%, due November 3, 2022 - During 2021, the Company entered into a convertible promissory note. In exchange for the convertible promissory note, the lender agreed to lend the Company $ |
|
|
|
| (C) | Convertible notes payable, 6%, maturity date of December 31, 2016 - At December 31, 2021, the Company was obligated to unrelated third parties for $ |
Notes payable - related parties consist of:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Demand notes payable to director, 6%, unsecured |
| $ |
|
| $ |
| ||
Demand note payable to employee, 6% unsecured |
|
|
|
|
|
| ||
Demand notes payable to officer and director, 6%, unsecured |
|
|
|
|
|
| ||
Demand note payable to officer and director, 6%, unsecured |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
| F-25 |
| Table of Contents |
NOTE 6. - LONG-TERM OBLIGATIONS
Notes Payable - Other - Term notes payable - other consist of:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
2016 note payable, 6%, unsecured, due December 31, 2021 (A) |
| $ |
|
| $ |
| ||
Note payable, 10%, secured, due January 1, 2018 (B) |
|
|
|
|
|
| ||
| Convertible term note payable,12%, secured, due January 1, 2024 (C) |
|
|
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|
| ||
| Term note payable - PBGC, 6%, secured (D) |
|
|
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|
| ||
| 2020 note payable, 6%, unsecured, due August 24, 2024 (E) |
|
|
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|
|
| ||
| Convertible term note payable,7%, secured (F) |
|
|
|
|
|
| ||
| Convertible notes payable, 6%, due January 1, 2024 (G) |
|
|
|
|
|
| ||
| Accrued interest due after 2021(H) |
|
|
|
|
|
| ||
|
|
|
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|
|
| ||
| Less: deferred financing costs |
|
|
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|
| ||
|
|
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| ||
| Less: current maturities |
|
|
|
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| ||
|
| $ |
|
| $ |
| ||
| (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 $ |
|
|
|
| (B) | Note payable, 10%, secured, due January 1, 2018 - During the years ended December 31, 2004 and 2003, the Company issued secured notes payable aggregating $ |
|
|
|
| (C) | Convertible term note payable, 12%, secured, due January 1, 2024 - The Company entered into a secured loan agreement during 2008 for working capital. The loan bears interest at |
| F-26 |
| Table of Contents |
| (D) | Term note payable - PBGC, 6%, secured - On October 17, 2011, in accordance with the settlement agreement dated September 6, 2011 the Company issued a secured promissory note in favor of the PBGC for $ |
|
|
|
| (E) | 2020 note payable, 6%, unsecured, due August 24, 2024 - The Company entered into a promissory note agreement dated August 24, 2020 with a third-party lender. The note represents the negotiated amount owed due to the lender after a payment in the amount of $ |
|
|
|
| (F) | Convertible term note payable, 7%, secured, due January 1, 2024 - The note bears interest at the rate of |
|
|
|
| (G) | Convertible notes payable, 6%, due January 1, 2024 - The Company has a note payable to a former related party in the amount of $ |
|
|
|
| (H) | Accrued interest due after 2021 - The accrued interest for items (G) above is not due until the due date of the respective loan. |
| F-27 |
| Table of Contents |
Notes Payable - Related Parties
Notes payable - related parties consist of:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
| Note payable, up to $500,000, 7.5%, due August 31, 2026 (A) |
| $ |
|
| $ |
| ||
| 2020 Note payable, 6%, due January 1, 2024 (B) |
|
|
|
|
|
| ||
| Convertible notes payable, 6% (C) |
|
|
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|
| ||
| Convertible note payable, 7%, due June 30, 2023 (D) |
|
|
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|
| ||
| Note payable, $100,000 line of credit, 6%, unsecured (E) |
|
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| ||
| Note payable, $75,000 line of credit, 6%, unsecured (F) |
|
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| ||
| Accrued interest due after 2022 (G) |
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| Less current maturities |
|
|
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|
| $ |
|
| $ |
| ||
| (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 $ |
|
|
|
| (B) | 2020 Note payable, 6%, due January 1, 2024 - On December 30, 2020, the Company entered into a promissory note agreement with a member of its Board. The interest payments are due quarterly. First payment to be made on April 1, 2021 and every three (3) months thereafter until the note is retired. Principal payments of one hundred thousand dollars ($ |
|
|
|
| (C) | Convertible notes payable, 6% - The Company has a note payable to a related party of $ |
|
|
|
|
| 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. |
|
|
|
| (D) | Convertible note payable, 7%, due June 30, 2023 - On February 12, 2015, the Company borrowed $ |
|
|
|
| (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 $ |
| F-28 |
| Table of Contents |
| (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 $ |
|
|
|
| (G) | Accrued interest due after 2022 - The accrued interest for item (C) above is not due until the due date of the loan. |
Long-Term Obligations
As of December 31, 2021, minimum future annual payments of long-term obligations and amortization of deferred financing costs are as follows:
|
| Annual |
|
| Annual |
|
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| ||||
|
| Payments |
|
| Amortization |
|
| Net |
| |||
Due Prior to 2022 |
| $ |
|
| $ |
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| $ |
| |||
2022 |
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2023 |
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2024 |
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2025 |
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2026 |
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Total long-term obligations |
| $ |
|
| $ |
|
| $ |
| |||
NOTE 7. - STOCK AND STOCK OPTION PLANS
Preferred Stock - The Company’s certificate of incorporation authorizes its Board to issue up to
2005 Plan - The Company’s Board and stockholders approved a stock option plan adopted in 2005, which has authority to grant options to purchase up to an aggregate of
2009 Plan - During 2009, the Company’s Board approved the 2009 stock option plan, which grants options to purchase up to an aggregate of
2019 Plan - During 2019, the Company’s Board approved the 2019 stock option plan, which grants options to purchase up to an aggregate of
2020 Plan - During 2020, the Company’s Board approved the 2020 stock option plan, which grants options to purchase up to an aggregate of
| F-29 |
| Table of Contents |
NOTE 8. - STOCK OPTION AGREEMENTS AND TRANSACTIONS
The Company grants stock options to its key employees and independent service providers as it deems appropriate. Most options expire from five to ten years after the grant date.
Option Agreements - The Company's Board approved stock option agreements with consultants, an employee for a performance-based award and a member of the Board of which options for an aggregate of
On April 6, 2021, the Company granted a stock option to purchase a total of
On April 19, 2021, the Company issued
The remaining stock options issued during the year ended December 31, 2021 included in the table below relate to options issued to employees as compensation expense.
Loan Fees - On May 7, 2019, the Company entered into a note payable agreement for up to $
On August 24, 2020, the Company entered into a note payable agreement for $
On November 17, 2020, the Company extended a note payable agreement of $
On December 31. 2020, the Company extended a note payable agreement of $
| F-30 |
| Table of Contents |
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, 2021 and 2020.
|
| 2021 |
|
| 2020 |
| ||
Risk free interest rate |
| % |
| % | ||||
Expected dividend yield |
|
| % |
|
| % | ||
Expected stock price volatility |
| % |
|
| % | |||
Expected life of options |
|
|
|
| ||||
The following is a summary of stock option activity, including qualified and non-qualified options for the years ended December 31, 2021 and 2020:
|
| Number of Options Outstanding |
|
| Weighted Average Exercise Price |
|
| Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at December 31, 2019 |
|
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| $ |
|
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|
| ||||
Granted |
|
|
|
| $ |
|
|
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|
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|
| ||||
Expired |
|
| ( | ) |
| $ |
|
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| |||
Forfeited |
|
| ( | ) |
| $ |
|
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| |||
Outstanding at December 31, 2020 |
|
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| $ |
|
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| ||||
Granted |
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| $ |
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| ||||
Exercised |
|
| ( | ) |
| $ |
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| |||
Expired |
|
| ( | ) |
| $ |
|
|
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| |||
Forfeited |
|
| ( | ) |
| $ |
|
|
|
|
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|
| |||
Outstanding at December 31, 2021 |
|
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| $ |
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| $ |
| ||||
|
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|
|
Vested or expected to vest at December 31, 2021 |
|
|
|
| $ |
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| $ |
| ||||
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|
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Exercisable at December 31, 2021 |
|
|
|
| $ |
|
|
|
| $ |
| |||||
At December 31, 2021, there was approximately $
The weighted average fair value of options granted was $
NOTE 9. - WARRANTS
On November 3, 2021, as additional consideration for the convertible promissory note financing (Note 6), the Company issued the Mast Hill Fund, L.P. (the “Lender”) a
| F-31 |
| Table of Contents |
On November 3, 2021, J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the same convertible promissory note and was paid a cash fee of $
NOTE 10. - INCOME TAXES
The components of income tax expense (benefit) consists of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Deferred: |
|
|
|
|
|
| ||
Federal |
| $ | ( | ) |
| $ |
| |
State |
|
| ( | ) |
|
| ( | ) |
|
|
| ( | ) |
|
|
| |
Change in valuation allowance |
|
|
|
|
| ( | ) | |
|
| $ |
|
| $ |
| ||
At December 31, 2021, the Company had federal net operating loss carryforwards of approximately $
At December 31, 2021, a net deferred tax asset, representing the future benefit attributed primarily to the available net operating loss carryforwards in the amount of approximately $
The following is a summary of the Company's temporary differences and carryforwards which give rise to deferred tax assets and liabilities.
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Deferred tax assets (liabilities): |
|
|
|
|
|
| ||
Net operating loss carryforwards |
| $ |
|
| $ |
| ||
Defined benefit pension liability |
|
|
|
|
|
| ||
Operating Lease ROU |
|
| ( | ) |
|
| ( | ) |
Operating Lease Liability |
|
|
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|
| ||
Deferred Revenue |
|
|
|
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|
| ||
Property and Equipment |
|
| ( | ) |
|
|
| |
Reserves and accrued expenses payable |
|
|
|
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|
| ||
Gross deferred tax asset |
|
|
|
|
|
| ||
Deferred tax asset valuation allowance |
|
| ( | ) |
|
| ( | ) |
Net deferred tax asset |
| $ |
|
| $ |
| ||
| F-32 |
| Table of Contents |
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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Statutory U.S. federal tax rate |
|
| % |
|
| % | ||
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
| ( | ) |
|
| ( | ) |
Net operating loss carryforward expiration |
|
| ( | ) |
|
|
| |
State taxes |
|
|
|
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
Expired stock-based compensation |
|
|
|
|
|
| ||
Forgiveness of PPP Loan |
|
|
|
|
| ( | ) | |
Other permanent non-deductible items |
|
| ( | ) |
|
|
| |
Effective income tax rate |
|
| % |
|
| % | ||
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 $
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 2021, 401(k) employee contribution limits are $
NOTE 12. - LEASE
Beginning on August 1, 2016, the Company leases its headquarters facility under an operating lease agreement that expires on
Upon adoption of the ASU on January 1, 2019, the Company recognized a right-of-use asset of $
| F-33 |
| Table of Contents |
Supplemental balance sheet information related to the operating lease was as follows:
|
| December 31, 2021 |
| |
Right of use asset - lease, net |
| $ |
| |
Operating lease liability - short-term |
| $ |
| |
Operating lease liability - long-term |
|
| 0 |
|
Total operating lease liability |
| $ | 42,437 |
|
|
|
|
|
|
Discount rate - operating lease |
|
| % | |
NOTE 13. - RELATED PARTY ACCRUED INTEREST PAYABLE
Accrued Interest Payable - Included in accrued interest payable is accrued interest payable to related parties of approximately $
NOTE 14. - SUBSEQUENT EVENTS
On January 31, 2022, the Company entered into a Stock Purchase Agreement (the “Agreement”), by and among the Company; the David A. Nelson, Jr. Living Trust (“Seller”); David A. Nelson, Jr. (the “Beneficiary” and, together with Seller, the “Seller Parties”); and Pratum, Inc., an Iowa corporation (the “Pratum”) and security services firm that helps clients solve challenges and find the right balance between information security, IT support, and compliance. Pratum is based in Ankeny, Iowa.
Pursuant to the Agreement, Company agreed to acquire all of the issued and outstanding equity securities of the Company from the Seller Parties (the “Acquisition”) for an aggregate purchase price of $
The Agreement contains customary representations, warranties and covenants by each of the parties, and contains indemnification provisions under which the parties have agreed, subject to certain limitations, to indemnify each other against losses resulting from certain liabilities.
The closing of the Acquisition is subject to customary conditions, including, among others, (i) receipt of any necessary regulatory approvals and licenses, (ii) the absence of any litigation or governmental order that restrains, prevents or materially alters the transactions contemplated by the Agreement, (iii) the accuracy of the parties’ representations and warranties contained in the Agreement remaining true as of closing (subject to certain qualifications), (iv) Pratum’s and the Seller Parties’ material compliance with the covenants and agreements in the Agreement, and (v) the Buyer obtaining sufficient debt or equity financing to fund the Acquisition Consideration. The Company expects the transaction to close in the first half of 2022.
The Agreement also contains customary pre-closing covenants, including the obligation of Pratum and the Seller Parties to cause Pratum to conduct its business in all material respects in the ordinary course and to refrain from taking certain specified actions without the written consent of the Company.
On March 28, 2022 the parties to the Pratum Agreement amended the agreement to extend the outside date for closing from March 31, 2022 to May 15, 2022. Accordingly, the Pratum Agreement may be terminated under certain circumstances, including, among others if the Acquisition does not close by May 15, 2022. Additionally, either party may terminate the Agreement upon a breach by the other party of any representation, warranty, covenant or agreement made by such breaching party in the Agreement, such that the conditions related to the representations, warranties, covenants and agreements made by such breaching party would not be satisfied and such breach or condition is not curable or, if curable, is not cured 30 days after written notice of such breach.
| F-34 |
| Table of Contents |
On February 15, 2022, the Company, as borrower, entered into a financing arrangement (the “Loan”) with Mast Hill Fund, L.P. (the “Lender”), a Delaware limited partnership. In exchange for a promissory note, Lender agreed to lend the Company $
J.H. Darbie & Co., Inc. ( “Finder”), a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $
| F-35 |
| Table of Contents |
Up to 3,000,000 Units Consisting of
Common Units
Each Consisting of
One Share of Common Stock and
Three Redeemable Warrants Each to Purchase One Share of Common Stock
Pre-funded Units
Each Consisting of
One Pre-funded Warrant to Purchase One Share of Common Stock and
Three Redeemable Warrants Each to Purchase One Share of Common Stock
______________________
PROSPECTUS
______________________
| Sole Book-Running Manager | |
|
| |
| Aegis Capital Corporation |
, 2022
Through and including , 2022 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
| Table of Contents |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by us in connection with the registration of the securities hereunder. All amounts are estimates, except the SEC registration fee.
SEC registration fee |
| $ | 3,268 |
|
Nasdaq listing fees |
|
| 75,000 |
|
FINRA filing fees |
|
| 5,788 |
|
Accounting fees and expenses |
|
| 75,000 |
|
Legal fees and expenses |
|
| 370,000 |
|
Miscellaneous fees and expenses* |
|
| 25,000 |
|
Total |
| $ | 554,056 |
|
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers
Section 102 of the Delaware General Corporation Law (the “DGCL”) permits a corporation to eliminate the personal liability of its directors or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his or her duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Our Certificate of Incorporation, as amended, provides for this limitation of liability.
Section 145 of the DGCL, or Section 145, provides, among other things, that a Delaware corporation may indemnify any person who was, is or is threatened to be made, party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), because such person is or was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit, or proceeding, provided such person acted in good faith and in a manner they reasonably believed to be in or not opposed to the corporation’s best interests and, concerning any criminal action or proceeding, had no reasonable cause to believe that their conduct was illegal. A Delaware corporation may indemnify any persons who were or are a party to any threatened, pending, or completed action or suit by or in the right of the corporation by reason of the fact that such person is or was a director, officer, employee, or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests, provided further that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred.
Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him in any such capacity or arising out of his or her status as such, whether or not the corporation would otherwise have the power to indemnify him or her under Section 145.
Our Certificate of Incorporation, as amended, provides that we will indemnify a director of the Company against actions brought by the Company or by its stockholders alleging breach of fiduciary duty, except for liability: (1) for any breach of the director’s duty of loyalty to the Company or its stockholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) under §174 of the DGCL; or (4) for any transaction from which the director derived an improper benefit.
Section 174 of the DGCL provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or unlawful stock purchase or redemption, may be held jointly and severally liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time may avoid liability by causing his or her dissent to such actions to be entered in the books containing the minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.
| II-1 |
| Table of Contents |
In addition, we intend to enter into new indemnification agreements with all of our directors and executive officers prior to the completion of this offering. In general, these agreements provide that we will indemnify the executive officer or director to the fullest extent permitted by law for claims arising in his or her capacity as an executive officer or director of our company or in connection with his or her service at our request for another corporation or entity. The indemnification agreements also provide for procedures that will apply in the event that an executive officer or director makes a claim for indemnification and establish certain presumptions that are favorable to the executive officer or director.
In addition, upon consummation of this offering, we intend to obtain a general liability insurance policy that covers certain liabilities of directors and officers of our corporation arising out of claims based on acts or omissions in their capacities as directors or officers.
The underwriting agreement we will enter into in connection with the offering of securities being registered hereby provides that the underwriter will indemnify, under certain conditions, our directors and officers (as well as certain other persons) against certain liabilities arising in connection with such offering.
Insofar as the foregoing provisions permit indemnification of directors, executive officers or persons controlling us for liability arising under the Securities Act of 1933, as amended, or the Securities Act, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act.
(a) Exchanges Exempt Under Section 3(a)(9) of the Securities Act
On November 2, 2021, the Company entered into a subscription agreement with its Vice President of Business Development, Richard Popper whereby Mr. Popper agreed to purchase an aggregate amount of 20,000 shares of the Company’s common stock, par value $0.001 per share, at $5.00 per share, in exchange for the conversion and cancellation of an aggregate of $100,000 principal amount of an existing promissory note held by Mr. Popper.
On April 29, 2022, Mast Hill exercised the warrant issued to them on November 3, 2021 in full on a cashless basis and acquired 17,205 shares of Common Stock.
(b) Sales Exempt Under Section 4(a)(2) of the Securities Act
On April 30, 2021, the Company issued 1,000 shares with a value of $11.625 per share, or $11,625, to a consultant for services to be rendered from April 1, 2021 to September 30, 2021.
On May 7, 2021, the Company issued 4,000 shares with a value of $11.625 per share, or $46,500, for consulting services to be rendered from March 1, 2021 to February 28, 2023.
On June 22, 2021, two non-executive employees exercised stock options of the Company. The issuances were for 400 and 1,280 shares at prices of $1.50 and $4.75, respectively.
On June 25, 2021, a non-executive employee exercised stock options of the Company. The issuances were for 4,000 shares at a price of $2.063.
On July 6, 2021, a non-executive employee exercised stock options of the Company. The issuances were for 1,000 shares at a price of $2.50.
On September 10, 2021, two non-executive employees exercised stock options of the Company. The issuances were for 1,600 and 2,100 shares at prices of $2.00 and $2.00, respectively.
On September 16, 2021, three executives exercised stock options of the Company. The issuances were for 10,000, 10,000 and 16,000 shares at prices of $2.00, $2.00 and $2.00, respectively.
| II-2 |
| Table of Contents |
On November 3, 2021, the Company issued a 5-year warrant to Mast Hill to purchase 28,000 shares of Company common stock at a fixed price of $8.00 per share in connection with a financing arrangement.
Additionally, in the event of a default under the loan or if the Company elects to pre-pay the Loan, the lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $5.00 per share. These warrants were exercised via a cashless transaction on April 29, 2022.
On November 3, 2021, the Company issued a 5-year warrant to J.H. Darbie & Co., Inc. to purchase 3,203 shares of Company common stock at a fixed price of $9.60 per share in connection with services provided for a financing arrangement.
On November 29, 2021, two non-executive employees exercised stock options of the Company. The issuances were for 400 and 1,000 shares at prices of $1.50 and $150, respectively.
On February 15, 2022, the Company issued a 5-year warrant to Mast Hill to purchase 18,000 shares of Company common stock at a fixed price of $8.00 per share in connection with a financing arrangement. Additionally, in the event of a default under the loan or if the Company elects to pre-pay the Loan, the lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $5.00 per share.
On February 15, 2022, the Company issued a 5-year warrant to J.H. Darbie & Co., Inc. to purchase 2,429 shares of Company common stock at a fixed price of $9.60 per share in connection with services provided for a financing arrangement.
On April 12, 2022, the Company issued a 5-year warrant to Talos Victory Fund, LLC to purchase 14,800 shares of Company common stock at a fixed price of $8.00 per share in connection with a financing arrangement. Additionally, in the event of a default under the loan or if the Company elects to pre-pay the Loan, the lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $5.00 per share.
On April 12, 2022, the Company issued a 5-year warrant to J.H. Darbie & Co., Inc. to purchase 1,943 shares of Company common stock at a fixed price of $9.60 per share in connection with services provided for a financing arrangement.
On May 31, 2022, the Company issued a 5-year warrant to Mast Hill to purchase 17,750 shares of Company common stock at a fixed price of $8.00 per share in connection with a financing arrangement. Additionally, in the event of a default under the loan or if the Company elects to pre-pay the Loan, the lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $5.00 per share.
On May 31, 2022, the Company issued a 5-year warrant to J.H. Darbie & Co., Inc. to purchase 2,330 shares of Company common stock at a fixed price of $9.60 per share in connection with services provided for a financing arrangement.
On July 29, 2022, an executive exercised stock options of the Company. The issuance was for 8,000 shares at a price of $2.00.
In August 2022, we informally agreed to sell 50,000 shares of our common stock to an employee at a price of $7.50 per share, subject to approval of our board directors and entering into a definitive purchase agreement.
The securities described above were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering, to the extent an exemption from such registration was required. The recipients of the securities in the transactions described above acquired the securities for their own account for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof. Appropriate legends were affixed to the instruments representing such securities issued in such transactions.
Item 16. Exhibits and Financial Statement Schedules
The following exhibits to this registration statement included in the Index to Exhibits are incorporated by reference.
INDEX TO EXHIBITS
Exhibit No. |
| Description |
1.1* |
| |
3.1 |
| Certificate of Incorporation of the Company dated April 29, 1993 (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856). |
| ||
| ||
| ||
3.5 |
| By-Laws of the Registrant (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856). |
| ||
4.1 |
| Specimen Stock Certificate (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856). |
| ||
| ||
| ||
5.1* |
| Opinion of Harter Secrest & Emery, LLP |
|
| II-3 |
| Table of Contents |
10.2 |
| Form of Stock Option Agreement (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856). |
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
|
| II-4 |
| Table of Contents |
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
|
| II-5 |
| Table of Contents |
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
10.61 |
| Modification Agreement to Promissory Note originally dated December 30, 2020 between the Company and Donald Reeve dated September 6, 2022 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 8, 2022). |
10.62 |
| Modification Agreement to Promissory Note originally dated May 25, 2021 between the Company and Donald Reeve dated September 6, 2022 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 8, 2022). |
| ||
| ||
| Consent of Freed Maxick CPAs, P.C., independent registered public accounting firm | |
23.2* |
| Consent of Harter Secrest & Emery, LLP (included in Exhibit 5.1) |
| II-6 |
| Table of Contents |
24.1 |
| Power of Attorney (incorporated herein by reference to the signature page of the Company’s Registration Statement on Form S-1 filed on January 14, 2022) |
| ||
| ||
| ||
| ||
| ||
101.INS* |
| XBRL Instance Document |
101.SCH* |
| XBRL Taxonomy Extension Schema Document |
101.CAL* |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
| XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
| XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith. |
|
|
† | Management contract or compensatory plan or arrangement |
| II-7 |
| Table of Contents |
Item 17. Undertakings
(a) | The undersigned registrant hereby undertakes: | |
|
|
|
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) | To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; |
|
|
|
| (ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; |
|
|
|
| (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
| (2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
|
|
|
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
|
|
|
| (4) | That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
|
|
|
(b) |
| |
|
|
|
| (1) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
|
|
|
| (2) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| II-8 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized in the Town of Pittsford, State of New York, on September 9, 2022.
| INFINITE GROUP, INC. |
|
|
|
|
| /s/ James Villa |
|
| James Villa |
|
| Chief Executive Officer |
|
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|
|
|
|
|
/s/ James Villa |
| Chief Executive Officer and Director |
| September 9, 2022 |
James Villa |
| (Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Richard Glickman |
| Vice President of Finance and Chief Accounting Officer |
| September 9, 2022 |
Richard Glickman |
| (Principal Financial Officer and Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/ Donald W. Reeve |
| Chairman of the Board |
| September 9, 2022 |
Donald W. Reeve |
|
|
|
|
|
|
|
|
|
/s/ Andrew Hoyen |
| President, Chief Operating Officer and Director |
| September 9, 2022 |
Andrew Hoyen |
|
|
|
|
| II-9 |
EXHIBIT 1.1
UNDERWRITING AGREEMENT
[PRICING DATE], 2022
Aegis Capital Corp.
810 7th Avenue,
18th Floor
New York, NY 10019
Ladies and Gentlemen:
Infinite Group, Inc., a Delaware corporation (the “Company”), agrees, subject to the terms and conditions in this agreement (this “Agreement”), to issue and sell to Aegis Capital Corp. (the “Underwriter”) an aggregate of [●] units (each, a “Closing Unit”), with each Closing Unit consisting of either: (A) one share of the Company’s common stock (the “Closing Shares”), $0.001 par value per share (the “Common Stock”) and three (3) redeemable warrants, each warrant to purchase one share of Common Stock at an exercise price of $[●] (representing 100% of the per Closing Common Unit (as defined below) offering price (the “Public Offering Price”) per whole share (each, a “Redeemable Warrant”, and collectively, the “Redeemable Warrants”) (each, a “Closing Common Unit”); and (B) one pre-funded warrant (each, a “Pre-funded Warrant”) to purchase one share of Common Stock at an exercise price of $[●] until such time as the Pre-funded Warrant is exercised in full subject to adjustment as provided in the Pre-funded Warrant and three (3) Redeemable Warrants (each, a “Closing Pre-funded Unit”). The shares of Common Stock referred to in this Section are hereinafter referred to as the “Closing Shares”; the Redeemable Warrants referred to in this Section are hereinafter referred to as the “Closing Warrants”; and the Pre-funded Warrants referred to in this Section are hereinafter referred to as the “Closing Pre-funded Warrants.” No Closing Common Units will be certificated, and the Closing Shares and the Closing Warrants comprising the Closing Common Units will be separated immediately upon issuance. No Closing Pre-funded Units will be certificated, and the Closing Pre-funded Warrants and the Closing Warrants comprising the Closing Pre-funded Units will be separated immediately upon issuance. At the option of the Underwriter, the Company agrees, subject to the terms and conditions herein, to issue and sell additional Option Securities (as defined herein). The Closing Units and the Option Securities are herein referred to collectively as the “Securities”. The respective number of Closing Units and Option Securities to be purchased by the Underwriter is set forth opposite its name in Schedule I hereto.
Definitions
“Affiliate” has the meaning set forth in Rule 405 under the Securities Act.
“Applicable Time” means [TIME] [a.m./p.m.] Eastern Time on the date hereof.
“Bona Fide Electronic Road Show” means a “bona fide electronic road show” (as defined in Rule 433(h)(5) under the Securities Act) that the Company has made available without restriction by “graphic means” (as defined in Rule 405 under the Securities Act) to any person.
“Business Day” means a day on which the Nasdaq is open for trading and on which banks in New York are not authorized or required by law or other governmental action to close, provided that such banks shall not be deemed to be authorized or obligated to be closed due to a “shelter in place,” “non-essential employee” or similar closure of physical location at the direction of any governmental authority if the bank’s electronic funds transfer systems (including for wire transfers) are open for use by customers on such day.
| 1 |
“Commission” means the United States Securities and Exchange Commission.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Final Prospectus” means the prospectus in the form first filed with the Commission pursuant to and within the time limits described in Rule 424(b) under the Securities Act.
“Free Writing Prospectus” has the meaning set forth in Rule 405 under the Securities Act.
“Investment Company Act” means the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder.
“Issuer Free Writing Prospectus” means an “issuer free writing prospectus” (as defined in Rule 433(h)(1) under the Securities Act).
“Preliminary Prospectus” means any preliminary prospectus included in the Registration Statement prior to the time at which the Commission declared the Registration Statement effective.
“Pricing Disclosure Package” means the Pricing Prospectus collectively with the documents and pricing information set forth in Schedule II hereto.
“Pricing Prospectus” means the Preliminary Prospectus included in the Registration Statement at the time at which the Commission declared the Registration Statement effective.
“Prospectus Delivery Period” means such period of time after the first date of the public offering of the Closing Units as in the opinion of counsel for the Underwriter a prospectus relating to the Closing Units is required by law to be delivered (or required to be delivered but for Rule 172 under the Securities Act) in connection with sales of the Closing Units by any underwriter or dealer.
“Registration Statement” means (a) the registration statement on Form S-1 (File No. 333-262167), including a prospectus, registering the offer and sale of the Securities under the Securities Act as amended at the time the Commission declared it effective, including each of the exhibits, financial statements and schedules thereto, (b) any Rule 430A Information, and (c) any Rule 462(b) Registration Statement.
“Rule 430A Information” means the information deemed, pursuant to Rule 430A under the Securities Act, to be part of the Registration Statement at the time the Commission declared the Registration Statement effective.
“Rule 462(b) Registration Statement” means an abbreviated registration statement to register the offer and sale of additional Securities pursuant to Rule 462(b) under the Securities Act.
“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated thereunder.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
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“Testing-the-Waters Communication” means any oral or Written Communication with potential investors undertaken in reliance on Section 5(d) of under the Securities Act.
“Written Communication” has the meaning set forth in Rule 405 under the Securities Act.
“Written Testing-the-Waters Communications” means any Testing-the-Waters Communication that is a Written Communication.
1. Representations and Warranties of the Company.
The Company hereby represents and warrants to, and agrees with, the Underwriter that:
(a) Registration Statement.
(i) The Company has prepared and filed the Registration Statement with the Commission under the Securities Act. The Commission has declared the Registration Statement effective under the Securities Act and the Company has not as of the date of this Agreement filed a post-effective amendment to the Registration Statement. The Commission has not issued any order suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of the Registration Statement, the Final Prospectus, any Preliminary Prospectus, any Issuer Free Writing Prospectus or any Testing-the-Waters Communication, and no proceedings for such purpose or pursuant to Section 8A of the Securities Act have been initiated, are pending before or, to the Company’s knowledge, threatened by the Commission.
(ii) The Registration Statement, at the time it became effective, did not contain, and any post-effective amendment thereto, as of the effective date of such amendment, will not contain, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that the Company makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to the Underwriter furnished to the Company in writing by the Underwriter expressly for use in the Registration Statement (including any post-effective amendment thereto), the Pricing Disclosure Package, the Final Prospectus (including any amendments or supplements thereto), any Preliminary Prospectus, any Issuer Free Writing Prospectus or any Testing-the-Waters Communication, it being understood and agreed that the only such information furnished by the Underwriter consists of the information under the heading “Undewriting” in the Registraion Statement (collectively, the “Underwriter Information”).
(iii) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective and at the date hereof, complied and will comply in all material respects with the Securities Act.
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(b) Pricing Disclosure Package. The Pricing Disclosure Package, as of the Applicable Time, did not, and as of the Closing Date (as defined below) and as of any Additional Closing Date (as defined below), as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with the Underwriter Information.
(c) Final Prospectus.
(i) Each of the Final Prospectus and any amendments or supplements thereto, as of its date, as of the time it is filed with the Commission pursuant to Rule 424(b) under the Securities Act, as of the Closing Date and as of any Additional Closing Date, as the case may be, will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with the Underwriter Information.
(ii) Each of the Final Prospectus and any amendments or supplements thereto, at the time it is filed with the Commission pursuant to Rule 424(b) under the Securities Act, as of the Closing Date and as of any Additional Closing Date, as the case may be, will comply in all material respects with the Securities Act.
(d) Preliminary Prospectuses.
(i) Each Preliminary Prospectus, as of the time it was filed with the Commission pursuant to Rule 424(a) under the Securities Act, if any, did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with the Underwriter Information.
(ii) Each Preliminary Prospectus, at the time it was filed with the Commission pursuant to Rule 424(a) under the Securities Act, if any, complied in all material respects with the Securities Act.
(e) Issuer Free Writing Prospectuses.
(i) Each Issuer Free Writing Prospectus, when considered together with the Preliminary Prospectus accompanying, or delivered prior to the delivery of, such Issuer Free Writing Prospectus, did not, as of the date of such Issuer Free Writing Prospectus, and will not, as of the Closing Date and as of any Additional Closing Date, as the case may be, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with the Underwriter Information.
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(ii) Each Issuer Free Writing Prospectus, at the time of filing with the Commission, complied or will comply in all material respects with the Securities Act.
(iii) The Company has filed, or will file, with the Commission, within the time period specified in Rule 433(d) under the Securities Act, any Free Writing Prospectus it is required to file pursuant to Rule 433(d) under the Securities Act. The Company has made available any Bona Fide Electronic Road Show used by it in compliance with Rule 433(d)(8)(ii) under the Securities Act such that no filing of any “road show” (as defined in Rule 433(h) under the Securities Act) (“Road Show”) is required in connection with the offering of the Securities.
(iv) Except for the Issuer Free Writing Prospectuses, if any, set forth in Schedule II hereto and electronic road shows, if any, each furnished to the Underwriter before first use, the Company has not used, authorized the use of, referred to or participated in the planning for use of, and will not, without the prior consent of the Underwriter, use, authorize the use of, refer to or participate in the planning for use of, any Free Writing Prospectus.
(f) Testing-the-Waters Communications.
(i) The Company has not (x) alone engaged in any Testing-the-Waters Communication and (y) authorized anyone to engage in Testing-the-Waters Communications.
(g) No Other Disclosure Materials. Other than the Registration Statement, the Pricing Disclosure Package, and the Final Prospectus, the Company (including its agents and representatives, other than the Underwriter, as to which no representation or warranty is given) has not, directly or indirectly, distributed, prepared, used, authorized, approved or referred to, and will not distribute, prepare, use, authorize, approve or refer to, any offering material in connection with the offering and sale of the Securities.
(h) Ineligible Issuer. At the time of filing of the registration statement on Form S-1 (File No. 333-262167) registering the offer and sale of the Securities submitted to the Commission on January 14, 2022 and any amendment thereto and at the date hereof, the Company was not and is not an “ineligible issuer” (as defined in Rule 405 under the Securities Act).
(i) Reserved.
(j) Due Authorization. The Company has full right, power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and all action required to be taken for the due and proper authorization, execution and delivery by it of this Agreement and the Underwriter’s Warrant, substantially in the form of Exhibit E hereto, (the “Underwriter’s Warrant”) and the consummation by it of the transactions contemplated hereby and thereby has been duly and validly taken.
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(k) Underwriting Agreement; Underwriter’s Warrant. This Agreement and the Underwriter’s Warrant have been duly authorized, executed and delivered by the Company and each, assuming the due authorization, execution and delivery by the other parties hereto and thereto, constitutes a valid and legally binding agreement of the Company, enforceable in accordance with its terms, except as (i) the enforcement hereof may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles (whether considered in a proceeding at law or in equity) relating to enforceability and (ii) rights to indemnification and contribution hereunder may be limited by applicable law and public policy considerations.
(l) No Material Adverse Change. Except as otherwise disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus (in each case exclusive of any amendment or supplement thereto), since the date of the most recent financial statements included in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus: (i) there has been no material adverse change, or any development that could result in a material adverse change, in or affecting the condition (financial or otherwise), earnings, business, properties, management, financial position, stockholders’ equity, or results of operations, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity; (ii) there has been no change in the capital stock of the Company (other than (A) the issuance of shares of Common Stock upon the exercise, settlement (including any “net” or “cashless” exercises or settlements) or conversion of stock options, restricted share units, warrants or preferred shares described as outstanding, (B) the grant of options and awards under existing equity incentive plans, or (C) the repurchase of shares of Common Stock by the Company, which were issued pursuant to the early exercise of stock options by option holders and are subject to repurchase by the Company, in each case, as described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus), or material change in the short-term debt or long-term debt of the Company or any of its subsidiaries, considered as one entity; and (iii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent (whether or not in the ordinary course of business); nor entered into any transaction or agreement (whether or not in the ordinary course of business) that is material to the Company and its subsidiaries, considered as one entity; and (iv) there has been no dividend or distribution of any kind declared, set aside for payment, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries of the Company, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock.
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(m) Organization and Good Standing of the Company and its Subsidiaries. The Company and each of its subsidiaries have been duly organized and are validly existing and in good standing under the laws of their respective jurisdictions of organization, are duly qualified to do business and are in good standing in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority (corporate and other) necessary to own, lease or hold their respective properties and to conduct the businesses in which they are engaged as described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, except where the failure to be in good standing, to be so qualified or to have such power or authority could not, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), earnings, business, properties, management, financial position, stockholders’ equity, or results of operations of the Company and its subsidiaries, considered as one entity, or adversely affect the performance by the Company of its obligations under this Agreement (a “Material Adverse Effect”).
(n) Capitalization. The capitalization of the Company is as set forth in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus under the heading “Capitalization”. All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. The Securities and the Underwriter’s Securities have been duly authorized and, when issued and paid for as contemplated herein, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Securities and the Underwriter’s Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Securities and the Underwriter’s Securities has been duly and validly taken. When paid for and issued in accordance with the Underwriter’s Warrant or applicable transaction documents, the Warrant Shares will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Warrant Shares are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Underwriter’s Warrant has been duly and validly taken. None of the outstanding shares of capital stock of the Company were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, there are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to acquire, or instruments convertible into or exchangeable or exercisable for, any shares of capital stock of, or other equity interest in, the Company or any of its subsidiaries. All of the outstanding shares of capital stock of, or other equity interest in, each of the Company’s subsidiaries (i) have been duly authorized and validly issued, (ii) are fully paid and non-assessable and (iii) are owned by the Company, directly or through the Company’s subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, charge, claim or restriction on voting or transfer (collectively, “Liens”).
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(o) Stock Plans. With respect to the stock options (the “Stock Options”) granted pursuant to the stock-based compensation plans of the Company and its subsidiaries (the “Company Stock Plans”), (i) each Stock Option intended to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), so qualifies, (ii) each grant of a Stock Option was duly authorized by all necessary corporate action, including, as applicable, approval by the board of directors of the Company (or a duly constituted and authorized committee thereof) and any required stockholder approval by the necessary number of votes or written consents, and the award agreement governing such grant (if any), to the Company’s knowledge, was duly executed and delivered by each party thereto, (iii) each such grant was made in all material respects in accordance with the terms of the Company Stock Plans, and (iv) each such grant was properly accounted for in accordance with generally accepted accounting principles as applied in the United States (“GAAP”) in the financial statements (including the related notes) of the Company.
(p) No Violation or Default. Neither the Company nor any of its subsidiaries is: (i) in violation of its certificate of incorporation, by-laws or similar organizational documents; (ii) in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant, condition or other obligation contained in any indenture, mortgage, deed of trust, loan agreement, contract, undertaking or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any property, right or asset of the Company or any of its subsidiaries is subject; or (iii) in violation of any law or statute applicable to the Company or any of its subsidiaries or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority having jurisdiction over the Company or any of its subsidiaries, or any of their respective properties or assets, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not, individually or in the aggregate, have a Material Adverse Effect.
(q) No Conflicts. None of (i) the execution, delivery and performance of this Agreement by the Company, (ii) the issuance, sale and delivery of the Securities, (iii) the application of the proceeds of the Offering as described under “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, or (iv) the consummation of the transactions contemplated herein will: (x) result in any violation of the terms or provisions of the charter, by-laws or similar organizational documents of the Company or any of its subsidiaries; (y) conflict with, result in a breach or violation of, or require the approval of stockholders, members or partners or any approval or consent of any persons under, any of the terms or provisions of, constitute a default under, result in the termination, modification, or acceleration of, or result in the creation or imposition of any lien, charge or encumbrance upon any property, right or asset of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement, note agreement, contract, undertaking or other agreement, obligation, condition, covenant or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any property, right or asset of the Company or any of its subsidiaries is subject; or (z) result in the violation of any law, statute, judgment, order, rule, decree or regulation applicable to the Company or any of its subsidiaries of any court, arbitrator, governmental or regulatory authority, agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets.
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(r) No Consents Required. No consent, approval, authorization, order, filing, registration, license or qualification of or with any court, arbitrator, or governmental or regulatory authority, agency, or body is required for (i) the execution, delivery and performance by the Company of this Agreement; (ii) the issuance, sale and delivery of the Securities; or (iii) the consummation of the transactions contemplated herein, except for such consents, approvals, authorizations, orders, filings, registrations or qualifications as (x) have already been obtained or made and are still in full force and effect, (y) may be required by FINRA, and (z) may be required under applicable state securities laws in connection with the purchase, distribution and resale of the Securities by the Underwriter.
(s) Independent Accountants. Freed Maxick CPAs P.C., independent registered public accounting firm, which expressed its opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules included in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, is an independent registered public accounting firm with respect to the Company and its subsidiaries within the meaning of the rules and regulations of the Commission and the Public Company Accounting Oversight Board and as required by the Securities Act.
(t) Financial Statements and Other Financial Data. The financial statements (including the related notes thereto), together with the supporting schedules, included in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus comply in all material respects with the applicable requirements of the Securities Act and present fairly the financial position of the entities to which they relate as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements, notes and schedules have been prepared in conformity with GAAP applied on a consistent basis throughout the periods involved, except as may be expressly stated in the notes thereto. The financial data set forth in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus under the captions “Capitalization” present fairly the information set forth therein on a basis consistent with that of the audited financial statements included in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus.
(u) Statistical and Market-Related Data. The statistical and market-related data included in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus are based on or derived from sources that the Company believes to be accurate and reliable in all material respects.
(v) Forward-Looking Statements. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) included in the Registration Statement, the Pricing Disclosure Package or the Final Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
(w) Legal Proceedings. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, (i) there are no legal, governmental or regulatory investigations, actions, demands, claims, suits, arbitrations, inquiries or proceedings (collectively, “Actions”) pending to which the Company or any of its subsidiaries is or may be a party or to which any property, right or asset of the Company or any of its subsidiaries is or may be the subject that, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries, could have a Material Adverse Effect; and (ii) to the knowledge of the Company, no such Actions are threatened or contemplated by any governmental or regulatory authority or by others.
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(x) Labor Disputes. No labor disturbance by or dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is threatened or contemplated that could, individually or in the aggregate, have a Material Adverse Effect.
(y) Intellectual Property Rights. (i) The Company and its subsidiaries own or have the right to use all patents, patent applications, trademarks, service marks, trade names, and other source indicators and registrations and applications for registration thereof, domain name registrations, copyrights and registrations and applications for registration thereof, technology and know-how, trade secrets, and all other intellectual property and related proprietary rights (collectively, “Intellectual Property Rights”) necessary to conduct their respective businesses; (ii) other than as disclosed in the Prospectus, neither the Company nor any of its subsidiaries has received any notice of infringement, misappropriation or other conflict with (and neither the Company nor any of its subsidiaries is otherwise aware of any infringement, misappropriation or other conflict with) the Intellectual Property Rights of any other person, except for such infringement, misappropriation or other conflict as could not have a Material Adverse Effect; and (iii) to the knowledge of the Company, the Intellectual Property Rights of the Company and its subsidiaries are not being infringed, misappropriated or otherwise violated by any person.
(z) Licenses and Permits. (i) The Company and its subsidiaries possess such valid and current certificates, authorizations, approvals, licenses and permits (collectively, “Authorizations”) issued by, and have made all declarations, amendments, supplements and filings with, the appropriate state, federal or foreign regulatory agencies or bodies necessary to own, lease and operate their respective properties and to conduct their respective businesses as set forth in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus; (ii) all such Authorizations are valid and in full force and effect and the Company and its subsidiaries are in compliance with the terms and conditions of all such Authorizations; and (iii) neither the Company nor any of its subsidiaries has received notice of any revocation, termination or modification of, or non-compliance with, any such Authorization or has any reason to believe that any such Authorization will not be renewed in the ordinary course, except where, in the case of clauses (i), (ii) and (iii), the failure to possess, make or obtain such Authorizations (by possession, declaration or filing) could not, individually or in the aggregate, have a Material Adverse Effect.
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(aa) Title to Property. Neither the Company nor any of its subsidiaries own any real property. The Company and its subsidiaries have good and marketable title in fee simple to, or have valid and enforceable rights to lease or otherwise use, all items of personal property (other than with respect to Intellectual Property Rights, which is addressed exclusively in Section 1(y)) that are material to the respective businesses of the Company and its subsidiaries, in each case, free and clear of all liens, encumbrances, claims, and defects and imperfections of title, except such liens, encumbrances, claims, defects and imperfections as (i) are disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, or (ii) do not materially affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company and its subsidiaries. The Company and its subsidiaries have good and marketable title in fee simple to, or have valid and enforceable rights to lease or otherwise use, all items of real and personal property that are material to the respective businesses of the Company and its subsidiaries, in each case, free and clear of all liens, encumbrances, claims and defects and imperfections of title, except such liens, encumbrances, claims, defects and imperfections as (i) are disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, or (ii) do not materially affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company and its subsidiaries. All items of real and personal property held under lease by the Company and its subsidiaries are held under valid, subsisting and enforceable leases, with such exceptions as do not materially interfere with the use made or proposed to be made of such property by the Company and its subsidiaries.
(bb) Taxes. The Company and each of its subsidiaries have filed all federal, state, local and foreign tax returns required to be filed through the date hereof or have timely requested extensions thereof and have paid all taxes required to be paid thereon (except as currently being contested in good faith and for which reserves required by GAAP have been created in the financial statements of the Company). The charges, accruals and reserves in respect of any income and other tax liability in the financial statements of the Company referred to in Section 1(t) are adequate, in accordance with GAAP principles, to meet any assessments for any taxes of the Company accruing through the end of the last period specified in such financial statements.
(cc) Investment Company Act. Neither the Company nor any of its subsidiaries is or, after giving effect to the offer and sale of the Securities and the application of the proceeds therefrom as described under “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, will be required to register as an “investment company” (as defined in the Investment Company Act).
(dd) Insurance. The Company and its subsidiaries are insured by recognized, financially sound institutions in such amounts, with such deductibles and covering such losses and risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is prudent and customary for companies engaged in similar businesses in similar industries. All insurance policies and fidelity or surety bonds insuring the Company and its subsidiaries or their respective businesses, assets, employees, officers and directors are in full force and effect; the Company and its subsidiaries are in compliance with the terms of such policies in all material respects; neither the Company nor any of its subsidiaries has received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required to be made in order to continue such insurance; and neither the Company nor any of its subsidiaries has been refused any insurance coverage sought or applied for. There are no claims by the Company or any of its subsidiaries under any such policy as to which any insurer is denying liability or defending under a reservation of rights clause; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that could not have a Material Adverse Effect.
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(ee) No Stabilization or Manipulation. None of the Company, its Affiliates or any person acting on its or any of their behalf (other than the Underwriter, as to which no representation or warranty is given) has taken, directly or indirectly, any action designed to or that has constituted or that could reasonably be expected to cause or result in the stabilization or manipulation of the price of any securities of the Company. The Company acknowledges that the Underwriter may engage in passive market making transactions in the Common Stock on the Nasdaq Capital Market (the “Exchange”) in accordance with Regulation M under the Exchange Act (“Regulation M”).
(ff) Compliance with the Sarbanes-Oxley Act. The Company and, to the knowledge of the Company, its officers and directors, in their capacities as such, are and have been in material compliance with all applicable provisions of the Sarbanes-Oxley Act.
(gg) Accounting Controls. The Company and its subsidiaries maintain systems of “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) that comply with the requirements of the Exchange Act in all material respects and have been designed by, or under the supervision of, their principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company and its subsidiaries maintain internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Other than as disclosed in the Registration Statement, the Company’s internal control over financial reporting is effective and the Company is not aware of any other material weaknesses in its internal control over financial reporting (whether or not remediated). Since the date of the most recent balance sheet included in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, (x) the Company’s auditors have not been advised of (A) any new significant deficiencies or material weaknesses in the design or operation of the internal control over financial reporting of the Company and its subsidiaries which could adversely affect the Company’s ability to record, process, summarize, and report financial data; or (B) any fraud, whether or not material, that involves management or other employees who have a role in the internal control over financial reporting of the Company or its subsidiaries; and (y) there have been no significant changes in the internal control over financial reporting of the Company or its subsidiaries or in other factors that could significantly affect, such internal control over financial reporting, including any corrective actions with regard to significant deficiencies or material weaknesses, since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus.
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(hh) Disclosure Controls and Procedures. The Company and its subsidiaries have established and maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) that are designed to comply with the requirements of the Exchange Act; such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company and its subsidiaries in the reports they file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure; and such disclosure controls and procedures are effective to perform the functions for which they were established.
(ii) Margin Rules. Neither the issuance, sale and delivery of the Securities nor the application of the proceeds thereof by the Company, in each case, as described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, will violate Regulation T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors.
(jj) Compliance with Environmental Laws. The Company and each of its subsidiaries (i) are, and at all times prior hereto were, in compliance with all Environmental Laws (as defined below) applicable to such entity, which compliance includes, without limitation, obtaining, maintaining and complying with all permits and authorizations and approvals required by Environmental Laws to conduct their respective businesses; and (ii) have not received notice or otherwise have knowledge of any actual or alleged violation of Environmental Laws, or of any actual or potential liability for or other obligation concerning the presence, disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants. And, except as described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, (x) there are no proceedings that are pending, or known to be contemplated, against the Company or any of its subsidiaries under Environmental Laws, other than such proceedings regarding which it is reasonably believed that no monetary sanctions of $100,000 or more will be imposed; (y) none of the Company or any of its subsidiaries is aware of any issues regarding compliance with Environmental Laws, including any pending or proposed Environmental Laws, or liabilities or other obligations under Environmental Laws or concerning hazardous or toxic substances or wastes, pollutants or contaminants, that could reasonably be expected to have a material effect on the capital expenditures, earnings or competitive position of the Company and its subsidiaries; and (z) none of the Company or any of its subsidiaries anticipates material capital expenditures relating to Environmental Laws.
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As used herein, the term “Environmental Laws” means any laws, regulations, ordinances, rules, orders, judgments, decrees, permits or other legal requirements of any governmental authority, including, without limitation, any international, foreign, national, state, provincial, regional, or local authority, relating to pollution, the protection of human health or safety, the environment, or natural resources, or to the use, handling, storage, manufacturing, transportation, treatment, discharge, disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants.
(kk) Reserved.
(ll) Related Party Transactions. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, no relationship, direct or indirect, exists between or among the Company or any of its subsidiaries, on the one hand, and the directors, officers, stockholders, other Affiliates, customers or suppliers of the Company or any of its subsidiaries, on the other hand, that would be required by the Securities Act to be described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus.
(mm) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee, Affiliate or other person associated with or acting on behalf of the Company or any of its subsidiaries has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government or regulatory official or employee; (iii) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment; or (iv) violated or is in violation of any provision of (y) the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder, or (z) any non-U.S. anti-bribery or anti-corruption statute or regulation. The Company and its subsidiaries have instituted and maintain and enforce policies and procedures designed to promote and ensure compliance with all applicable anti-bribery and anti-corruption laws.
(nn) Compliance with Anti-Money Laundering Laws. The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with all applicable financial recordkeeping and reporting requirements, including the applicable anti-money laundering statutes of all jurisdictions where the Company or any of its subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by any governmental agency (collectively, the “Anti-Money Laundering Laws”); and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
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(oo) Compliance with OFAC. Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company or any of its subsidiaries is an individual or entity (an “OFAC Person”), or is owned or controlled by an OFAC Person, that is currently the subject or target of any sanctions administered or enforced by the U.S. government (including, without limitation, the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”) or the U.S. Department of State and including, without limitation, the designation as a “specially designated national” or “blocked person”), the United Nations Security Council, the European Union, Her Majesty’s Treasury, or other relevant sanctions authority (collectively, “Sanctions”), nor is the Company or any of its subsidiaries located, organized or resident in a country or territory that is the subject or the target of Sanctions, including, without limitation, Crimea, Cuba, Iran, North Korea, Sudan and Syria (each, a “Sanctioned Country”); and the Company will not directly or indirectly use the proceeds of the Offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other OFAC Person (i) to fund or facilitate any activities of or business with any OFAC Person that, at the time of such funding or facilitation, is the subject or the target of Sanctions, (ii) to fund or facilitate any activities or business in any Sanctioned Country or (iii) in any other manner that will result in a violation by any OFAC Person (including any OFAC Person participating in the transaction, whether as underwriter, advisor, investor or otherwise) of Sanctions. Since the Company’s inception, the Company and its subsidiaries have not knowingly engaged in and are not now knowingly engaged in any dealings or transactions with any OFAC Person that at the time of the dealing or transaction is or was the subject or the target of Sanctions or with any Sanctioned Country.
(pp) No Registration Rights. Except as described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, there are no contracts, agreements or understandings between the Company or any of its subsidiaries, on the one hand, and any person, on the other hand, granting such person any rights to require the Company or any of its subsidiaries to file a registration statement under the Securities Act with respect to any securities of the Company or any of its subsidiaries owned or to be owned by such person or to require the Company or any of its subsidiaries to include such securities in any securities to be registered pursuant to any registration statement to be filed by the Company or any of its subsidiaries under the Securities Act.
(qq) Subsidiaries. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, the Company does not have any subsidiaries.
(rr) Reserved.
(ss) No Broker’s Fees. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that would give rise to a valid claim against any of them or the Underwriter for a brokerage commission, finder’s fee or like payment in connection with the offering and sale of the Securities.
(tt) Exchange Listing. Subject to notice of issuance, the Closing Shares, the Option Shares, the Warrant Shares, the Closing Warrants and the Option Warrants have been approved for listing on the Exchange.
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Any certificate signed by an officer of the Company and delivered to the Underwriter or to counsel for the Underwriter shall be deemed to be a representation and warranty by the Company to the Underwriter as to the matters set forth therein.
2. Representations and Warranties of the Underwriter.
The Underwriter represents and warrants to, and agrees with, the Company:
(a) No Testing-the-Waters Communications. The Underwriter has not (i) alone engaged in any Testing-the-Waters Communication and (ii) authorized anyone to engage in Testing-the-Waters Communications. The Underwriter has not distributed, or authorized anyone else to distribute, any Written Testing-the-Waters Communications.
3. Purchase and Resale.
(a) Agreements to Sell and Purchase. On the basis of the representations, warranties and covenants herein and subject to the conditions herein,
(i) The Company agrees to issue and sell the Closing Units to the Underwriter; and
(ii) The Underwriter agrees to purchase from the Company the Closing Units.
(iii) The purchase price per Closing Common Unit shall be $[●] (representing 93.0% of the Public Offering Price), which purchase price will be allocated as $[●] per Closing Share and $0.001 per Closing Warrant, and the purchase price per Closing Pre-funded Unit (representing 93% of the Public Offering Price minus $[●]) shall be $[●], which purchase price will be allocated as $[●] per Closing Pre-funded Warrant and $[●] per Closing Warrant. The Closing Common Units are to be offered to the public at the Public Offering Price and the Closing Pre-funded Units are to be offered to the public at the Public Offering Price less $[●] (being the per share exercise price of a Pre-funded Warrant).
(iv) Payment for the Closing Units (the “Closing Units Payment”) shall be made by wire transfer in immediately available funds to the accounts specified by the Company to the Underwriter at the offices of Kaufman & Canoles, P.C. at 5:00 p.m., Eastern Time, on [DATE], 2022 or at such other place on the same or such other date and time, not later than the fifth business day thereafter, as the Underwriter and the Company may agree upon in writing (the “Closing Date”). The Closing Units Payment shall be made against delivery of the Closing Units to be purchased on the Closing Date to the Underwriter, with any transfer taxes, stamp duties and other similar taxes payable in connection with the sale of the Closing Units duly paid by the Company.
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(b) Over-Allotment Option. On the basis of the representations, warranties and covenants herein and subject to the conditions herein,
(i) the Underwriter is hereby granted an option (the “Over-Allotment Option”) to purchase, in the aggregate, up to [●] additional shares of Common Stock and/or Pre-funded Warrants to purchase shares of Common Stock, representing 15.0% of the Closing Units sold in the offering from the Company (the “Option Shares” or “Option Pre-funded Warrants,” as applicable) and up to [●] additional Warrants to purchase an aggregate of an additional [●] shares of Common Stock, representing 15.0% of the Closing Units sold in the offering from the Company (the “Option Warrants”). The purchase price to be paid per Option Share or Option Pre-funded Warrant shall be equal to the price per Closing Unit set forth in Section 3(a) hereof and the purchase price to be paid per Option Warrant shall be equal to $[●] per Option Warrant. The Over-allotment Option is, at the Underwriter’s sole discretion, for Option Shares and Option Warrants together, Option Pre-funded Warrants and Option Warrants together, solely Option Shares, solely Option Pre-funded Warrants, solely Option Warrants, or any combination thereof (each, an “Option Security” and collectively, the “Option Securities”). The Closing Units and the Option Securities are referred to collectively as the “Securities”, and the Securities and the shares of Common Stock issuable upon exercise of the Pre-funded Warrants and the Warrants (the “Underlying Shares”) are referred to collectively as the “Public Securities”. The Public Securities shall be issued directly by the Company and shall have the rights and privileges described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The certificate (the “Pre-funded Warrant Certificate”) evidencing the Closing Pre-funded Warrants and the Option Pre-funded Warrants, if any, will be in the form attached hereto as Exhibit [●]. The offering and sale of the Public Securities is herein referred to as the “Offering.”
(ii) Upon an exercise of the Over-Allotment Option and subject to the terms and conditions herein, the Company agrees to issue and sell the Option Securities to the Underwriter;
(iii) The Underwriter may exercise the Over-Allotment Option at any time in whole, or from time to time in part, on or before the forty-fifth (45th) day following the date of the Final Prospectus, by written notice from the Underwriter to the Company (the “Over-Allotment Exercise Notice”). The Underwriter must give the Over-Allotment Exercise Notice to the Company at least two Business Days prior to the Closing Date or the applicable Additional Closing Date, as the case may be. The Underwriter may cancel any exercise of the Over-Allotment Option at any time prior to the Closing Date or the applicable Additional Closing Date, as the case may be, by giving written notice of such cancellation to the Company.
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(iv) The Over-Allotment Exercise Notice shall set forth:
(A) the aggregate number of Option Securities as to which the Over-Allotment Option is being exercised;
(B) the purchase price for the Option Securities;
(C) the names and denominations in which the Option Securities are to be registered; and
(D) the applicable Additional Closing Date, which may be the same date and time as the Closing Date but shall not be earlier than the Closing Date nor later than the tenth (10th) full business day after the date of the Over-Allotment Exercise Notice.
(v) Payment for the Option Securities (the “Option Securities Payment”) shall be made by wire transfer in immediately available funds to the accounts specified by the Company to the Underwriter at the offices of Kaufman & Canoles, P.C. at 5:00 p.m. Eastern Time on the date specified in the corresponding Over-Allotment Exercise Notice, or at such other place on the same or such other date and time, not later than the fifth business day thereafter, as the Underwriter and the Company may agree upon in writing (an “Additional Closing Date”). The Option Securities Payment shall be made against delivery to the Underwriter for the respective accounts of the Underwriter of the Option Securities to be purchased on any Additional Closing Date, with any transfer taxes, stamp duties and other similar taxes payable in connection with the sale of the Option Securities duly paid by the Company.
(vi) As additional compensation for the Underwriter’s services, the Company shall issue to the Underwriter or its designees at the closing of the Offering warrants (the “Underwriter’s Warrant”) to purchase that number of shares of Common Stock equal to 4.0% of the aggregate number of Closing Shares sold in the Offering. The Underwriter’s Warrant will be exercisable at any time and from time to time, in whole or in part, during the period commencing six months from the commencement of sales of the Closing Shares in the public offering and ending four years and six months thereafter, at a price per share equal to 125.0% of the offering price per Closing Share in the Offering. The Underwriter’s Warrant and the shares of Common Stock issuable upon exercise thereof are sometimes hereinafter referred to collectively as the “Underwriter’s Securities.” The Underwriter understands and agrees that there are restrictions pursuant to FINRA Rule 5110 against transferring the Underwriter’s Securities during the 180-day period after the commencement of sales of the Closing Shares in the Offering and by its acceptance thereof shall agree that it and its respective designees, if any, will not, sell, transfer, assign, pledge or hypothecate their respective Underwriter’s Securities, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of 180 days following the commencement of sales of the public offering to anyone other than (A) an underwriter or a selected dealer in connection with the Offering, or (B) a bona fide officer or partner of the Underwriter or of any such underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions. Delivery of the executed Underwriter’s Warrant shall be made on the Closing Date and the Underwriter’s Warrant shall be issued in the name or names and in such authorized denominations as the Underwriter may request.
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(c) Public Offering. The Company understands that the Underwriter intends to make a public offering of the Closing Units as soon after the effectiveness of this Agreement as in the judgment of the Underwriter is advisable, and initially to offer the Closing Units on the terms set forth in the Final Prospectus. The Company acknowledges and agrees that the Underwriter may offer and sell Closing Units to or through any Affiliate of the Underwriter.
4. Covenants of the Company. The Company hereby covenants and agrees with the Underwriter as follows:
(a) Filings with the Commission. The Company will:
(i) prepare and file the Final Prospectus (in a form approved by the Underwriter and containing the Rule 430A Information) with the Commission in accordance with and within the time periods specified by Rules 424(b) and 430A under the Securities Act;
(ii) file any Issuer Free Writing Prospectus with the Commission to the extent required by Rule 433 under the Securities Act; and
(iii) file with the Commission such reports as may be required by Rule 463 under the Securities Act.
(b) Notice to the Underwriter. The Company will advise the Underwriter promptly, and confirm such advice in writing:
(i) when the Registration Statement has become effective;
(ii) when the Final Prospectus has been filed with the Commission;
(iii) when any amendment to the Registration Statement has been filed or becomes effective;
(iv) when any Rule 462(b) Registration Statement has been filed with the Commission;
(v) when any supplement to the Final Prospectus, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication or any amendment to the Final Prospectus has been filed or distributed;
(vi) of (x) any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Final Prospectus, (y) the receipt of any comments from the Commission relating to the Registration Statement or (z) any other request by the Commission for any additional information, including, but not limited to, any request for information concerning any Testing-the-Waters Communication;
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(vii) of (x) the issuance by the Commission of any order suspending the effectiveness of the Registration Statement or preventing or suspending the use of the Registration Statement, the Pricing Disclosure Package, the Final Prospectus, any Preliminary Prospectus, any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication or (y) the initiation or, to the knowledge of the Company, threatening of any proceeding for that purpose or pursuant to Section 8A of the Securities Act;
(viii) of the occurrence of any event or development within the Prospectus Delivery Period as a result of which, the Final Prospectus, the Pricing Disclosure Package, any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication as then amended or supplemented would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Final Prospectus, the Pricing Disclosure Package, any such Issuer Free Writing Prospectus or any such Written Testing-the-Waters Communication is delivered to a purchaser, not misleading;
(ix) of the issuance by any governmental or regulatory authority or any order preventing or suspending the use of any of the Registration Statement, the Pricing Disclosure Package, the Final Prospectus, any Preliminary Prospectus, any Issuer Free Writing Prospectus or any Testing-the-Waters Communication or the initiation or threatening for that purpose; and
(x) of the receipt by the Company of any notice with respect to any suspension of the qualification of the Closing Units for offer and sale in any jurisdiction or the initiation or, to the knowledge of the Company, threatening of any proceeding for such purpose.
(c) Reserved.
(d) Ongoing Compliance.
(i) If during the Prospectus Delivery Period:
(A) any event or development shall occur or condition shall exist as a result of which the Final Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Final Prospectus is delivered to a purchaser, not misleading, the Company will, as soon as reasonably possible, notify the Underwriter thereof and forthwith prepare and, subject to Section 4(e) hereof, file with the Commission and furnish, at its own expense, to the Underwriter and to such dealers as the Underwriter may designate such amendments or supplements to the Final Prospectus as may be necessary so that the statements in the Final Prospectus as so amended or supplemented will not, in the light of the circumstances existing when the Final Prospectus is delivered to a purchaser, be misleading; or
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(B) it is necessary to amend or supplement the Final Prospectus to comply with applicable law, the Company will, as soon as reasonably possible, notify the Underwriter thereof and forthwith prepare and, subject to Section 4(e) hereof, file with the Commission and furnish, at its own expense, to the Underwriter and to such dealers as the Underwriter may designate such amendments or supplements to the Final Prospectus as may be necessary so that the Final Prospectus will comply with applicable law; and
(ii) if at any time prior to the Closing Date or any Additional Closing Date, as the case may be:
(A) any event or development shall occur or condition shall exist as a result of which the Pricing Disclosure Package as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Pricing Disclosure Package is delivered to a purchaser, not misleading, the Company will immediately notify the Underwriter thereof and forthwith prepare and, subject to Section 4(e) hereof, file with the Commission (to the extent required) and furnish, at its own expense, to the Underwriter and to such dealers as the Underwriter may designate such amendments or supplements to the Pricing Disclosure Package as may be necessary so that the statements in the Pricing Disclosure Package as so amended or supplemented will not, in the light of the circumstances existing when the Pricing Disclosure Package is delivered to a purchaser, be misleading; or
(B) it is necessary to amend or supplement the Pricing Disclosure Package to comply with applicable law, the Company will immediately notify the Underwriter thereof and forthwith prepare and, subject to Section 4(e) hereof, file with the Commission (to the extent required) and furnish, at its own expense, to the Underwriter and to such dealers as the Underwriter may designate such amendments or supplements to the Pricing Disclosure Package as may be necessary so that the Pricing Disclosure Package will comply with applicable law.
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(e) Amendments, Supplements and Issuer Free Writing Prospectuses. Before (i) using, authorizing, approving, referring to, distributing or filing any Issuer Free Writing Prospectus, (ii) filing (x) any Rule 462(b) Registration Statement or (y) any amendment or supplement to the Registration Statement or the Final Prospectus, or (iii) distributing any amendment or supplement to the Pricing Disclosure Package or the Final Prospectus, the Company will furnish to the Underwriter and counsel for the Underwriter a copy of the proposed Issuer Free Writing Prospectus, Rule 462(b) Registration Statement or other amendment or supplement for review and will not use, authorize, refer to, distribute or file any such Issuer Free Writing Prospectus or Rule 462(b) Registration Statement, or file or distribute any such proposed amendment or supplement (A) to which the Underwriter objects in a timely manner and (B) which is not in compliance with the Securities Act. The Company will, pursuant to reasonable procedures developed in good faith, retain copies of each Issuer Free Writing Prospectus that is not filed with the Commission in accordance with Rule 433 under the Securities Act.
(f) Delivery of Copies. The Company will, upon request of the Underwriter, deliver, without charge, (i) to the Underwriter, three signed copies of the Registration Statement as originally filed and each amendment thereto, in each case, including all exhibits and consents filed therewith; and (ii) to the Underwriter (A) a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits and consents) and (B) during the Prospectus Delivery Period, as many copies of the Final Prospectus (including all amendments and supplements thereto and each Issuer Free Writing Prospectus) as the Underwriter may reasonably request.
(g) Reserved.
(h) Blue Sky Compliance. The Company will use its best efforts, with the Underwriter’s cooperation, if necessary, to qualify or register (or to obtain exemptions from qualifying or registering) the Securities and the Underwriter’s Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Underwriter shall reasonably request and will use its reasonable best efforts, with the Underwriter’s cooperation, if necessary, to continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Securities and the Underwriter’s Securities; provided that the Company shall not be required to (i) qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction where it would not otherwise be required to so qualify, (ii) file any general consent to service of process in any such jurisdiction or (iii) subject itself to taxation in any such jurisdiction if it is not otherwise so subject.
(i) Earning Statement. The Company will make generally available to its security holders and the Underwriter as soon as practicable an earning statement that satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 under the Securities Act covering a period of at least 12 months beginning with the first fiscal quarter of the Company occurring after the “effective date” (as defined in Rule 158 under the Securities Act) of the Registration Statement; provided that the Company will be deemed to have furnished such statement to its security holders and the Underwriter to the extent it is filed on the Commission’s Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”).
(j) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Closing Units and the Option Securities in the manner described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus.
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(k) Clear Market.
(i) For a period of one hundred eighty (180) days after the Closing Date (the “Lock-Up Period”), the Company will not (x) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (y) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the shares of Common Stock or any such other securities, whether any such transaction described in clause (x) or (y) above is to be settled by delivery of shares of Common Stock or such other securities, in cash or otherwise, without the prior written consent of the Underwriter.
(ii) The restrictions contained in Section 4(k)(i) hereof shall not apply to: (A) the Securities, (B) any warrants to be issued by the Company in connection with the Offering or Warrant Shares issued pursuant to the exercise of such warrants, in each case, as described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus, (C) any shares of Common Stock issued under Company Stock Plans or pursuant to the exercise or conversion of options, warrants, convertible notes or preferred shares issued by the Company prior to the Offering, (D) any options and other awards granted under a Company Stock Plan as described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus or any subsequently adopted Company Stock Plan, (E) the filing by the Company of any registration statement on Form S-8 or a successor form thereto relating to a Company Stock Plan described in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus or any subsequently adopted Company Stock Plan and (F) shares of Common Stock or other securities issued in connection with a transaction with an unaffiliated third party that includes a bona fide commercial relationship (including joint ventures, marketing or distribution arrangements, collaboration agreements or intellectual property license agreements) or any acquisition of assets or acquisition of not less than a majority or controlling portion of the equity of another entity; provided that (x) the aggregate number of shares of Common Stock issued pursuant to clause (F) shall not exceed ten percent (10%) of the total number of outstanding shares of Common Stock immediately following the issuance and sale of the Closing Units pursuant hereto and (y) if the recipient of any such Common Stock or other securities issued or granted pursuant to clauses (B), (C), (D) and (F) during the Lock-Up Period is or becomes a holder of ten percent (10%) of the total number of outstanding shares of Common Stock immediately following the issuance and sale of the Closing Units pursuant hereto, then the Company shall use commercially reasonable efforts to cause such recipient to enter into an agreement substantially in the form of Exhibit A hereto.
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(iii) If the Underwriter, in its sole discretion, agrees to release or waive the restrictions set forth in any Lock-Up Agreement and provides the Company with notice of the impending release or waiver substantially in the form of Exhibit B hereto at least three Business Days before the effective date of the release or waiver, then the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two Business Days before the effective date of the release or waiver.
(l) No Stabilization or Manipulation. None of the Company, its Affiliates or any person acting on its or any of their behalf (other than the Underwriter, as to which no covenant is given) will take, directly or indirectly, any action designed to or that constitutes or that could reasonably be expected to cause or result in the stabilization or manipulation of the price of any securities of the Company. The Company acknowledges that the Underwriter may engage in passive market making transactions in the Common Stock on the Exchange in accordance with Regulation M.
(m) Investment Company Act. The Company shall not invest, or otherwise use the proceeds received by the Company from the sale of the Securities in such a manner as would require the Company or any of its subsidiaries to register as an “investment company” (as defined in the Investment Company Act) under the Investment Company Act.
(n) Right of First Refusal. The Company agrees that, if, for the period ending twelve (12) months from the closing of the Offering, the Company or any of its subsidiaries (a) decides to finance or refinance any indebtedness, the Underwriter (or any affiliate designated by the Underwriter) shall have the right to act as sole book-runner, sole manager, sole placement agent or sole agent with respect to such financing or refinancing; or (b) decides to raise funds by means of a public offering (including at-the-market facility) or a private placement or any other capital raising financing of equity, equity-linked or debt securities, the Underwriter (or any affiliate designated by the Underwriter) shall have the right to act as sole book-running manager, sole underwriter or sole placement agent for such financing. If the Underwriter or one of its affiliates decides to accept any such engagement, the agreement governing such engagement will contain, among other things, provisions for customary fees for transactions of similar size and nature, but in no event will the fees be less than those outlined herein, and the provisions of this Agreement, including indemnification, which are appropriate to such a transaction. Notwithstanding the foregoing, the decision to accept the Company’s engagement under this Section 4(n) shall be made by the Underwriter or one of its affiliates, by a written notice to the Company, within ten (10) days of the receipt of the Company’s notification of its financing needs.
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(o) Transfer Agent. For the period of two years from the date of this Agreement, the Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock.
(p) Reports. For the period of two years from the date of this Agreement, the Company will furnish to the Underwriter, as soon as they are available, copies of all reports or other communications (financial or other) furnished to holders of the Securities, and copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange or automatic quotation system; provided that the Company will be deemed to have furnished such reports and financial statements to the Underwriter to the extent they are filed on EDGAR.
5. Covenants of the Underwriter. The Underwriter hereby covenants and agrees with the Company as follows:
(a) Underwriter Free Writing Prospectus. The Underwriter has not used, authorized the use of, referred to or participated in the planning for use of, and will not use, authorize the use of, refer to or participate in the planning for use of, any Free Writing Prospectus (which term includes use of any written information furnished to the Commission by the Company and not incorporated by reference into the Registration Statement and any press release issued by the Company) other than (i) a Free Writing Prospectus that contains no “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act (“Issuer Information”) that was not included in the Pricing Prospectus or a previously filed Issuer Free Writing Prospectus, (ii) any Issuer Free Writing Prospectus listed in Schedule II hereto or prepared pursuant to Section 1(e)(iv) or Section 4(e) hereof (including any electronic road show), or (iii) any Free Writing Prospectus prepared by the Underwriter and approved by the Company in advance in writing.
(b) Section 8A Proceedings. The Underwriter is not subject to any pending proceeding under Section 8A of the Securities Act with respect to the offering of the Securities and will promptly notify the Company if any such proceeding against it is initiated during the Prospectus Delivery Period.
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6. Payment of Expenses.
(a) Company Expenses. The Company hereby agrees to pay on the Closing Date all expenses incident to the performance of the obligations of the Company under this Agreement including, but not limited to: (a) all filing fees and expenses relating to the registration of the Securities with the Commission; (b) all filing fees and expenses associated with the review of the offering of the Securities by FINRA; (c) all fees and expenses relating to the listing of the Securities on the Exchange (to the extent relevant) and on such other stock exchanges as the Company and the Underwriter together determine; (d) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Securities under the “blue sky” securities laws of such states and other jurisdictions as the Underwriter may reasonably designate (including, without limitation, all filing and registration fees, and the reasonable fees and disbursements of the Company’s “blue sky” counsel, which will be the Underwriter’s counsel) unless such filings are not required in connection with the Company’s listing on an exchange; (e) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Securities under the securities laws of such foreign jurisdictions as the Underwriter may reasonably designate; (f) the costs of all mailing and printing of the underwriting documents, the Registration Statement, Pricing Disclosure Package, the Final Prospectus, any Preliminary Prospectus, any Issuer Free Writing Prospectus or any Testing-the-Waters Communication and all amendments, supplements and exhibits thereto as the Underwriter may reasonably deem necessary; (g) stock transfer and/or stamp taxes, if any, payable upon the transfer of Securities from the Company to the Underwriter; (h) the fees and expenses of the Company’s accountants; and (i) the “road show” expenses and the reasonable fees and expenses of the Company’s legal counsel and other agents and Underwriter and fees and expenses of the Underwriter’s counsel. The total amount payable pursuant to this Section 6(a) to the Underwriter shall not to exceed $100,000. The Underwriter may deduct from the net proceeds of the Offering payable to the Company on the Closing Date the expenses set forth herein to be paid by the Company to the Underwriter. Except as provided for in this Agreement, the Underwriter shall bear the costs and expenses incurred by it in connection with the sale of the Securities and the transactions contemplated thereby.
(b) Non-accountable Expenses. On the Closing Date, the Company shall pay to the Underwriter, by deduction from the net proceeds of the Offering a non-accountable expense allowance equal to one percent (1.0%) of the gross proceeds received by the Company from the sale of the Closing Units, provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriter pursuant to Section 6(c) hereof.
(c) Underwriter Expenses. Except to the extent otherwise provided in this Section 6 or Section 8 hereof, the Underwriter will pay all of its own costs and expenses, including the fees and expenses of their counsel, any stock transfer taxes on resale of any of the Securities held by them, and any advertising expenses connected with any offers they may make.
(d) Company Reimbursement. The provisions of this Section 6 shall not affect any agreement that the Company may make for the sharing of such costs and expenses.
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7. Conditions of the Obligations of the Underwriter. The obligations of the Underwriter to purchase the Closing Units as provided herein on the Closing Date or the Option Securities as provided herein on any Additional Closing Date, as the case may be, shall be subject to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions:
(a) Registration Compliance; No Stop Order.
(i) The Registration Statement and any post-effective amendment thereto shall have become effective, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto shall be in effect, and no proceeding for such purpose or pursuant to Section 8A of the Securities Act shall be pending before or threatened by the Commission.
(ii) The Company shall have filed the Final Prospectus and each Issuer Free Writing Prospectus with the Commission in accordance with and within the time periods prescribed by Section 4(a) hereof.
(iii) The Company shall have (A) disclosed to the Underwriter all requests by the Commission for additional information relating to the offer and sale of the Securities and (B) complied with such requests to the reasonable satisfaction of the Underwriter.
(b) Representations and Warranties. The representations and warranties of the Company contained herein shall be true and correct on the date hereof and on and as of the Closing Date or any Additional Closing Date, as the case may be; and the statements of the Company and its officers made in any certificates delivered pursuant to this Agreement shall be true and correct on and as of the Closing Date or any Additional Closing Date, as the case may be.
(c) Accountants’ Comfort Letters. On the date of this Agreement and on the Closing Date or any Additional Closing Date, as the case may be, Freed Maxick CPAs, P.C., independent registered public accounting firm, shall have furnished to the Underwriter, at the request of the Company, letters, dated the respective dates of delivery thereof and addressed to the Underwriter, in form and substance reasonably satisfactory to the Underwriter, containing statements and information of the type customarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in each of the Registration Statement, the Pricing Disclosure Package and the Final Prospectus; provided that the letter delivered on the Closing Date or any Additional Closing Date, as the case may be, shall use a “cut-off” date no more than two Business Days prior to the Closing Date or such Additional Closing Date, as the case may be.
(d) Reserved.
(e) No Material Adverse Change. No event or condition of a type described in Section 1(l) hereof shall have occurred or shall exist, which event or condition is not described in each of the Pricing Disclosure Package and the Final Prospectus (in each case, exclusive of any amendment or supplement thereto), the effect of which in the judgment of the Underwriter makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Securities on the Closing Date or any Additional Closing Date, as the case may be, in the manner and on the terms contemplated by this Agreement, the Pricing Disclosure Package and the Final Prospectus (in each case, exclusive of any amendment or supplement thereto).
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(f) Opinion and Negative Assurance Letter of Counsel to the Company. Harter Secrest & Emery LLP, U.S. counsel to the Company with respect to U.S. securities matters, shall have furnished to the Underwriter, at the request of the Company, its (i) written opinion, addressed to the Underwriter and dated the Closing Date or any Additional Closing Date, as the case may be, and (ii) negative assurance letter, addressed to the Underwriter and dated the Closing Date or any Additional Closing Date, shall have furnished to the Underwriter, at the request of the Company, its written opinion, addressed to the Underwriter and dated the Closing Date or any Additional Closing Date, as the case may be, each in a form and substance reasonably satisfactory to the Underwriter.
(g) Officer’s Certificate. The Underwriter shall have received on and as of the Closing Date or any Additional Closing Date, as the case may be, a certificate of an executive officer of the Company who has specific knowledge of the Company’s financial matters and is satisfactory to the Underwriter, (i) confirming that such officer has carefully reviewed the Registration Statement, the Pricing Disclosure Package, the Final Prospectus, each Issuer Free Writing Prospectus and each Written Testing-the-Waters Communication and, to the knowledge of such officer, the representations set forth in Sections 1(a)(ii), 1(b), 1(c)(i), 1(d)(i), 1(e)(i) and 1(f)(i) hereof are true and correct on and as of the Closing Date or any Additional Closing Date, as the case may be; (ii) to the effect set forth in clause (i) of Section 1(l) and Section 7(a) hereof; and (iii) confirming that all of the other representations and warranties of the Company in this Agreement are true and correct on and as of the Closing Date or any Additional Closing Date, as the case may be, and that the Company has complied with all agreements and covenants and satisfied all other conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date or any Additional Closing Date, as the case may be.
(h) No Legal Impediment to Issuance and Sale. No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the Closing Date or any Additional Closing Date, as the case may be, prevent the issuance, sale or delivery of the Securities by the Company; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date or any Additional Closing Date, as the case may be, prevent the issuance, sale or delivery of the Securities.
(i) Good Standing. The Underwriter shall have received on and as of the Closing Date and any Additional Closing Date, as the case may be, satisfactory evidence of the good standing of the Company under the laws of Delaware as of the date hereof and its good standing in such other jurisdictions as the Underwriter may reasonably request, in each case, in writing from the appropriate governmental authorities of such jurisdictions.
(j) Lock-Up Agreements. The Lock-Up Agreements executed by the officers, directors and shareholders holding at least ten percent (10%) of the outstanding Common Stock of the Company relating to sales and certain other dispositions of Common Stock or certain other securities, delivered to the Underwriter on or before the date hereof, shall be in full force and effect on the Closing Date or any Additional Closing Date, as the case may be.
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(k) Underwriter’s Warrant. The Underwriter’s Warrant, substantially in the form of Exhibit E hereto, executed by the officers of the Company, delivered to the Underwriter on or before the date hereof, shall be in full force and effect on the Closing Date or any Additional Closing Date, as the case may be.
(l) Exchange Listing. On the Closing Date or any Additional Closing Date, as the case may be, the Closing Shares, the Option Shares and the Warrant Shares shall have been approved for listing on the Exchange, subject to notice of issuance.
(m) Additional Documents. On or prior to the Closing Date or any Additional Closing Date, as the case may be, the Underwriter and its counsel shall have received such information, certificates and other additional documents from the Company as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as contemplated herein or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the covenants, closing conditions or other obligations, contained in this Agreement.
All opinions, letters, certificates and other documents delivered pursuant to this Agreement will be deemed to be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to counsel for the Underwriter.
If any condition specified in this Section 7 is not satisfied when and as required to be satisfied, this Agreement and all obligations of the Underwriter hereunder may be terminated by the Underwriter by notice to the Company at any time on or prior to the Closing Date or any Additional Closing Date, as the case may be, which termination shall be without liability on the part of any party to any other party, except that the Company shall continue to be liable for the payment of expenses under Section 6 and Section 11 hereof and except that the provisions of Section 8 and Section 9 hereof shall at all times be effective and shall survive any such termination.
8. Indemnification.
(a) Indemnification of the Underwriter by the Company. The Company agrees to indemnify and hold harmless the Underwriter, its Affiliates, directors, officers, employees and agents and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, all reasonable legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted, as such fees and expenses are incurred), joint or several, that arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Pricing Disclosure Package (including any Pricing Disclosure Package that has subsequently been amended), the Final Prospectus (or any amendment or supplement thereto), any Preliminary Prospectus, any Issuer Information, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication or any Road Show, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case, except insofar as such losses, claims, damages or liabilities arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with the Underwriter Information. The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Company may otherwise have.
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(b) Indemnification of the Company by the Underwriter. The Underwriter agrees to indemnify and hold harmless the Company, its directors, each officer who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, all reasonable legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted, as such fees and expenses are incurred), joint or several, to the same extent as the indemnity set forth in Section 8(a) hereof; provided, however, that the Underwriter shall be liable only to the extent that any untrue statement or omission or alleged untrue statement or omission was made in the Registration Statement (or any amendment or supplement thereto), any Pricing Disclosure Package (including any Pricing Disclosure Package that has subsequently been amended), the Final Prospectus (or any amendment or supplement thereto), any Preliminary Prospectus, any Issuer Information, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication or any Road Show in reliance upon, and in conformity with, the Underwriter Information. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that the Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnification may be sought pursuant to any of the preceding subsections of this Section 8, such person (the “Indemnified Person”) shall promptly notify the person against whom such indemnification may be sought (the “Indemnifying Person”) in writing; provided that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have under any of the preceding subsections of this Section 8 except to the extent that it has been materially prejudiced by such failure; and provided, further, that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have to an Indemnified Person otherwise than under any of the preceding subsections of this Section 8. If any such proceeding shall be brought or asserted against an Indemnified Person and it shall have notified the Indemnifying Person thereof, the Indemnifying Person shall retain counsel reasonably satisfactory to the Indemnified Person (who shall not, without the consent of the Indemnified Person, be counsel to the Indemnifying Person) to represent the Indemnified Person in such proceeding and shall pay the reasonable and documented fees and expenses of such counsel related to such proceeding, as incurred. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary; (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person; (iii) the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the Indemnifying Person; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them. It is understood and agreed that the Indemnifying Person shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be paid or reimbursed as they are incurred. Any such separate firm for (i) the Underwriter, its Affiliates, directors, officers, employees and agents and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall be designated in writing by the Underwriter; and (ii) the Company, its directors, its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall be designated in writing by the Company.
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(d) Settlements. The Indemnifying Person under this Section 8 shall not be liable for any settlement of any proceeding (i) effected without its written consent, which consent may not be unreasonably withheld(but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees to indemnify the Indemnified Person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment) or (ii) if any Indemnified Person made any admission or settlement without the prior written consent of the Company or did not fully cooperate with the defense. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested an Indemnifying Person to reimburse the Indemnified Person for any reasonably incurred and documented fees and expenses of counsel as contemplated by this Section 8, the Indemnifying Person agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such Indemnifying Person of the aforesaid request, (ii) such Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request, or shall not have disputed in good faith the Indemnified Person’s entitlement to such reimbursement, prior to the date of such settlement and (iii) such Indemnified Person shall have given the Indemnifying Person at least 45 days’ prior notice of its intention to settle. No Indemnifying Person shall, without the prior written consent of the Indemnified Person effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any Indemnified Person is or could have been a party and indemnity was or could have been sought hereunder by such Indemnified Person, unless such settlement, compromise or consent (x) includes an unconditional release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from and against all liability on claims that are the subject matter of such action, suit or proceeding and (y) does not include any statements as to or any findings of fault, culpability or failure to act by or on behalf of any Indemnified Person.
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9. Contribution. To the extent the indemnification provided for in Section 8 hereof is unavailable to or insufficient to hold harmless an Indemnified Person in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each Indemnifying Person, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the aggregate amount paid or payable by such Indemnified Person, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriter, on the other hand, from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriter, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriter, on the other hand, in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company, on the one hand, and the total underwriting discounts and commissions received by the Underwriter, on the other hand, in each case as set forth in the table on the cover of the Final Prospectus bear to the aggregate initial offering price of the Securities. The relative fault of the Company, on the one hand, and the Underwriter, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriter, on the other hand, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 8 hereof, all reasonable legal or other fees or expenses incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 8 hereof with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8 hereof for purposes of indemnification.
The Company and the Underwriter agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, the Underwriter shall not be required to contribute any amount in excess of the amount by which the total discounts and commissions received by the Underwriter in connection with the Securities distributed by it exceeds the amount of any damages the Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11 of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
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For purposes of this Section 9, each director, officer, employee and agent of the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Underwriter, and each director and officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company with the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company.
The remedies provided for in Section 8 and Section 9 hereof are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Person at law or in equity.
If any provision in this Agreement cancels or limits the insurance coverage of the Company, such provision shall be deemed amended to remove such cancellation or limitation or (if it may not be amended) be deemed canceled and of no effect.
10. Termination. Prior to the delivery of and payment for the Securities on the Closing Date or any Additional Closing Date, as the case may be, this Agreement may be terminated by the Underwriter in the absolute discretion of the Underwriter by notice given to the Company if after the execution and delivery of this Agreement: (i) trading or quotation of any securities issued or guaranteed by the Company shall have been suspended or materially limited on any securities exchange, quotation system or in the over-the-counter market; (ii) trading in securities generally on any of the New York Stock Exchange, the Nasdaq Global Market or the over-the-counter market shall have been suspended or materially limited; (iii) a general banking moratorium on commercial banking activities shall have been declared by federal or New York state authorities; (iv) there shall have occurred a material disruption in commercial banking or securities settlement, payment or clearance services in the United States; (v) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in general economic, financial or political conditions in the United States or internationally, as in the judgment of the Underwriter is material and adverse and makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Securities on the Closing Date or any Additional Closing Date, as the case may be, in the manner and on the terms described in the Pricing Disclosure Package or to enforce contracts for the sale of securities; or (vi) the Company or any of its subsidiaries shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Underwriter may interfere materially with the conduct of the business and operations of the Company and its subsidiaries, considered as one entity, regardless of whether or not such loss shall have been insured.
Any termination pursuant to this Section 10 shall be without liability on the part of: (x) the Company to the Underwriter, except that the Company shall continue to be liable for the payment of expenses under Section 6; (y) the Underwriter to the Company; or (z) any party hereto to any other party except that the provisions of Section 8 and Section 9 hereof shall at all times be effective and shall survive any such termination.
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11. Representations and Indemnities to Survive Delivery. The respective indemnities, rights of contribution, agreements, representations, warranties and other statements of the Company and the Underwriter set forth in or made pursuant to this Agreement or made by or on behalf of the Company or the Underwriter pursuant to this Agreement or any certificate delivered pursuant hereto shall remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriter, the Company or any of their respective officers or directors or any controlling person, as the case may be, and shall survive delivery of and payment for the Securities sold hereunder and any termination of this Agreement.
12. Notices. All notices, requests, consents, claims, demands, waivers and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered by hand (with written confirmation of receipt), (ii) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested), (iii) on the date sent by email of a PDF document (with confirmation of receipt from the intended recipient by return email or other written acknowledgment) if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient, or (iv) on the third day after the date mailed, by certified or registered mail (in each case, return receipt requested, postage pre-paid). Such communications must be sent to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 12):
| If to the Underwriter: | Aegis Capital Corp. 810 7th Avenue 18th Floor New York, NY 10019 Email Address: reide@aegiscap.com Attention: Robert Eide | |
| with a copy to (which shall not constitute notice): | Kaufman & Canoles, P.C. Two James Center 1021 East Cary Street, Suite 1400 Richmond, Va. 23219
Email: awbasch@kaufcan.com jbwilliston@kaufcan.com Attention: Anthony W. Basch J. Britton Williston | |
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| If to the Company: | Infinite Group, Inc. 175 Sully’s Trail, Suite 202 Pittsford, New York 14534 Email: jvilla@igius.com Attention: James Villa | |
| with a copy to (which shall not constitute notice): | Harter Secrest & Emery LLP 1600 Bausch & Lomb Place Rochester, New York 14604 Email: amcclean@hselaw.com cmurillo@hselaw.com Attention: Alexander McClean, Esq. Christopher Murillo, Esq. | |
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Any party hereto may change the address or facsimile number for receipt of communications by giving written notice to the others in accordance with this Section 12.
13. Successors. This Agreement shall inure solely to the benefit of and be binding upon the Underwriter, the Company and the other indemnified parties referred to in Section 8 and Section 9 hereof, and in each case their respective successors. Nothing in this Agreement is intended, or shall be construed, to give any other person or entity any legal or equitable right, benefit, remedy or claim under, or in respect of or by virtue of, this Agreement or any provision contained herein. The term “successors,” as used herein, shall not include any purchaser of the Securities from the Underwriter merely by reason of such purchase.
14. Equitable Remedies. Each party to this Agreement acknowledges and agrees that (a) a breach or threatened breach by the Company of any of its obligations under Section 4(k) or Section 4(n) would give rise to irreparable harm to the Underwriter for which monetary damages would not be an adequate remedy and (b) if a breach or a threatened breach by the Company under Section 4(k) or Section 4(n) ocurrs, the Underwriter will, in addition to any and all other rights and remedies that may be available to such party at law, at equity, or otherwise in respect of such breach, be entitled to equitable relief, including a temporary restraining order, an injunction, specific performance of the terms of Sections 4(k) or 4(n), as applicable, and any other relief that may be available from a court of competent jurisdiction, without any requirement to (i) post a bond or other security, or (ii) prove actual damages or that monetary damages will not afford an adequate remedy. Each party to this Agreement agrees that such party shall not oppose or otherwise challenge the existence of irreparable harm, the appropriateness of equitable relief or the entry by a court of competent jurisdiction of an order granting equitable relief, in either case, consistent with the terms of this Section 14.
15. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.
16. Governing Law. This Agreement and any claim, controversy or dispute arising under or related to this Agreement, whether sounding in contract, tort or statute, shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in such state (including its statute of limitations), without giving effect to the conflict of laws provisions thereof to the extent such principles or rules would require or permit the application of the laws of any jurisdiction other than those of the State of New York.
17. Consent to Jurisdiction. No legal suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby (each, a “Related Proceeding”) may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts (collectively, the “Specified Courts”) shall have jurisdiction over the adjudication of any Related Proceeding, and the parties to this Agreement hereby irrevocably consent to the exclusive jurisdiction the Specified Courts and personal service of process with respect thereto. The parties to this Agreement hereby irrevocably waive any objection to the laying of venue of any Related Proceeding in the Specified Courts and irrevocably waive and agree not to plead or claim in any Specified Court that any Related Proceeding brought in any Specified Court has been brought in an inconvenient forum.
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18. Waiver of Jury Trial. The parties to this Agreement hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any Related Proceeding.
19. No Fiduciary Relationship. The Company acknowledges and agrees that: (i) the purchase and sale of the Securities pursuant to this Agreement, including the determination of the offering price of the Securities and any related discounts and commissions, is an arm’s-length commercial transaction between the Company, on the one hand, and the Underwriter, on the other hand; (ii) in connection with each transaction contemplated hereby and the process leading to such transaction the Underwriter is and has been acting solely as a principal and is not the agent or fiduciary of the Company or its Affiliates, stockholders, members, partners, creditors or employees or any other party; (iii) the Underwriter has not assumed or will assume an advisory or fiduciary responsibility in favor of the Company with respect to any of the transactions contemplated hereby or the process leading thereto (irrespective of whether the Underwriter has advised or is currently advising the Company on other matters) or any other obligation to the Company except the obligations expressly set forth in this Agreement; (iv) the Underwriter and its Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Company, and the Underwriter has no obligation to disclose any of such interests by virtue of any fiduciary or advisory relationship; and (v) the Underwriter has not provided any legal, accounting, regulatory or tax advice in any jurisdiction with respect to the offering contemplated hereby, and the Company has consulted its own legal, accounting, regulatory and tax advisors to the extent they deemed appropriate. The Company waives and releases, to the full extent permitted by applicable law, any claims it may have against the Underwriter arising from an alleged breach of fiduciary duty in connection with the offering of the Securities or any matters leading up to the offering of the Securities.
20. Compliance with the USA Patriot Act. In accordance with the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), the Underwriter is required to obtain, verify and record information that identifies its clients, including the Company, which information may include the name and address of its clients, as well as other information that will allow the Underwriter to properly identify its clients.
21. Entire Agreement. This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not superseded by this Agreement) that relate to the offering of the Securities, represents the entire agreement among the Company and the Underwriter with respect to the preparation of the Registration Statement, the Pricing Disclosure Package, the Final Prospectus, each Preliminary Prospectus, each Issuer Free Writing Prospectus, each Testing-the-Waters Communication and each Road Show, the purchase and sale of the Securities and the conduct of the offering contemplated hereby.
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22. Amendments or Waivers. No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by all the parties hereto. No waiver by any party shall operate or be construed as a waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after the waiver. No failure to exercise, or delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise of any other right, remedy, power or privilege.
23. Section Headings. The headings herein are included for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.
24. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will be deemed to be one and the same agreement. Counterparts may be delivered via facsimile, email (including PDF or any electronic signature complying with the U.S. federal ESIGN Act of 2000) or other transmission method, and any counterpart so delivered will be deemed to have been duly and validly delivered and be valid and effective for all purposes.
25. Recognition of the U.S. Special Resolution Regimes.
(a) In the event that the Underwriter is a Covered Entity (as defined below) and becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer from the Underwriter of this Agreement, and any interest and obligation in or under this Agreement, will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime (as defined below) if this Agreement, and any such interest and obligation, were governed by the laws of the United States or a state of the United States.
(b) In the event that the Underwriter is a Covered Entity or a BHC Act Affiliate (as defined below) of the Underwriter becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights (as defined below) under this Agreement that may be exercised against the Underwriter are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if this Agreement were governed by the laws of the United States or a state of the United States.
(c) As used in this section:
“BHC Act Affiliate” has the meaning assigned to the term “affiliate” in, and shall be interpreted in accordance with, 12 U.S.C. § 1841(k).
“Covered Entity” means any of the following:
(i) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b);
(ii) a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or
(iii) a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).
“Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.
“U.S. Special Resolution Regime” means each of (i) the Federal Deposit Insurance Act and the regulations promulgated thereunder and (ii) Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder.
[SIGNATURE PAGE FOLLOWS]
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If the foregoing is in accordance with your understanding, please indicate your acceptance of this Agreement by signing in the space provided below.
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| Very truly yours, |
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| INFINITE GROUP, INC. |
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| By: |
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| Name: | James Villa |
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| Title: | Chief Executive Officer |
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Confirmed and accepted as of the date first above written:
AEGIS CAPITAL CORP.
By:_____________________
Name: Robert Eide
Title: Chief Executive Officer
SCHEDULE I
Underwriter
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Underwriter |
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Number of Closing Units to Be Purchased |
| Number of Option Securities to Be Purchased if the Maximum Over-Allotment Option Is Exercised |
| Aegis Capital Corp. |
| Closing Units: [NUMBER] |
| [NUMBER] |
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| Pre-funded Units: [NUMBER] |
| [NUMBER] |
| Total: |
| [NUMBER] |
| [NUMBER] |
SCHEDULE II
Pricing Disclosure Package
| Number of Closing Units: |
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| [●]
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| ● Number of Closing Common Units
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| [●]
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| ● Number of Closing Pre-funded Units
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| [●]
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| Number of Option Shares and/or Pre-funded Warrants:
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| [●]
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| Number of Option Warrants:
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| [●]
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| Number of Underwriter’s Warrants:
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| [●]
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| Public Offering Price per Closing Common Unit:
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| $
| [●]
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| Public Offering Price per Closing Pre-funded Unit:
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| $
| [●]
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| Exercise Price per Pre-Funded Warrant:
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| $
| 0.001
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| Exercise Price per Warrant per whole share:
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| $
| [●]
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| Exercise Price of Underwriter’s Warrant:
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| $
| [●]
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| Public Price per Option Share:
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| $
| [●]
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| Public Price per Option Pre-Funded Warrant:
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| $
| [●]
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| Price per Option Warrant:
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| $
| 0.01
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| Underwriting Discount per Closing Common Unit:
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| $
| [●]
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| Underwriting Discount per Closing Pre-funded Unit:
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| $
| [●]
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| Underwriting Discount per Option Share and/or Pre-funded Warrant:
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| $
| [●]
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| Non-accountable expense allowance per Common Unit and per Pre-funded Unit: |
| $ | [●] |
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EXHIBIT A
Form of Lock-Up Agreement
_____, 2022
Aegis Capital Corp.
810 Seventh Avenue, 18th Floor
New York, NY 10019
Ladies and Gentlemen:
The undersigned understands that Aegis Capital Corp. (the “Underwriter”), proposes to enter into an Underwriting Agreement (the “Underwriting Agreement”) with Infinite Group, Inc., a Delaware corporation (the “Company”), providing for the public offering (the “Public Offering”) of [●] units (each, a “Closing Unit”), with each Closing Unit consisting of either: (A) one shareof common stock, $0.0001 par value per share, of the Company (the “Common Stock”) and three warrants, with each warrant to purchase one share of Common Stock (the “Warrant”); or (B) one pre-funded warrant (each, a “Pre-funded Warrant”) to purchase one share of Common Stock at an exercise price of [●] until such time as the Pre-funded Warrant is exercised in full subject to adjustment as provided in the Pre-funded Warrant and three Warrants.
To induce the Underwriter to continue its efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Underwriter, the undersigned will not, during the period commencing on the date hereof and ending one hundred eighty (180) days after the effective date of the Registration Statement on Form S-1 relating to the Public Offering (the “Lock-Up Period”), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the “Lock-Up Securities”); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities. Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Underwriter in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Public Offering; provided that no filing under Section 13 or Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or other public announcement shall be required or shall be voluntarily made in connection with subsequent sales of Lock-Up Securities acquired in such open market transactions; (b) transfers of Lock-Up Securities as a bona fide gift, by will or intestacy or to a family member or trust for the benefit of the undersigned (for purposes of this lock-up agreement, “family member” means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; (d) if the undersigned is a corporation, partnership, limited liability company or other business entity, (i) any transfers of Lock-Up Securities to another corporation, partnership or other business entity that controls, is controlled by or is under common control with the undersigned or (ii) distributions of Lock-Up Securities to members, partners, stockholders, subsidiaries or affiliates (as defined in Rule 405 promulgated under the Securities Act of 1933, as amended) of the undersigned; (e) if the undersigned is a trust, to a trustee or beneficiary of the trust; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c) (d) or (e), (i) any such transfer shall not involve a disposition for value, (ii) each transferee shall sign and deliver to the Underwriter a lock-up agreement substantially in the form of this lock-up agreement and (iii) no filing under Section 13 or Section 16(a) of the Exchange Act or other public announcement shall be required or shall be voluntarily made with respect to such transfer during the Lock-Up Period; (f) the receipt by the undersigned from the Company of Common Stock upon the vesting of restricted stock awards or stock units or upon the exercise of options to purchase the Company’s Common Stock issued under an equity incentive plan of the Company or an employment arrangement described in the Pricing Prospectus (as defined in the Underwriting Agreement) (the “Plan Shares”) or the transfer or withholding of Common Stock or any securities convertible into Common Stock to the Company upon a vesting event of the Company’s securities or upon the exercise of options to purchase the Company’s securities, in each case on a “cashless” or “net exercise” basis or to cover tax obligations of the undersigned in connection with such vesting or exercise, provided that if the undersigned is required to file a report under Section 13 or Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of Common Stock during the Lock-Up Period, the undersigned shall include a statement in such schedule or report to the effect that the purpose of such transfer was to cover tax withholding obligations of the undersigned in connection with such vesting or exercise and, provided further, that the Plan Shares shall be subject to the terms of this lock-up agreement; (g) the transfer of Lock-Up Securities pursuant to agreements described in the Pricing Prospectus under which the Company has the option to repurchase such securities or a right of first refusal with respect to the transfer of such securities, provided that if the undersigned is required to file a report under Section 13 or Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of Common Stock during the Lock-Up Period, the undersigned shall include a statement in such schedule or report describing the purpose of the transaction; (h) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of Lock-Up Securities, provided that (i) such plan does not provide for the transfer of Lock-Up Securities during the Lock-Up Period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by or on behalf of the undersigned or the Company regarding the establishment of such plan, such public announcement or filing shall include a statement to the effect that no transfer of Lock-Up Securities may be made under such plan during the Lock-Up Period; (i) the transfer of Lock-Up Securities that occurs by operation of law, such as pursuant to a qualified domestic order or in connection with a divorce settlement, provided that the transferee agrees to sign and deliver a lock-up agreement substantially in the form of this lock-up agreement for the balance of the Lock-Up Period, and provided further, that any filing under Section 13 or Section 16(a) of the Exchange Act that is required to be made during the Lock-Up Period as a result of such transfer shall include a statement that such transfer has occurred by operation of law; and (j) the transfer of Lock- Up Securities pursuant to a bona fide third party tender offer, merger, consolidation or other similar transaction made to all holders of the Common Stock involving a change of control (as defined below) of the Company after the closing of the Public Offering and approved by the Company’s board of directors; provided that in the event that the tender offer, merger, consolidation or other such transaction is not completed, the Lock-Up Securities owned by the undersigned shall remain subject to the restrictions contained in this lock-up agreement. For purposes of clause (j) above, “change of control” shall mean the consummation of any bona fide third party tender offer, merger, amalgamation, consolidation or other similar transaction the result of which is that any “person” (as defined in Section 13(d)(3) of the Exchange Act), or group of persons, becomes the beneficial owner (as defined in Rules 13d-3 and 13d- 5 of the Exchange Act) of a majority of total voting power of the voting stock of the Company. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s Lock-Up Securities except in compliance with this lock-up agreement.
If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing restrictions shall be equally applicable to any issuer-directed or “friends and family” securities that the undersigned may purchase in the Public Offering; (ii) the Underwriter agrees that, at least three (3) Business Days (as defined in the Underwriting Agreement) before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Underwriter will notify the Company of the impending release or waiver; and (iii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) Business Days before the effective date of the release or waiver. Any release or waiver granted by the Underwriter hereunder to any such officer or director shall only be effective two (2) Business Days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.
The undersigned understands that the Company and the Underwriter are relying upon this lock-up agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.
The undersigned understands that, if the Underwriting Agreement is not executed by all parties thereto by [●], 2022 or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the shares of Common Stock to be sold thereunder, then this lock-up agreement shall be void and of no further force or effect.
Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriter.
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EXHIBIT B
Form of Lock-Up Waiver
[●], 2022
[NAME AND ADDRESS]
Re: Lock-Up Agreement Waiver
Ladies and Gentlemen:
[Pursuant to Section 7(j) of the Underwriting Agreement, dated [●], 2022 (the “Underwriting Agreement”), among Infinite Group, Inc., a Delaware corporation (the “Company”), and Aegis Capital Corp. (the “Underwriter”) and the Lock-Up Agreement, dated [●], 2022 (the “Lock-Up Agreement”), between you and the Underwriter relating to the Company’s common stock, $0.001 par value per share (the “Shares”), the Underwriter hereby gives its consent to allow you to sell up to [●] Shares [solely from and including [DATE] to and including [DATE]].]
[Pursuant to Section 7(k) of the Underwriting Agreement, the Underwriter hereby gives its consent to allow the Company to issue and sell up to [●] Shares pursuant to an offering of the Shares to commence prior to the expiration of the Lock-Up Period as defined in the Underwriting Agreement[, provided that such offering closes on or prior to [●]].]
[Signature Page Follows]
EXHIBIT C
Form of Lock-Up Waiver Press Release
INFINITE GROUP, INC.
[Date]
Infinite Group, Inc., a Delaware corporation (the “Company”), announced today that Aegis Capital Corp., acting as Underwriter in the Company’s recent public offering of the Company’s common stock, is [waiving] [releasing] a lock-up restriction with respect to the Company’s common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on [Date], and the shares may be sold on or after such date.
This press release is not an offer or sale of the securities in the United States or in any other jurisdiction where such offer or sale is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act of 1933, as amended.
EXHIBIT D
Certificate of the Company’s Chief Accounting Officer
OFFICER’S CERTIFICATE
[●], 2022
I, Richard W. Glickman, Chief Accounting Officer of Infinite Group, Inc., a Delaware corporation (the “Company”), solely in such capacity and not in my individual capacity, do hereby certify that this certificate is being delivered by me pursuant to Section 7(g) of that certain Underwriting Agreement (the “Agreement”; capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Agreement), dated [●], 2022, by and between the Company and Aegis Capital Corp. and do hereby further certify on behalf of the Company that:
1. I have carefully reviewed the Registration Statement, the Pricing Disclosure Package, the Final Prospectus, each Issuer Free Writing Prospectus and each Written Testing-the-Waters Communication and, to my knowledge, the representations set forth in Sections 1(a)(ii), 1(b), 1(c)(i), 1(d)(i), 1(e)(i) and 1(f)(i) of the Agreement are true and correct on and as of the Closing Date;
2. Except as otherwise disclosed in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus (in each case exclusive of any amendment or supplement thereto), since the date of the most recent financial statements included in the Registration Statement, the Pricing Disclosure Package and the Final Prospectus there has been no material adverse change, or any development that could result in a material adverse change, in or affecting the condition (financial or otherwise), earnings, business, properties, management, financial position, stockholders’ equity, or results of operations, whether or not arising from transactions in the ordinary course of business, of the Company;
3. The Company has timely performed the covenants and other obligations set forth in Section 7(a) of the Agreement.
4. All of the other representations and warranties of the Company in the Agreement are true and correct on and as of the Closing Date and the Company has complied in all material respects with all agreements and covenants and satisfied all other conditions on its part to be performed or satisfied thereunder at or prior to the Closing Date.
[Signature Page Follows]
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| INFINITE GROUP, INC. |
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| Name: | Richard W. Glickman |
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| Title: | Chief Accounting Officer |
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EXHIBIT E
Form of Underwriter’s Warrant
EXHIBIT [●]
Pre-funded Warrant Certificate
Exhibit 4.2
COMMON STOCK PURCHASE WARRANT
INFINITE GROUP, INC.
| Warrant Certificate No.: [●] |
| Issue Date: _____________, 2022 |
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| Certificate for [●] Warrants, each entitling the holder to acquire one (1) Warrant Share (subject to adjustment as provided herein) |
| Initial Exercise Date: _____________, 2022 |
CUSIP: [●]
ISIN: [●]
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, [●] or its assigns (the “Holder” provided that a “Holder” shall include, if the warrant or warrants are held in “street name,” a Participant, any designee appointed by such Participant and each “beneficial owner” of such warrant or warrants) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after [●], 2022 (the “Initial Exercise Date”) and on or prior to 5:00 p.m. (New York City time) on the earlier of [●], 2027 or the Redemption Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Infinite Group, Inc., a Delaware corporation (the “Company”), up to [●] shares (as subject to adjustment hereunder, the “Warrant Shares”) of the Company’s Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b). This Warrant shall initially be issued and maintained in the form of a security held in book-entry form and the Depository Trust Company or its nominee (“DTC”) shall initially be the sole registered holder of this Warrant, subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agency Agreement, in which case this sentence shall not apply.
Section 1. Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average per share price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the OTC Pink Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Public Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“Board of Directors” means the board of directors of the Company.
“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed; provided, however, for clarification, commercial banks shall not be deemed to be authorized or required by law to remain closed due to “stay at home”, “shelter-in-place”, “non-essential employee” or any other similar orders or restrictions or the closure of any physical branch locations at the direction of any governmental authority so long as the electronic funds transfer systems (including for wire transfers) of commercial banks in The City of New York generally are open for use by customers on such day.
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“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Equity Conditions” means, with respect to any Redemption Notice Date: (i) on such date one or more registration statements (each, the “Redemption Registration Statement”) shall be effective and the prospectus contained therein shall be available on such date (with, for the avoidance of doubt, any shares of Common Stock previously issued pursuant to such prospectus deemed unavailable) for the issuance of all the shares of Common Stock issuable upon exercise of this Warrant and other warrants issued pursuant to the Underwriting Agreement (collectively, the “Registered Warrants”) in connection with the Redemption (such applicable aggregate number of shares of Common Stock, each, a “Required Minimum Securities Amount”); (ii) on each day during the period beginning thirty (30) calendar days prior to the applicable Redemption Notice Date and ending on and including the applicable Redemption Notice Date (the “Equity Conditions Measuring Period”), the shares of Common Stock (including the shares of Common Stock to be issued in the Redemption) is listed or designated for quotation (as applicable) on a Trading Market and shall not have been suspended from trading on a Trading Market (other than suspensions of not more than two (2) days and occurring prior to the applicable date of determination due to business announcements by the Company) nor shall delisting or suspension by a Trading Market have been threatened (with a reasonable prospect of delisting occurring after giving effect to all applicable notice, appeal, compliance and hearing periods) or reasonably likely to occur or pending as evidenced by (A) a writing by such Trading Market or (B) the Company falling below the minimum listing maintenance requirements of the Trading Market on which the shares of Common Stock is then listed or designated for quotation (as applicable); (iii) during the Equity Conditions Measuring Period, the Company shall have delivered all Warrant Shares issuable upon exercise of this Warrant on a timely basis as set forth in Section 2 hereof and all other share capital required to be delivered by the Company on a timely basis as set forth in the Underwriting Agreement; (iv) the Required Minimum Securities Amount of shares of Common Stock to be issued in connection with the Redemption may be issued in full without violating the rules or regulations of the Trading Market on which the shares of Common Stock is then listed or designated for quotation (as applicable); (v) on each day during the Equity Conditions Measuring Period, no public announcement of a pending, proposed or intended Fundamental Transaction shall have occurred which has not been abandoned, terminated or consummated; (vi) the Company shall have no knowledge of any fact that would reasonably be expected to cause the applicable Redemption Registration Statement to not be effective or the prospectus contained therein to not be available for the issuance of the Required Minimum Securities Amount of shares of Common Stock in connection with the Redemption; (vii) the Holder shall not be in possession of any material, non-public information provided to any of them by the Company, any of its subsidiaries or any of their respective affiliates, employees, officers, representatives, agents or the like; (viii) on each day during the Equity Conditions Measuring Period, the Company otherwise shall have been in compliance with each, and shall not have breached any representation or warranty in any material respect (other than representations or warranties subject to material adverse effect or materiality, which may not be breached in any respect) or any covenant or other term or condition of this Warrant or the Underwriting Agreement, including, without limitation, the Company shall not have failed to timely make any payment pursuant to this Warrant or the Underwriting Agreement; (ix) on the applicable Redemption Notice Date (A) a sufficient number of shares shall be authorized and reserved in accordance with Section 6(d) and (B) all Warrant Shares to be issued in connection with the event requiring this determination may be issued in full without resulting in a violation of Section 6(d); (x) the issuance of Required Minimum Securities Amount of shares of Common Stock to be issued in connection with the Redemption will not result in a violation of Section 6(d); (xi) any shares of Common Stock to be issued in connection with the Redemption may be issued in full without violating Section 2(e) hereof (or the equivalent provisions of any other applicable Registered Warrants), (xii) no bone fide dispute shall exist, by and between any of holder of the Registered Warrants, the Company, the principal Trading Market and/or FINRA with respect to any term or provision of this Warrant or the Underwriting Agreement and (xiii) no Redemption hereunder shall have occurred during the twenty (20) Trading Day period immediately prior to Redemption Notice Date, and (xiv) the shares of Common Stock issuable upon exercise of the Registered Warrants are duly authorized and listed and eligible for trading without restriction on a Trading Market.
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“Equity Conditions Failure” means that on any day during the period commencing ten (10) Trading Days prior to the applicable Redemption Notice Date through and including the applicable Redemption Date, the Equity Conditions have not been satisfied (or waived in writing by the Holder).
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan duly adopted for such purpose by the Board of Directors or a committee of non-employee directors established for such purpose for services rendered to the Company (including, for the avoidance of doubt, any such plan that may be adopted following the date of the Underwriting Agreement), (b) securities issued or issuable upon the exercise or exchange of or conversion of any securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of (or issuable under) the Underwriting Agreement, provided that such securities have not been amended since the date of the Underwriting Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that such securities are issued as “restricted securities” (as defined in Rule 144) and carry no registration rights that require or permit the filing of any registration statement in connection therewith within 2 years following [●], 2022 (the “Initial Exercise Date”), but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.
“Offering” means the underwritten public offering of securities by the Company pursuant to the Underwriting Agreement and as described in the Registration Statement.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Public Warrants” means the Common Stock purchase warrants included in the units issued by the Company in the Offering pursuant to the Registration Statement, or any pre-funded warrant issued pursuant to the Registration Statement.
“Qualified Holder” means each Holder, including each “beneficial holder”, together with all Affiliates of such Holder and/or “beneficial holder”, that purchased at least $[●] worth of units in connection with the Offering and who holds Qualified Warrants, provided such Qualified Holder continues to hold any Qualified Warrants as of the event described herein to which Qualified Holder status applies. For the sake of clarity, no holder shall be considered to be a Qualified Holder for more Qualified Warrants than the number of Qualified Warrants purchased by such Qualified Holder in the Offering; provided, however, that a Qualified Holder may sell and buy Public Warrants following completion of the Offering and the number of Qualified Warrants held at any point in time shall equal the number of Public Warrants held up to the maximum number of Qualified Warrants for such Qualified Holder at completion of the Offering.
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“Qualified Warrants” means Public Warrants included in at least $[●] worth of units purchased in connection with the Offering by any Qualified Holder, including each “beneficial holder” of Public Warrants, taken together with all Affiliates of such Holder and/or “beneficial holder”. Qualified Warrants shall not include Pre-funded Warrants. The maximum number of Qualified Warrants that can be held by a Qualified Holder shall be fixed at completion of the Offering.
“Registration Statement” means the Company’s registration statement on Form S-1 (File No. 333-262167), as amended.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Subsidiary” means any subsidiary of the Company and shall, where applicable, also include any direct or indirect subsidiary of the Company formed or acquired after the date hereof.
“Trading Day” means a day on which the Common Stock is traded on a Trading Market.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, OTCQB or OTCQX (or any successors to any of the foregoing).
“Transfer Agent” means Issuer Direct, the current transfer agent of the Company, with a mailing address of One Glenwood Ave., Suite 1001, Raleigh, NC 27603 and a facsimile number of 202-521-3505, and any successor transfer agent of the Company.
“Underwriting Agreement” means the underwriting agreement, dated as of [●], 2022 among the Company and Aegis Capital Corp. as underwriter named therein, as amended, modified or supplemented from time to time in accordance with its terms.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price per share of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price per share of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the OTC Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Public Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“Warrant Agency Agreement” means that certain warrant agency agreement, dated on or about [●], 2022, between the Company and the Warrant Agent.
“Warrant Agent” means the Transfer Agent and any successor warrant agent of the Company.
“Warrants” means this Warrant and other common stock purchase warrants issued to investors by the Company pursuant to the Registration Statement, other than any pre-funded warrant issued pursuant to the Registration Statement, each of which shall be subject to the terms of such form of pre-funded warrant.
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Section 2. Exercise.
a) Exercise of Warrant. Subject to the provisions of Section 2(e) herein, exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Warrant Agent of a duly executed PDF copy submitted by e-mail (or e-mail attachment) of the Notice of Exercise in the form annexed hereto as Annex A (the “Notice of Exercise”), and, unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise, delivery of the aggregate Exercise Price of the Warrant Shares specified in the applicable Notice of Exercise as specified in this Section 2(a). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined in Section 2(d)(i) herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the Warrant Shares specified in the applicable Notice of Exercise by wire transfer of immediately available funds or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Warrant Agent until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Warrant Agent for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Warrant Agent. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Warrant Agent shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Trading Day of receipt of such notice. Notwithstanding the foregoing, with respect to any Notice(s) of Exercise delivered on or prior to 4:00 p.m. (New York City time) on the Trading Date prior to the Initial Exercise Date, which may be delivered at any time after the time of execution of the Underwriting Agreement, the Company agrees to deliver the Warrant Shares subject to such notice(s) by 4:00 p.m. (New York City time) on the Initial Exercise Date and the Initial Exercise Date shall be the Warrant Share Delivery Date for purposes hereunder, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received by such Warrant Share Delivery Date. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
Notwithstanding the foregoing in this Section 2(a), a holder whose interest in this Warrant is a beneficial interest in certificate(s) representing this Warrant held in book-entry form through DTC (or another established clearing corporation performing similar functions), shall effect exercises made pursuant to this Section 2(a) by delivering to DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by DTC (or such other clearing corporation, as applicable), subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agency Agreement, in which case this sentence shall not apply.
b) Exercise Price. The exercise price per share of Common Stock under this Warrant shall be $[●] (the “Initial Exercise Price”), subject to adjustment hereunder (as in effect from time to time, the “Exercise Price”).
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c) Cashless Exercise. The Company shall use its commercially reasonable efforts to cause the Registration Statement to remain effective with a current prospectus and to maintain the registration of the shares of Common Stock and of the Warrants under the Exchange Act. If at any time after the six month anniversary of the Initial Exercise Date, there is no effective registration statement registering, or the prospectus contained therein is not available for the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
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| (A) | = as applicable: (i) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) at the option of the Holder, either (y) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise or (z) the Bid Price of the Common Stock on the principal Trading Market as reported by Bloomberg L.P. as of the time of the Holder’s execution of the applicable Notice of Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within two (2) hours thereafter (including until two (2) hours after the close of “regular trading hours” on a Trading Day) pursuant to Section 2(a) hereof or (iii) the VWAP on the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2(a) hereof after the close of “regular trading hours” on such Trading Day; | ||
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| (B) | = the Exercise Price of this Warrant, as adjusted hereunder; and | ||
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| (X) | = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise. | ||
If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Public Warrants being exercised, and the holding period of the Warrant Shares being issued may be tacked on to the holding period of this Warrant. Assuming (i) the Holder is not an Affiliate of the Company, and (ii) all of the applicable conditions of Rule 144 promulgated under the Securities Act with respect to Holder and the Warrant Shares are met in the case of such a cashless exercise, the Company agrees that the Company will cause the removal of the legend from such Warrant Shares (including by delivering an opinion of the Company’s counsel to the Company’s transfer agent at its own expense to ensure the foregoing), and the Company agrees that the Holder is under no obligation to sell the Warrant Shares issuable upon the exercise of the Warrant prior to removing the legend. The Company agrees not to take any position contrary to this Section 2(c).
Notwithstanding anything herein to the contrary, in the event that, on the Termination Date, there is no effective registration statement registering, or no current prospectus available for the issuance of, the Warrant Shares to the Holder, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c) on such Termination Date.
d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144 (assuming cashless exercise of the Warrant), and otherwise by book-entry or physical delivery of a certificate at the election of Holder, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earliest of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise, (ii) one (1) Trading Day after delivery of the aggregate Exercise Price to the Company and (iii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.
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ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise; provided, however, that the Holder shall be required to return any Warrant Shares subject to any such rescinded exercise notice concurrently with the return to Holder of the aggregate Exercise Price paid to the Company for such Warrant Shares and the restoration of Holder’s right to acquire such Warrant Shares pursuant to this Warrant (including, issuance of a replacement warrant certificate evidencing such restored right).
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. Notwithstanding anything herein to the contrary, any amounts payable under this Section 2(d)(iv) shall be offset by any amounts payable pursuant to Section 2(d)(i).
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v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto as Annex B duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within one (1) Trading Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
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Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Reserved.
c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to all (or substantially all) of the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, that to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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d) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to all (or substantially all) of the holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, that to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
e) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company or any Subsidiary, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer as approved or recommended by the Board of Directors or a committee thereof is completed pursuant to which holders of shares of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding shares of Common Stock or 50% or more of the voting power of the common equity of the Company, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of shares of Common Stock or any compulsory share exchange pursuant to which the shares of Common Stock are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off, merger or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock or 50% or more of the voting power of the common equity of the Company (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of shares of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction.
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Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction (or, if later, the date of the public announcement of the applicable Fundamental Transaction), purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value (as defined below) of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction; provided, however, that, if the Fundamental Transaction is not within the Company’s control, including not approved by the Company’s Board of Directors, Holder shall only be entitled to receive from the Company or any Successor Entity the same type or form of consideration (and in the same proportion), at the Black Scholes Value of the unexercised portion of this Warrant, that is being offered and paid to the holders of shares of Common Stock of the Company in connection with the Fundamental Transaction, whether that consideration be in the form of cash, stock or any combination thereof, or whether the holders of shares of Common Stock are given the choice to receive from among alternative forms of consideration in connection with the Fundamental Transaction; provided, further, that if holders of shares of Common Stock of the Company are not offered or paid any consideration in such Fundamental Transaction, such holders will be deemed to have received shares of Common Stock of the Successor Entity (which Entity may be the Company following such Fundamental Transaction) in such Fundamental Transaction.
“Black Scholes Value” means the value of this Warrant based on the Black-Scholes Option Pricing Model obtained from the “OV” function on Bloomberg determined as of the day of consummation of the applicable contemplated Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the “HVT” function on Bloomberg (determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the greater of (i) the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (ii) the highest VWAP during the period beginning on the Trading Day immediately preceding the announcement of the applicable Fundamental Transaction (or the consummation of the applicable Fundamental Transaction, if earlier) and ending on the Trading Day of the Holder’s request pursuant to this Section 3(d) and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date and (E) a zero cost of borrow. The payment of the Black Scholes Value will be made by wire transfer of immediately available funds (or such other consideration) within the later of (i) five (5) Business Days of the Holder’s election and (ii) the date of consummation of the Fundamental Transaction.
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The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction). Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall be added to the term “Company” under this Warrant (so that from and after the date of such Fundamental Transaction, each and every provision of this Warrant referring to the “Company” shall refer instead to each of the Company and the Successor Entity or Successor Entities, jointly and severally with the Company), and may exercise every right and power of the Company prior thereto and the Successor Entity or Successor Entities shall assume all of the obligations of the Company prior thereto under this Warrant with the same effect as if the Company and such Successor Entity or Successor Entities, jointly and severally, had been named as the Company herein.
f) Adjustment Upon Issuance of Common Stock. From the date hereof until two (2) years after the Issuance Date or (b) the date there are no Qualified Holders (such period, the “Adjustment Period”), the Company issues or sells, or, in accordance with this Section 3(f), is deemed to have issued or sold, any Common Stock (excluding any Excluded Securities (as defined below) issued or sold or deemed to have been issued or sold) for a consideration per share (the “New Issuance Price”) less than a price equal to the Exercise Price in effect immediately prior to such issue or sale or deemed issuance or sale (such Exercise Price then in effect is referred to as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the Exercise Price then in effect shall be reduced to an amount equal to the New Issuance Price. “Excluded Securities” means any issuance of Common Stock, restricted share units, Options and/or Convertible Securities (i) under the Company’s current or future equity incentive plans or issued to employees, directors, consultants or officers as compensation or consideration in the ordinary course of business, including any issuance of Options (and the underlying Common Stock) in exchange for Options issued under the Company’s equity incentive plans, subject to a limitation of 15% of Common Stock outstanding as of the Issuance Date, (ii) issued pursuant to agreements, Options, restricted share units, Convertible Securities or Adjustment Rights (as defined below) existing as of the date hereof, provided that such agreements, Options, Convertible Securities or Adjustment Rights have not been amended since the initial issuance date of this Warrant to increase the number of such securities or decrease the exercise price, exchange price or conversion price of such securities, (iii) issued pursuant to acquisitions (whether by merger, consolidation, purchase of equity, purchase of assets, reorganization or otherwise), mergers, consolidations, reorganizations or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a Person (or to the equityholders of a Person) which is, itself or through its subsidiaries, an operating company or an owner of an asset in a business complementary with the business of the Company and shall provide to the Company additional benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities, or (iv) to which the Holder consents in writing. “Adjustment Right” means any right granted with respect to any securities issued in connection with, or with respect to, any issuance or sale (or deemed issuance or sale in accordance with this Section 3(f)) of Common Stock (other than rights of the type described in Sections 3(a) through (e)) that could result in a decrease in the net consideration received by the Company in connection with, or with respect to, such securities (including, without limitation, any cash settlement rights, cash adjustment or other similar rights). For all purposes of the foregoing, the following shall be applicable:
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i. Issuance of Options. If, during the Adjustment Period, the Company in any manner grants or sells any Options (other than Excluded Securities) and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option (such Common Stock issuable upon such exercise of any Option or upon conversion, exercise or exchange of any Convertible Securities, the “Convertible Securities Shares”) is less than the Applicable Price, then such shares of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 3(f)(i), the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option” shall be equal to (A) the sum of (1) the lowest amount of consideration (if any) received or receivable by the Company with respect to any one Convertible Securities Share upon the granting or sale of such Option, upon exercise of such Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option and (2) the lowest exercise price set forth in such Option for which one Convertible Securities Share is issuable upon the exercise of any such Option or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option, minus (B) the sum of all amounts paid or payable to the holder of such Option (or any other Person), with respect to any one Convertible Securities Share, upon the granting or sale of such Option, upon exercise of such Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such Option (or any other Person), with respect to any one Convertible Securities Share. Except as contemplated below, no further adjustment of the Exercise Price shall be made upon the actual issuance of such Convertible Securities Share or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Convertible Securities Share upon conversion, exercise or exchange of such Convertible Securities.
ii. Issuance of Convertible Securities. If, during the Adjustment Period, the Company in any manner issues or sells any Convertible Securities (other than Excluded Securities) and the lowest price per share for which one Convertible Securities Share is issuable upon the conversion, exercise or exchange thereof is less than the Applicable Price, then such Convertible Securities Share shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 3(f)(ii), the “lowest price per share for which one Convertible Securities Share is issuable upon the conversion, exercise or exchange thereof” shall be equal to (A) the sum of (1) the lowest amount of consideration (if any) received or receivable by the Company with respect to one Convertible Securities Share upon the issuance or sale of the Convertible Security and upon conversion, exercise or exchange of such Convertible Security and (2) the lowest conversion price set forth in such Convertible Security for which one Convertible Securities Share is issuable upon conversion, exercise or exchange thereof, minus (B) the sum of all amounts paid or payable to the holder of such Convertible Security (or any other Person), with respect to any one Convertible Securities Share, upon the issuance or sale of such Convertible Security plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such Convertible Security (or any other Person), with respect to any one Convertible Securities Share. Except as contemplated below, no further adjustment of the Exercise Price shall be made upon the actual issuance of such Convertible Securities Share upon conversion, exercise or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Exercise Price has been or is to be made pursuant to other provisions of this Section 3(f), except as contemplated below, no further adjustment of the Exercise Price shall be made by reason of such issue or sale.
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iii. Change in Option Price or Rate of Conversion. If, during the Adjustment Period, the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exercise or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for Common Stock increases or decreases at any time (other than proportional changes in conversion or exercise prices, as applicable, in connection with an event referred to in Section 3(a)), the Exercise Price in effect at the time of such increase or decrease shall be adjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities provided for such increased or decreased purchase price, additional consideration or increased or decreased conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 3(f)(iii), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of this Warrant are increased or decreased in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Convertible Securities Shares deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such increase or decrease. No adjustment pursuant to this Section 3(f) shall be made if such adjustment would result in an increase of the Exercise Price then in effect.
iv. Calculation of Consideration Received. If any Option or Convertible Security is issued in connection with the issuance or sale or deemed issuance or sale of any other securities of the Company (the “Primary Security”, and such Option or Convertible Security, the “Secondary Securities” and together with the Primary Security, each a “Unit”), together comprising one integrated transaction, the aggregate consideration per share of Common Stock with respect to such Primary Security shall be deemed to be the lowest of (x) the purchase price of such Unit, (y) if such Primary Security is an Option and/or Convertible Security, the lowest price per share for which one share of Common Stock is at any time issuable upon the exercise or conversion of the Primary Security in accordance with Section 3(f)(i) or 3(f)(ii) above and (z) the lowest VWAP of the Common Stock on any Trading Day during the five Trading Day period immediately following the public announcement of such Dilutive Issuance (for the avoidance of doubt, if such public announcement is released prior to the opening of the Principal Market on a Trading Day, such Trading Day shall be the first Trading Day in such five Trading Day period); provided. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount of cash received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of publicly traded securities, in which case the amount of consideration received by the Company for such securities will be the arithmetic average of the VWAPs of such security for each of the five (5) Trading Days immediately preceding the date of receipt. If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities (as the case may be). The fair market value of any consideration other than cash or publicly traded securities will be determined in good faith jointly by the Company and the Holder. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair market value of such consideration will be determined within five (5) Trading Days after the tenth (10th) day following such Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder. The determination of such appraiser shall be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.
v. Record Date. If, during the Adjustment Period, the Company takes a record of the holders of the Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase (as the case may be).
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vi. Exercise Floor Price. No adjustment to the Exercise Price pursuant to Section 3(f) of this Warrant shall cause the Exercise Price to be less than 50% of the Initial Exercise Price of warrants issued in the Company’s public offering (as adjusted pursuant to Section 3(a) for share splits, share dividends, recapitalizations and similar events, the “Exercise Floor Price”). For the avoidance of doubt, if a Dilutive Issuance would cause the Exercise Price to be lower than the Exercise Floor Price but for the immediately preceding sentence, then the Exercise Price shall be equal to the Exercise Floor Price.
g) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
h) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice (unless such information is filed with the Commission, in which case a notice shall not be required) stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
i) Reset of Exercise Price. If, on the date that is ninety (90) calendar days immediately following the Issuance Date of this Warrant, the Reset Price, as defined below, is less than the Exercise Price at such time, the Exercise Price shall be decreased to the Reset Price. “Reset Price” shall mean the greater of (i) 50% of the Initial Exercise Price (as adjusted for share splits, share dividends, recapitalizations and similar events pursuant to Section 3(a) hereof) and (ii) 100% of the lowest VWAP occurring on any day between the Initial Exercise Date and ninety (90) calendar days following the Issuance Date.
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j) Voluntary Adjustment by Company. Subject to the rules and regulations of the Trading Market, the Company may at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the board of directors of the Company.
Section 4. Transfer of Warrant.
a) Transferability. Subject to compliance with the Warrant Agent Agreement and any applicable securities laws and the conditions set forth in Section 4(d) hereof, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Warrant Agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company and Warrant Agent shall execute and deliver a new warrant or warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
b) New Warrants. If this Warrant is not held in global form through DTC (or any successor depositary), this Warrant may be divided or combined with other Public Warrants upon presentation hereof at the aforesaid office of the Warrant Agent, together with a written notice specifying the names and denominations in which new Public Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company and Warrant Agent shall execute and deliver a new warrant or warrants in exchange for the warrant or warrants to be divided or combined in accordance with such notice. All Public Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c) Warrant Register. The Warrant Agent shall register this Warrant, upon records to be maintained by the Warrant Agent for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company and the Warrant Agent may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
Section 5. Reserved.
Section 6. Redemption.
a) Redemption. Subject to Section 2(e), at any time after the six-month anniversary of the Issue Date and prior to the expiration of the Warrants, upon notice to the Holders, the Company may redeem, at the price of $0.01 per Warrant (the “Redemption Price”), up to such aggregate number of fully paid, validly issued and non-assessable Warrant Shares equal to the least of (i) the aggregate number of all remaining Warrant Shares available for purchase hereunder, (ii) the aggregate number of Warrant Shares then permitted to be issued to the Holder in compliance with Section 2(e) above, and (iii) the Holder’s Redemption Limitation (such lesser number of Warrant Shares, the “Maximum Redemption Share Amount”) as designated in the applicable Redemption Notice (as defined below) to be issued and delivered in accordance with Section 1(a) hereof (each, a “Redemption”). Redemption shall be permitted under this Section 6 provided that (i) no Equity Conditions Failure exists (unless waived, in whole or in part, in writing by the Holder (and, if in part, only to the extent of the Warrant Shares applicable to such partial waiver)); (ii) the VWAP of the shares of Common Stock listed on the principal Trading Market has been at least $[●] per share (as adjusted for share splits, share dividends, recapitalizations and similar events) (the “Redemption Trigger Price”), on each of twenty (20) consecutive Trading Days prior to the Redemption Notice Date; (iii) either (x) there is an effective registration statement covering the shares of Common Stock issuable upon exercise of the Warrants, and a current prospectus relating thereto, available throughout the Redemption Period (defined below) or (y) the Company has elected to require the exercise of the Warrants via cashless exercise; and (iv) if and when the Warrants become redeemable by the Company, the Company may not exercise such redemption right if the issuance of shares of Common Stock upon exercise of the Warrants is (a) not exempt from registration or qualification under applicable state blue sky laws or the Company is unable to effect such registration or qualification or (b) would cause the Holder to exceed the Redemption Limitation (collectively, the “Redemption Conditions”).
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b) Mechanics. The Company may exercise its right to Redemption under this Section 6 on the Trading Day immediately following any Equity Conditions Measuring Period by delivering a written notice thereof, by electronic mail to all, but not less than all, of the holders of the Registered Warrants (each, a “Redemption Notice”, and the date thereof, each a “Redemption Notice Date”). For purposes of Section 2(a) hereof, “Redemption Notice” shall be deemed to replace “Exercise Notice” for all purposes thereunder as if the Holder delivered an Exercise Notice to the Company on the Redemption Notice Date, mutatis mutandis. Each Redemption Notice shall be irrevocable. The Company may only deliver one Redemption Notice in any given twenty (20) Trading Day period. Each Redemption Notice shall (x) state that the Company is electing to effect a Redemption on the thirtieth (30th) day (the “Redemption Date”) following the applicable Redemption Notice Date (such 30-day period, the “Redemption Period”), (y) state the aggregate number of Warrant Shares to be exercised by the Holder (not in excess of the Maximum Redemption Share Amount) and all of the holders of the Registered Warrants on the Redemption Date (subject to any adjustments thereto pursuant to Section 3 that may occur prior to the Redemption Date), and (z) contain a certification from an officer or director of the Company that the Redemption Conditions shall have been satisfied as of the Redemption Notice Date.
c) Pro Rata Exercise Requirement. If the Company elects to cause a Redemption of this Warrant pursuant to this Section 6, then it must simultaneously take the same action in the same proportion with respect to all of the Registered Warrants.
d) Exercise After Notice of Redemption. The Warrants may be exercised, for cash (or via cashless exercise) at any time during the Redemption Period. The Redemption Notice shall contain the information necessary to calculate the number of shares of Common Stock to be received via cashless exercise of the Warrants, including the VWAP on the Trading Day immediately preceding the Redemption Notice Date. After 5:00 p.m. (New York City time) on the Redemption Date, the record holder of the Warrants shall have no further rights except to receive, upon surrender of the Warrants, the Redemption Price.
Section 7. Miscellaneous.
a) No Rights as Stockholder Until Exercise; No Settlement in Cash. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3. Without limiting the rights of a Holder to receive Warrant Shares on a “cashless exercise,” pursuant to Section 2(c) or to receive cash payments pursuant to Section 2(d)(i) and Section 2(d)(iv) herein, including if the Company is for any reason unable to issue and deliver Warrant Shares upon exercise of this Warrant as required pursuant to the terms hereof, in no event shall the Company be required to net cash settle an exercise of this Warrant or cash settle in any other form.
b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
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c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
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e) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or their respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action, suit or proceeding to enforce any provisions of this Warrant, the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for their reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. Notwithstanding the foregoing, nothing in this paragraph shall limit or restrict the federal district court in which a Holder may bring a claim under the federal securities laws.
f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
g) Non-waiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. No provision of this Warrant shall be construed as a waiver by the Holder of any rights which the Holder may have under the U.S. federal securities laws and the rules and regulations of the Commission thereunder. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534, Attention: [Chief Executive Officer, email address: JVilla@IGIus.com], or such other email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the e-mail address or address of such Holder appearing on the books of the Company. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the time of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K.
i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
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k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company, on the one hand, and the Holder of this Warrant, on the other hand.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
o) Warrant Agency Agreement. This Warrant is issued subject to the Warrant Agency Agreement. To the extent any provision of this Warrant conflicts with the express provisions of the Warrant Agency Agreement, the provisions of this Warrant shall govern and be controlling.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
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ANNEX A
NOTICE OF EXERCISE
TO: INFINITE GROUP, INC.
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant dated [●], 2022 (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States, payable to the Company; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
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The Warrant Shares shall be delivered to the following DWAC Account Number:
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[SIGNATURE OF HOLDER]
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ANNEX B
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to exercise the Warrant to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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EXHIBIT 4.3
PRE-FUNDED COMMON STOCK PURCHASE WARRANT
INFINITE GROUP, INC.
| Warrant Shares: [●] | Issue Date: [●], 2022 |
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THIS PRE-FUNDED COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, [●], or its registered assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Issue Date”) and until this Warrant is exercised in full (the “Termination Date”) but not thereafter, to subscribe for and purchase from INFINITE GROUP, INC., a Delaware corporation (the “Company”), up to [●] shares of Common Stock (as subject to adjustment hereunder, the “Warrant Shares”). The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b). This Warrant shall initially be issued and maintained in the form of a security held in book-entry form and the Depository Trust Company or its nominee (“DTC”) shall initially be the sole registered holder of this Warrant, subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agency Agreement, in which case this sentence shall not apply.
Section 1. Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the OTC Pink Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed; provided, however, for clarification, commercial banks shall not be deemed to be authorized or required by law to remain closed due to “stay at home”, “shelter-in-place”, “non-essential employee” or any other similar orders or restrictions or the closure of any physical branch locations at the direction of any governmental authority so long as the electronic funds transfer systems (including for wire transfers) of commercial banks in The City of New York generally are open for use by customers on such day.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
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“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Registration Statement” means the Company’s registration statement on Form S-1 (File No. 333-262167), as amended.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Subsidiary” means any subsidiary of the Company and shall, where applicable, also include any direct or indirect subsidiary of the Company formed or acquired after the date hereof.
“Trading Day” means a day on which the Common Stock is traded on a Trading Market.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, OTCQB or OTCQX (or any successors to any of the foregoing).
“Transfer Agent” means Issuer Direct, the current transfer agent of the Company, with a mailing address of One Glenwood Ave., Suite 1001, Raleigh, NC 27603 and a facsimile number of 202-521-3505, and any successor transfer agent of the Company.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price per share of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price per share of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the OTC Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“Warrant Agency Agreement” means that certain warrant agency agreement, dated on or about [●], 2022, between the Company and the Warrant Agent.
“Warrant Agent” means the Transfer Agent and any successor warrant agent of the Company.
“Warrants” means this Warrant and other Pre-Funded Common Stock purchase warrants issued by the Company pursuant to the Registration Statement.
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Section 2. Exercise.
a) Exercise of Warrant. Subject to the provisions of Section 2(e) herein, exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Issue Date and on or before the Termination Date by delivery to the Company of a duly executed PDF copy submitted by e-mail (or e-mail attachment) of the Notice of Exercise in the form annexed hereto as Annex A (the “Notice of Exercise”), and, unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise, delivery of the aggregate Exercise Price of the Warrant Shares specified in the applicable Notice of Exercise as specified in this Section 2(a). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined in Section 2(d)(i) herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the Warrant Shares specified in the applicable Notice of Exercise by wire transfer of immediately available funds or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Trading Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
Notwithstanding the foregoing in this Section 2(a), a holder whose interest in this Warrant is a beneficial interest in certificate(s) representing this Warrant held in book-entry form through DTC (or another established clearing corporation performing similar functions), shall effect exercises made pursuant to this Section 2(a) by delivering to DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by DTC (or such other clearing corporation, as applicable), subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agency Agreement, in which case this sentence shall not apply.
b) Exercise Price. The aggregate exercise price of this Warrant, except for a nominal exercise price of $0.001 per Warrant Share, was pre-funded to the Company on or prior to the Issue Date and, consequently, no additional consideration (other than the nominal exercise price of $0.001 per Warrant Share) shall be required to be paid by the Holder to any Person to effect any exercise of this Warrant. The Holder shall not be entitled to the return or refund of all, or any portion, of such pre-paid aggregate exercise price under any circumstance or for any reason whatsoever, including in the event this Warrant shall not have been exercised prior to the Termination Date. The remaining unpaid exercise price per share of Common Stock under this Warrant shall be $0.001, subject to adjustment hereunder (the “Exercise Price”).
c) Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
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If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised. The Company agrees not to take any position contrary to this Section 2(c).
d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by book-entry or physical delivery of a certificate at the election of Holder, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earliest of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise, (ii) one (1) Trading Day after delivery of the aggregate Exercise Price to the Company and (iii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth (5th) Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise. Notwithstanding the foregoing, with respect to any Notice(s) of Exercise delivered on or prior to 12:00 p.m. (New York City time) on the Issue Date, which may be delivered at any time after the time of execution of the Underwriting Agreement, dated [●], 2022 between the Company and Aegis Capital Corp., the Company agrees to deliver the Warrant Shares subject to such notice(s) by 4:00 p.m. (New York City time) on the Issue Date.
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ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise; provided, however, that the Holder shall be required to return any Warrant Shares subject to any such rescinded exercise notice concurrently with the return to Holder of the aggregate Exercise Price paid to the Company for such Warrant Shares and the restoration of Holder’s right to acquire such Warrant Shares pursuant to this Warrant (including, issuance of a replacement warrant certificate evidencing such restored right).
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. Notwithstanding anything herein to the contrary, any amounts payable under this Section 2(d)(iv) shall be offset by any amounts payable pursuant to Section 2(d)(i).
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v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto as Annex B duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within one Trading Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
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Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to all (or substantially all) of the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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c) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to all (or substantially all) of holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
d) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company or any Subsidiary, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (approved or recommended by the Board of Directors or a committee thereof) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off, merger or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant) upon delivery of the Exercise Price or via cashless exercise, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.
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e) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
f) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company (or any of its Subsidiaries) is a party, any sale or transfer of all or substantially all of its assets, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by email to the Holder at its last email address as it shall appear upon the Warrant Register of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice (unless such information is filed with the Commission, in which case a notice shall not be required) stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
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Section 4. Transfer of Warrant.
a) Transferability. Subject to compliance with the Warrant Agent Agreement and any applicable securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Warrant Agent, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company and Warrant Agent shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c) Warrant Register. The Warrant Agent shall register this Warrant, upon records to be maintained by the Warrant Agent for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company and the Warrant Agent may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
Section 5. Miscellaneous.
a) No Rights as Stockholder until Exercise; No Settlement in Cash. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3. Without limiting the rights of a Holder to receive Warrant Shares on a “cashless exercise” pursuant to Section 2(c) or to receive cash payments contemplated pursuant to Sections 2(d)(i) and 2(d)(iv), in no event, including if the Company is for any reason unable to issue and deliver Warrant Shares upon exercise of this Warrant as required pursuant to the terms hereof, shall the Company be required to net cash settle an exercise of this Warrant or cash settle in any other form.
b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
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c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or their respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action, suit or proceeding to enforce any provisions of this Warrant, the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for their reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. Notwithstanding the foregoing, nothing in this paragraph shall limit or restrict the federal district court in which a Holder may bring a claim under the federal securities laws.
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f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. No provision of this Warrant shall be construed as a waiver by the Holder of any rights which the Holder may have under the federal securities laws and the rules and regulations of the Commission thereunder. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534, Attention: [Chief Executive Officer, email address: JVilla@IGIus.com], or such other email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the e-mail address or address of such Holder appearing on the books of the Company. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the time of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K.
i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
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j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company, on the one hand, and the Holder, on the other hand.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
o) Warrant Agency Agreement. This Warrant is issued subject to the Warrant Agency Agreement. To the extent any provision of this Warrant conflicts with the express provisions of the Warrant Agency Agreement, the provisions of this Warrant shall govern and be controlling.
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(Signature Page Follows)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
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ANNEX A
NOTICE OF EXERCISE
| TO: | INFINITE GROUP, INC. |
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States, payable to the Company; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
_______________________________
_______________________________
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(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
Name of Investing Entity: _______________________________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________________________________
Name of Authorized Signatory: ___________________________________________________________________
Title of Authorized Signatory: ____________________________________________________________________
Date: _______________________________________________________________________________________
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ANNEX B
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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Signature to be guaranteed by an authorized officer of a chartered bank, trust company or medallion guaranteed by an investment dealer who is a member of a recognized stock exchange.
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EXHIBIT 4.5
WARRANT AGENT AGREEMENT
This WARRANT AGENT AGREEMENT (this “Warrant Agreement”) dated as of [*], 2022 (the “Issuance Date”) is between Infinite Group, Inc., a Delaware corporation (the “Company”), and Issuer Direct (the “Warrant Agent”).
WHEREAS, pursuant to the terms of that certain Underwriting Agreement (“Underwriting Agreement”), dated [*], 2022, by and between the Company and Aegis Capital Corp., as the underwriter set forth therein (the “Underwriter”), the Company is engaged in a public offering of up to [*] units (the “Units”), consisting of the following three Units (i) [*] comm units (the “Common Units”), with each Common Unit consisting of one (1) share of common stock, par value $0.001 per share (the “Common Stock”) of the Company, three (3) warrants (each a “Redeemable Warrant”, and collectively, the “Redeemable Warrants” or “Warrants”) of the Company each to purchase one (1) share each of Common Stock; (ii) up to [*] pre-funded units (the “Pre-funded Units”), with each Pre-funded Unit consisting of one (1) pre-funded warrant to purchase one share of common stock at an exercise price of $0.001 per share and three (3) Redeemable Warrants; (iii) up to [*] qualified units (the “Qualified Units”), with each Qualified Unit consisting of one (1) share of Common Stock of the Company and three (3) Redeemable Warrants, and (iv) up to [*] shares of Common Stock, Pre-funded Warrants and/or Redeemable Warrants issuable pursuant to the Underwriter’s over-allotment option granted pursuant to the Underwriting Agreement;
WHEREAS, the Company has filed with the Securities and Exchange Commission (the “Commission”) a Registration Statement on Form S-1 (File No. 333-262167) (as the same may be amended from time to time, the “Registration Statement”), for the registration under the Securities Act of 1933, as amended (the “Securities Act”), of the Common Units, Pre-funded Units, Common Stock, Pre-funded Warrants, Redeemable Warrants, and Common Stock underlying Pre-funded Warrants and Redeemable Warrants, and such Registration Statement was declared effective on [*], 2022; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in accordance with the terms set forth in this Warrant Agreement in connection with the issuance, registration, transfer, exchange and exercise of the Warrants;
WHEREAS, the Company desires to provide for the provisions of the Warrants, the terms upon which they shall be issued and exercised, and the respective rights, limitation of rights, and immunities of the Company, the Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which are necessary to make the Warrants the valid, binding and legal obligations of the Company, and to authorize the execution and delivery of this Warrant Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company with respect to the Redeemable Warrants, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with the express terms and conditions set forth in this Warrant Agreement (and no implied terms or conditions).
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2. Warrants.
2.1. Form of Warrants. The Redeemable Warrants shall be registered securities and shall be evidenced by a global warrant (“Global Warrants”) in the form of Exhibit A to this Warrant Agreement, which shall be deposited on behalf of the Company with a custodian for The Depository Trust Company (“DTC”) and registered in the name of Cede & Co., a nominee of DTC. The terms of the Global Warrant are incorporated herein by reference. If DTC subsequently ceases to make its book-entry settlement system available for the Warrants, the Company may instruct the Warrant Agent regarding making other arrangements for book-entry settlement. In the event that the Warrants are not eligible for, or it is no longer necessary to have the Warrants available in, book-entry form, the Company may instruct the Warrant Agent to provide written instructions to DTC to deliver to the Warrant Agent for cancellation the Global Warrant, and the Company shall instruct the Warrant Agent to deliver to DTC separate certificates evidencing Warrants (“Definitive Certificates” and, together with the Global Warrant, “Warrant Certificates”) registered as requested through the DTC system.
2.2. Issuance and Registration of Warrants.
2.2.1. Warrant Register. The Warrant Agent shall maintain books (“Warrant Register”) for the registration of original issuance and the registration of transfer of the Warrants.
2.2.2. Issuance of Warrants. Upon the initial issuance of the Global Warrants, the Warrant Agent shall issue the Warrants in the DTC book-entry settlement system in accordance with written instructions delivered to the Warrant Agent by the Company. Ownership of security entitlements in the Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained (i) by DTC and (ii) by institutions that have accounts with DTC (each, a “Participant”).
2.2.3. Beneficial Owner; Holder. Prior to due presentment for registration of transfer of any Warrant, the Company and the Warrant Agent may deem and treat the person in whose name that Warrant shall be registered on the Warrant Register (the “Holder”) as the absolute owner of such Warrant for purposes of any exercise thereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Warrant Agent or any agent of the Company or the Warrant Agent from giving effect to any written certification, proxy or other authorization furnished by DTC governing the exercise of the rights of a holder of a beneficial interest in any Warrant. The rights of beneficial owners in a Warrant evidenced by the Global Warrant shall be exercised by the Holder or a Participant through the DTC system, except to the extent set forth herein or in the Global Warrant.
2.2.4. Delivery of Warrant Certificate. A Holder has the right to elect at any time or from time to time a Warrant Exchange (as defined below) pursuant to a Warrant Certificate Request Notice (as defined below). Upon written notice by a Holder to the Warrant Agent for the exchange of some or all of such Holder’s Global Warrants for a Warrant Certificate evidencing the same number of Warrants, which request shall be in the form attached hereto as Exhibit B (a “Warrant Certificate Request Notice” and the date of delivery of such Warrant Certificate Request Notice by the Holder, the “Warrant Certificate Request Notice Date” and the deemed surrender upon delivery by the Holder of a number of Global Warrants for the same number of Warrants evidenced by a Warrant Certificate, a “Warrant Exchange”), the Warrant Agent shall promptly effect the Warrant Exchange and shall promptly issue and deliver to the Holder a Warrant Certificate for such number of Warrants in the name set forth in the Warrant Certificate Request Notice. Such Warrant Certificate shall be dated the date of issuance of the Warrant Certificate, shall include the initial exercise date of the Warrants, shall be executed by an authorized signatory of the Company and shall be reasonably acceptable in all respects to such Holder. In connection with a Warrant Exchange, the Company agrees to deliver, or to direct the Warrant Agent to deliver, the Warrant Certificate to the Holder within three (3) Business Days of the Warrant Certificate Request Notice pursuant to the delivery instructions in the Warrant Certificate Request Notice (“Warrant Certificate Delivery Date”). If the Company fails for any reason to deliver to the Holder the Warrant Certificate subject to the Warrant Certificate Request Notice by the Warrant Certificate Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”) evidenced by such Warrant Certificate (based on the VWAP (as defined in the Warrants) of the Common Stock on the Warrant Certificate Request Notice Date), $10 per Business Day for each Business Day after such Warrant Certificate Delivery Date until such Warrant Certificate is delivered or, prior to delivery of such Warrant Certificate, the Holder rescinds such Warrant Exchange. The Company covenants and agrees that, upon the date of delivery of the Warrant Certificate Request Notice, the Holder shall be deemed to be the holder of the Warrant Certificate and, notwithstanding anything to the contrary set forth herein, the Warrant Certificate shall be deemed for all purposes to contain all of the terms and conditions of the Warrants evidenced by such Warrant Certificate and the terms of this Agreement.
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2.2.5. Execution. The Warrant Certificates shall be executed on behalf of the Company by any authorized officer of the Company (an “Authorized Officer”), which need not be the same authorized signatory for all of the Warrant Certificates, either manually or by facsimile signature. The Warrant Certificates shall be countersigned by an authorized signatory of the Warrant Agent, which need not be the same signatory for all of the Warrant Certificates, and no Warrant Certificate shall be valid for any purpose unless so countersigned. In case any Authorized Officer of the Company that signed any of the Warrant Certificates ceases to be an Authorized Officer of the Company before countersignature by the Warrant Agent and issuance and delivery by the Company, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be an Authorized Officer of the Company authorized to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such an Authorized Officer.
2.2.6. Registration of Transfer. At any time at or prior to the Expiration Date (as defined below), a transfer of any Warrants may be registered and any Warrant Certificate or Warrant Certificates may be split up, combined or exchanged for another Warrant Certificate or Warrant Certificates evidencing the same number of Warrants as the Warrant Certificate or Warrant Certificates surrendered. Any Holder desiring to register the transfer of Warrants or to split up, combine or exchange any Warrant Certificate shall make such request in writing delivered to the Warrant Agent, and shall surrender to the Warrant Agent the Warrant Certificate or Warrant Certificates evidencing the Warrants the transfer of which is to be registered or that is or are to be split up, combined or exchanged and, in the case of registration of transfer, shall provide a signature guarantee. Thereupon, the Warrant Agent shall countersign and deliver to the person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested. The Company and the Warrant Agent may require payment, by the Holder requesting a registration of transfer of Warrants or a split-up, combination or exchange of a Warrant Certificate (but, for purposes of clarity, not upon the exercise of the Warrants and issuance of Warrant Shares to the Holder), of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with such registration of transfer, split-up, combination or exchange, together with reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto.
2.2.7. Loss, Theft and Mutilation of Warrant Certificates. Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security in customary form and amount, and reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto, and upon surrender to the Warrant Agent and cancellation of the Warrant Certificate if mutilated, the Warrant Agent shall, on behalf of the Company, countersign and deliver a new Warrant Certificate of like tenor to the Holder in lieu of the Warrant Certificate so lost, stolen, destroyed or mutilated. The Warrant Agent may charge the Holder an administrative fee for processing the replacement of lost Warrant Certificates,. The Warrant Agent may receive compensation from the surety companies or surety agents for administrative services provided to them.
2.2.8. Proxies. The Holder of a Warrant may grant proxies or otherwise authorize any person, including the Participants and beneficial holders that may own interests through the Participants, to take any action that a Holder is entitled to take under this Agreement or the Warrants; provided, however, that at all times that Warrants are evidenced by a Global Warrant, exercise of those Warrants shall be effected on their behalf by Participants through DTC in accordance the procedures administered by DTC.
3. Terms, Exercise and Redemption of Warrants.
3.1. Exercise Price. Each Warrant shall entitle the Holder, subject to the provisions of the applicable Warrant Certificate and of this Warrant Agreement, to purchase from the Company the number of shares of Common Stock stated therein, at the price of $________ per whole share with respect to the Redeemable Warrants, subject to the subsequent adjustments provided in the Global Warrant. The term “Exercise Price” as used in this Warrant Agreement refers to the price per share at which shares of Common Stock may be purchased at the time a Warrant is exercised.
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3.2. Duration of Warrants. A Warrant may be exercised only during the period (“Exercise Period”) commencing on the date of issuance and ending on the Termination Date. For purposes of this Warrant Agreement, the “Termination Date” shall have the meaning set forth in the Global Warrant. Each Warrant not exercised on or before the Termination Date shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall cease at the close of business on the Termination Date.
3.3. Exercise of Warrants.
3.3.1. Exercise. Subject to the provisions of the Global Warrant, a Holder (or a Participant or a designee of a Participant acting on behalf of a Holder) may exercise Warrants by delivering to the Warrant Agent, not later than 5:00 P.M., Eastern Standard Time, on any business day during the Exercise Period a notice of exercise of the Warrants to be exercised (i) in the form attached to the Global Warrant or (ii) via an electronic warrant exercise through the DTC system (each, an “Election to Purchase”)and, unless the cashless exercise procedure is specified in the applicable Election to Purchase, delivery of the aggregate Exercise Price of the Warrant Shares specified in the applicable Election to Purchase. All other requirements for the exercise of a Warrant shall be as set forth in the Warrant. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender a Warrant Certificate to the Warrant Agent until the Holder has purchased all of the Warrant Shares available thereunder and the applicable Warrant Certificate has been exercised in full, in which case, the Holder shall surrender the Warrant Certificate to the Warrant Agent for cancellation within three (3) Trading Days of the date on which the final Election to Purchase is delivered to the Warrant Agent. Partial exercises of a Warrant Certificate resulting in purchases of a portion of the total number of Warrant Shares available thereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable thereunder in an amount equal to the applicable number of Warrant Shares purchased.
3.3.2. The Warrant Agent shall, by 5:00 p.m., New York City time, on the Trading Day following the Exercise Date of any Warrant, advise the Company, the transfer agent and registrar for the Company’s Common Stock, in respect of (i) the number of Warrant Shares indicated on the Notice of Exercise as issuable upon such exercise with respect to such exercised Warrants, (ii) the instructions of the Holder or Participant, as the case may be, provided to the Warrant Agent with respect to the delivery of the Warrant Shares and the number of Warrants that remain outstanding after such exercise and (iii) such other information as the Company or such transfer agent and registrar shall reasonably request. The Company shall issue the Warrant Shares in compliance with the terms of the Warrant.
3.3.3. Valid Issuance. All Warrant Shares issued by the Company upon the proper exercise of a Warrant in conformity with this Warrant Agreement shall be validly issued, fully paid and non-assessable.
3.3.4. No Fractional Exercise. Notwithstanding any provision contained in this Warrant Agreement to the contrary, no fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
3.3.5. No Transfer Taxes. The Company shall not be required to pay any stamp or other tax or governmental charge required to be paid in connection with any transfer involved in the issue of the Warrant Shares upon the exercise of Warrants; and in the event that any such transfer is involved, the Company shall not be required to issue or deliver any Warrant Shares until such tax or other charge shall have been paid or it has been established to the Company’s satisfaction that no such tax or other charge is due.
3.3.6. Date of Issuance. The Company will treat an exercising Holder as a beneficial owner of the Warrant Shares as of the Exercise Date, and for purposes of Regulation SHO, a holder whose interest in this Warrant is a beneficial interest in certificate(s) representing this Warrant held in book-entry form through DTC shall be deemed to have exercised its interest in this Warrant upon instructing its broker that is a DTC participant to exercise its interest in this Warrant, except that, if the Exercise Date is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the open of business on the next succeeding date on which the stock transfer books are open.
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3.3.7 Redemption. Not less than all of the outstanding Redeemable Warrants may be redeemed, at the option of the Company, at any time during the Exercise Period, at the office of the Warrant Agent, as set forth in Section 2(f) of the Redeemable Warrant.
4. Adjustments. Upon every adjustment of the Exercise Price or the number of Warrant Shares issuable upon exercise of a Warrant, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event specified in Section 3 of the Warrant, then, in any such event, the Company shall give written notice to the Warrant Agent. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event. The Warrant Agent shall be entitled to rely conclusively on, and shall be fully protected in relying on, any certificate, notice or instructions provided by the Company with respect to any adjustment of the Exercise Price or the number of shares issuable upon exercise of a Warrant, or any related matter, and the Warrant Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with any such certificate, notice or instructions or pursuant to this Warrant Agreement. The Warrant Agent shall not be deemed to have knowledge of any such adjustment unless and until it shall have received written notice thereof from the Company.
5. Restrictive Legends; Fractional Warrants. In the event that a Warrant Certificate surrendered for transfer bears a restrictive legend, the Warrant Agent shall not register that transfer until the Warrant Agent has received an opinion of counsel for the Company stating that such transfer may be made and indicating whether the Warrants must also bear a restrictive legend upon that transfer. The Warrant Agent shall not be required to effect any registration of transfer or exchange which will result in the transfer of or delivery of a Warrant Certificate for a fraction of a Warrant.
6. Other Provisions Relating to Rights of Holders of Warrants.
6.1. No Rights as Stockholder. Except as otherwise specifically provided herein, a Holder, solely in its capacity as a holder of Warrants, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant Agreement be construed to confer upon a Holder, solely in its capacity as the registered holder of Warrants, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of share capital, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights or rights to participate in new issues of shares, or otherwise, prior to the issuance to the Holder of the Warrant Shares which it is then entitled to receive upon the due exercise of Warrants.
6.2. Reservation of Common Stock. The Company shall at all times reserve and keep available a number of its authorized but unissued shares of Common Stock that will be sufficient to permit the exercise in full of all outstanding Warrants issued pursuant to this Warrant Agreement.
7. Concerning the Warrant Agent and Other Matters.
7.1. Any instructions given to the Warrant Agent orally, as permitted by any provision of this Warrant Agreement, shall be confirmed in writing by the Company as soon as practicable. The Warrant Agent shall not be liable or responsible and shall be fully authorized and protected for acting, or failing to act, in accordance with any oral instructions which do not conform with the written confirmation received in accordance with this Section 7.1.
7.2. (a) Whether or not any Warrants are exercised, for the Warrant Agent’s services as agent for the Company hereunder, the Company shall pay to the Warrant Agent such fees as may be separately agreed between the Company and Warrant Agent and the Warrant Agent’s out of pocket expenses in connection with this Warrant Agreement, including, without limitation, the fees and expenses of the Warrant Agent’s counsel. While the Warrant Agent endeavors to maintain out-of-pocket charges (both internal and external) at competitive rates, these charges may not reflect actual out-of-pocket costs, and may include handling charges to cover internal processing and use of the Warrant Agent’s billing systems. (b) All amounts owed by the Company to the Warrant Agent under this Warrant Agreement are due within 30 days of the invoice date. Delinquent payments are subject to a late payment charge of one and one-half percent (1.5%) per month commencing 45 days from the invoice date. The Company agrees to reimburse the Warrant Agent for any attorney’s fees and any other costs associated with collecting delinquent payments. (c) No provision of this Warrant Agreement shall require Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under this Warrant Agreement or in the exercise of its rights.
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7.3. As agent for the Company hereunder the Warrant Agent: (a) shall have no duties or obligations other than those specifically set forth herein or as may subsequently be agreed to in writing by the Warrant Agent and the Company; (b) shall be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value, or genuineness of the Warrants or any Warrant Shares; (c) shall not be obligated to take any legal action hereunder; if, however, the Warrant Agent determines to take any legal action hereunder, and where the taking of such action might, in its judgment, subject or expose it to any expense or liability it shall not be required to act unless it has been furnished with an indemnity reasonably satisfactory to it; (d) may rely on and shall be fully authorized and protected in acting or failing to act upon any certificate, instrument, opinion, notice, letter, telegram, telex, facsimile transmission or other document or security delivered to the Warrant Agent and believed by it to be genuine and to have been signed by the proper party or parties; (e) shall not be liable or responsible for any recital or statement contained in the Registration Statement or any other documents relating thereto; (f) shall not be liable or responsible for any failure on the part of the Company to comply with any of its covenants and obligations relating to the Warrants, including without limitation obligations under applicable securities laws; (g) may rely on and shall be fully authorized and protected in acting or failing to act upon the written, telephonic or oral instructions with respect to any matter relating to its duties as Warrant Agent covered by this Warrant Agreement (or supplementing or qualifying any such actions) of officers of the Company, and is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Company or counsel to the Company, and may apply to the Company, for advice or instructions in connection with the Warrant Agent’s duties hereunder, and the Warrant Agent shall not be liable for any delay in acting while waiting for those instructions; any applications by the Warrant Agent for written instructions from the Company may, at the option of the Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent under this Warrant Agreement and the date on or after which such action shall be taken or such omission shall be effective; the Warrant Agent shall not be liable for any action taken by, or omission of, the Warrant Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than five business days after the date such application is sent to the Company, unless the Company shall have consented in writing to any earlier date) unless prior to taking any such action, the Warrant Agent shall have received written instructions in response to such application specifying the action to be taken or omitted; (h) may consult with counsel satisfactory to the Warrant Agent, including its in-house counsel, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by it hereunder in good faith and in accordance with the advice of such counsel; (i) may perform any of its duties hereunder either directly or by or through nominees, correspondents, designees, or subagents, and it shall not be liable or responsible for any misconduct or negligence on the part of any nominee, correspondent, designee, or subagent appointed with reasonable care by it in connection with this Warrant Agreement; (j) is not authorized, and shall have no obligation, to pay any brokers, dealers, or soliciting fees to any person; and (k) shall not be required hereunder to comply with the laws or regulations of any country other than the United States of America or any political subdivision thereof.
7.4. (a) In the absence of gross negligence or willful or illegal misconduct on its part, the Warrant Agent shall not be liable for any action taken, suffered, or omitted by it or for any error of judgment made by it in the performance of its duties under this Warrant Agreement. Anything in this Warrant Agreement to the contrary notwithstanding, in no event shall Warrant Agent be liable for special, indirect, incidental, consequential or punitive losses or damages of any kind whatsoever (including but not limited to lost profits), even if the Warrant Agent has been advised of the possibility of such losses or damages and regardless of the form of action. Any liability of the Warrant Agent will be limited in the aggregate to the amount of fees paid by the Company hereunder. The Warrant Agent shall not be liable for any failures, delays or losses, arising directly or indirectly out of conditions beyond its reasonable control including, but not limited to, acts of government, exchange or market ruling, suspension of trading, work stoppages or labor disputes, fires, civil disobedience, riots, rebellions, storms, electrical or mechanical failure, computer hardware or software failure, communications facilities failures including telephone failure, war, terrorism, insurrection, earthquakes, floods, acts of God or similar occurrences. (b) In the event any question or dispute arises with respect to the proper interpretation of the Warrants or the Warrant Agent’s duties under this Warrant Agreement or the rights of the Company or of any Holder, the Warrant Agent shall not be required to act and shall not be held liable or responsible for its refusal to act until the question or dispute has been judicially settled (and, if appropriate, it may file a suit in interpleader or for a declaratory judgment for such purpose) by final judgment rendered by a court of competent jurisdiction, binding on all persons interested in the matter which is no longer subject to review or appeal, or settled by a written document in form and substance satisfactory to Warrant Agent and executed by the Company and each such Holder. In addition, the Warrant Agent may require for such purpose, but shall not be obligated to require, the execution of such written settlement by all the Holders and all other persons that may have an interest in the settlement.
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7.5. The Company covenants to indemnify the Warrant Agent and hold it harmless from and against any loss, liability, claim or expense (“Loss”) arising out of or in connection with the Warrant Agent’s duties under this Warrant Agreement, including the costs and expenses of defending itself against any Loss, unless such Loss shall have been determined by a court of competent jurisdiction to be a result of the Warrant Agent’s gross negligence or willful misconduct.
7.6. Unless terminated earlier by the parties hereto, this Agreement shall terminate 90 days after the earlier of the Expiration Date and the date on which no Warrants remain outstanding (the “Termination Date”). On the business day following the Termination Date, the Agent shall deliver to the Company any entitlements, if any, held by the Warrant Agent under this Warrant Agreement. The Agent’s right to be reimbursed for fees, charges and out-of-pocket expenses as provided in this Section 8 shall survive the termination of this Warrant Agreement.
7.7. If any provision of this Warrant Agreement shall be held illegal, invalid, or unenforceable by any court, this Warrant Agreement shall be construed and enforced as if such provision had not been contained herein and shall be deemed an Agreement among the parties to it to the full extent permitted by applicable law.
7.8. The Company represents and warrants that: (a) it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation; (b) the offer and sale of the Warrants and the execution, delivery and performance of all transactions contemplated thereby (including this Warrant Agreement) have been duly authorized by all necessary corporate action and will not result in a breach of or constitute a default under the articles of association, bylaws or any similar document of the Company or any indenture, agreement or instrument to which it is a party or is bound; (c) this Warrant Agreement has been duly executed and delivered by the Company and constitutes the legal, valid, binding and enforceable obligation of the Company; (d) the Warrants will comply in all material respects with all applicable requirements of law; and (e) to the best of its knowledge, there is no litigation pending or threatened as of the date hereof in connection with the offering of the Warrants.
7.9. In the event of inconsistency between this Warrant Agreement and the descriptions in the Warrant, as it may from time to time be amended, the terms of this Warrant Agreement shall control.
7.10. Set forth in Exhibit C hereto is a list of the names and specimen signatures of the persons authorized to act for the Company under this Warrant Agreement (the “Authorized Representatives”). The Company shall, from time to time, certify to the Warrant Agent the names and signatures of any other persons authorized to act for the Company under this Warrant Agreement.
7.11. Except as expressly set forth elsewhere in this Warrant Agreement, all notices, instructions and communications under this Agreement shall be in writing, shall be effective upon receipt and shall be addressed, if to the Company, to its address set forth beneath its signature to this Agreement, or, if to the Warrant Agent, to Issuer Direct, One Glenwood Avenue, Suite 1001, Raleigh, North Carolina 27603, or to such other address of which a party hereto has notified the other party.
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7.12. (a) This Warrant Agreement shall be governed by and construed in accordance with the laws of the State of New York. All actions and proceedings relating to or arising from, directly or indirectly, this Warrant Agreement may be litigated in courts located within the Borough of Manhattan in the City and State of New York. The Company hereby submits to the personal jurisdiction of such courts and consents that any service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder. Each of the parties hereto hereby waives the right to a trial by jury in any action or proceeding arising out of or relating to this Warrant Agreement. (b) This Warrant Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. This Warrant Agreement may not be assigned, or otherwise transferred, in whole or in part, by either party without the prior written consent of the other party, which the other party will not unreasonably withhold, condition or delay; except that (i) consent is not required for an assignment or delegation of duties by Warrant Agent to any affiliate of Warrant Agent and (ii) any reorganization, merger, consolidation, sale of assets or other form of business combination by the Warrant Agent or the Company shall not be deemed to constitute an assignment of this Warrant Agreement. (c) No provision of this Warrant Agreement may be amended, modified or waived, except in a written document signed by both parties. The Company and the Warrant Agent may amend or supplement this Warrant Agreement without the consent of any Holder for the purpose of curing any ambiguity, or curing, correcting or supplementing any defective provision contained herein or adding or changing any other provisions with respect to matters or questions arising under this Agreement as the parties may deem necessary or desirable and that the parties determine, in good faith, shall not adversely affect the interest of the Holders. All other amendments and supplements shall require the vote or written consent of Holders of at least 50.1% of the then outstanding Warrants, provided that adjustments may be made to the Warrant terms and rights in accordance with Section 4 without the consent of the Holders.
7.13. Payment of Taxes. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of Warrant Shares upon the exercise of Warrants, but the Company may require the Holders to pay any transfer taxes in respect of the Warrants or such shares. The Warrant Agent may refrain from registering any transfer of Warrants or any delivery of any Warrant Shares unless or until the persons requesting the registration or issuance shall have paid to the Warrant Agent for the account of the Company the amount of such tax or charge, if any, or shall have established to the reasonable satisfaction of the Company and the Warrant Agent that such tax or charge, if any, has been paid.
7.14. Resignation of Warrant Agent.
7.14.1. Appointment of Successor Warrant Agent. The Warrant Agent, or any successor to it hereafter appointed, may resign its duties and be discharged from all further duties and liabilities hereunder after giving thirty (30) days’ notice in writing to the Company, or such shorter period of time agreed to by the Company. The Company may terminate the services of the Warrant Agent, or any successor Warrant Agent, after giving thirty (30) days’ notice in writing to the Warrant Agent or successor Warrant Agent, or such shorter period of time as agreed. If the office of the Warrant Agent becomes vacant by resignation, termination or incapacity to act or otherwise, the Company shall appoint in writing a successor Warrant Agent in place of the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the Warrant Agent, then the Warrant Agent or any Holder may apply to any court of competent jurisdiction for the appointment of a successor Warrant Agent at the Company’s cost. Pending appointment of a successor to such Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent (but not including the initial Warrant Agent), whether appointed by the Company or by such court, shall be a person organized and existing under the laws of any state of the United States of America, in good standing, and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by federal or state authority. After appointment, any successor Warrant Agent shall be vested with all the authority, powers, rights, immunities, duties, and obligations of its predecessor Warrant Agent with like effect as if originally named as Warrant Agent hereunder, without any further act or deed, and except for executing and delivering documents as provided in the sentence that follows, the predecessor Warrant Agent shall have no further duties, obligations, responsibilities or liabilities hereunder, but shall be entitled to all rights that survive the termination of this Warrant Agreement and the resignation or removal of the Warrant Agent, including but not limited to its right to indemnity hereunder. If for any reason it becomes necessary or appropriate or at the request of the Company, the predecessor Warrant Agent shall execute and deliver, at the expense of the Company, an instrument transferring to such successor Warrant Agent all the authority, powers, and rights of such predecessor Warrant Agent hereunder; and upon request of any successor Warrant Agent the Company shall make, execute, acknowledge, and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such authority, powers, rights, immunities, duties, and obligations.
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7.14.2. Notice of Successor Warrant Agent. In the event a successor Warrant Agent shall be appointed, the Company shall give notice thereof to the predecessor Warrant Agent and the transfer agent for the Common Stock not later than the effective date of any such appointment.
7.14.3. Merger or Consolidation of Warrant Agent. Any person into which the Warrant Agent may be merged or converted or with which it may be consolidated or any person resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party or any person succeeding to the shareowner services business of the Warrant Agent or any successor Warrant Agent shall be the successor Warrant Agent under this Warrant Agreement, without any further act or deed. For purposes of this Warrant Agreement, “person” shall mean any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust or other entity, and shall include any successor (by merger or otherwise) thereof or thereto.
8. Miscellaneous Provisions.
8.1. Persons Having Rights under this Warrant Agreement. Nothing in this Warrant Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the parties hereto any right, remedy, or claim under or by reason of this Warrant Agreement or of any covenant, condition, stipulation, promise, or agreement hereof.
8.2. Examination of the Warrant Agreement. A copy of this Warrant Agreement shall be available at all reasonable times at the office of the Warrant Agent designated for such purpose for inspection by any Holder. Prior to such inspection, the Warrant Agent may require any such holder to provide reasonable evidence of its interest in the Warrants.
8.3. Counterparts. This Warrant Agreement may be executed in any number of original, facsimile or electronic counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
8.4. Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant Agreement and shall not affect the interpretation thereof.
9. Certain Definitions. As used herein, the following terms shall have the following meanings:
(a) “Trading Day” means any day on which the Common Stock is traded on the Trading Market, or, if the Trading Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market in the United States on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is are scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00 P.M., Eastern Standard Time).
(b) “Trading Market” means NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange.
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IN WITNESS WHEREOF, this Warrant Agent Agreement has been duly executed by the parties hereto as of the day and year first above written.
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| INFINITE GROUP, INC. |
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| ISSUER DIRECT |
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EXHIBIT A
GLOBAL WARRANT
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EXHIBIT B
WARRANT CERTIFICATE REQUEST NOTICE
To: ___________ as Warrant Agent for __________ (the “Company”)
The undersigned Holder of Common Stock Purchase Warrants (“Warrants”) in the form of Global Warrants issued by the Company hereby elects to receive a Warrant Certificate evidencing the Warrants held by the Holder as specified below:
| 1. | Name of Holder of Warrants in form of Global Warrants: _____________________________ |
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| 2. | Name of Holder in Warrant Certificate (if different from name of Holder of Warrants in form of Global Warrants): ________________________________ |
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| 3. | Number of Warrants in name of Holder in form of Global Warrants: ___________________ |
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| 4. | Number of Warrants for which Warrant Certificate shall be issued: __________________ |
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| 5. | Number of Warrants in name of Holder in form of Global Warrants after issuance of Warrant Certificate, if any: ___________ |
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| 6. | Warrant Certificate shall be delivered to the following address: |
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The undersigned hereby acknowledges and agrees that, in connection with this Warrant Exchange and the issuance of the Warrant Certificate, the Holder is deemed to have surrendered the number of Warrants in form of Global Warrants in the name of the Holder equal to the number of Warrants evidenced by the Warrant Certificate.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ____________________________________________________
Signature of Authorized Signatory of Investing Entity: ______________________________
Name of Authorized Signatory: ________________________________________________
Title of Authorized Signatory: _________________________________________________
Date: _______________________________________________________________
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EXHIBIT C
AUTHORIZED REPRESENTATIVES
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| James Villa |
| Chief Executive Officer |
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| Richard Glickman |
| Chief Financial Officer |
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EXHIBIT 4.6
WARRANT AGENT AGREEMENT
This WARRANT AGENT AGREEMENT (this “Warrant Agreement”) dated as of [*], 2022 (the “Issuance Date”) is between Infinite Group, Inc., a Delaware corporation (the “Company”), and Issuer Direct (the “Warrant Agent”).
WHEREAS, pursuant to the terms of that certain Underwriting Agreement (“Underwriting Agreement”), dated [*], 2022, by and between the Company and Aegis Capital Corp., as the underwriter set forth therein (the “Underwriter”), the Company is engaged in a public offering of up to [*] units (the “Units”), consisting of following three Units (i) up to [*] common units (the “Common Units”) with each Common Unit consisting of one (1) share of Common Stock, $0.001 par value per share (the “Common Stock”) of the Company, three (3) Redeemable warrants (each a “Redeemable Warrant”, and collectively, the “Redeemable Warrants”) of the Company each to purchase one share of Common Stock; (ii) up to [*] pre-funded units (the “Pre-Funded Units”), with each Pre-Funded Unit consisting of one (1) pre-funded warrant to purchase one share of Common Stock at an exercise price of $0.001 per share (a “Pre-Funded Warrant,” and collectively, the “Pre-Funded Warrants”) and three (3) Redeemable Warrants; (iii) up to [*] qualified units (the “Qualified Units”), with each Qualified Unit consisting of one (1) share of Common Stock of the Company, three (3) Redeemable Warrants, and (iv) up to [*] shares of Common Stock, Pre-Funded Warrants and/or Redeemable Warrants issuable pursuant to the Underwriter’s over-allotment option granted pursuant to the Underwriting Agreement;
WHEREAS, the Company has filed with the Securities and Exchange Commission (the “Commission”) a Registration Statement on Form S-1 (File No. 333-262167) (as the same may be amended from time to time, the “Registration Statement”), for the registration under the Securities Act of 1933, as amended (the “Securities Act”), of the Common Units, Pre-Funded Units, Common Stock, Pre-Funded Warrants, Redeemable Warrants, and Common Stock underlying Pre-Funded Warrants and Redeemable Warrants, and such Registration Statement was declared effective on [*], 2022; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in accordance with the terms set forth in this Warrant Agreement in connection with the issuance, registration, transfer, exchange and exercise of the Pre-Funded Warrants;
WHEREAS, the Company desires to provide for the provisions of the Pre-Funded Warrants, the terms upon which they shall be issued and exercised, and the respective rights, limitation of rights, and immunities of the Company, the Warrant Agent, and the holders of the Pre-Funded Warrants; and
WHEREAS, all acts and things have been done and performed which are necessary to make the Pre-Funded Warrants the valid, binding and legal obligations of the Company, and to authorize the execution and delivery of this Warrant Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company with respect to the Pre-Funded Warrants, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with the express terms and conditions set forth in this Warrant Agreement (and no implied terms or conditions).
2. Pre-Funded Warrants.
2.1. Form of Pre-Funded Warrants. The Pre-Funded Warrants shall be registered securities and shall be evidenced by a global Pre-Funded warrant (“Global Pre-Funded Warrant”) in the form of Exhibit A to this Warrant Agreement, which shall be deposited on behalf of the Company with a custodian for The Depository Trust Company (“DTC”) and registered in the name of Cede & Co., a nominee of DTC. The terms of the Global Pre-Funded Warrant are incorporated herein by reference. If DTC subsequently ceases to make its book-entry settlement system available for the Pre-Funded Warrants, the Company may instruct the Warrant Agent regarding making other arrangements for book-entry settlement. In the event that the Pre-Funded Warrants are not eligible for, or it is no longer necessary to have the Pre-Funded Warrants available in, book-entry form, the Company may instruct the Warrant Agent to provide written instructions to DTC to deliver to the Warrant Agent for cancellation the Global Pre-Funded Warrant, and the Company shall instruct the Warrant Agent to deliver to DTC separate certificates evidencing Pre-Funded Warrants (“Definitive Certificates” and, together with the Global Pre-Funded Warrant, “Warrant Certificates”) registered as requested through the DTC system.
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2.2. Issuance and Registration of Pre-Funded Warrants.
2.2.1. Warrant Register. The Warrant Agent shall maintain books (“Warrant Register”) for the registration of original issuance and the registration of transfer of the Pre-Funded Warrants.
2.2.2. Issuance of Pre-Funded Warrants. Upon the initial issuance of the Pre-Funded Warrants, the Warrant Agent shall issue the Global Warrant and deliver the Pre-Funded Warrants in the DTC book-entry settlement system in accordance with written instructions delivered to the Warrant Agent by the Company. Ownership of security entitlements in the Pre-Funded Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained (i) by DTC and (ii) by institutions that have accounts with DTC (each, a “Participant”).
2.2.3. Beneficial Owner; Holder. Prior to due presentment for registration of transfer of any Pre-Funded Warrant, the Company and the Warrant Agent may deem and treat the person in whose name that Pre-Funded Warrant shall be registered on the Warrant Register (the “Holder”) as the absolute owner of such Pre-Funded Warrant for purposes of any exercise thereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Warrant Agent or any agent of the Company or the Warrant Agent from giving effect to any written certification, proxy or other authorization furnished by DTC governing the exercise of the rights of a holder of a beneficial interest in any Pre-Funded Warrant. The rights of beneficial owners in a Pre-Funded Warrant evidenced by the Global Pre-Funded Warrant shall be exercised by the Holder or a Participant through the DTC system, except to the extent set forth herein or in the Global Pre-Funded Warrant.
2.2.4. Delivery of Warrant Certificate. A Holder has the right to elect at any time or from time to time a Warrant Exchange (as defined below) pursuant to a Warrant Certificate Request Notice (as defined below). Upon written notice by a Holder to the Warrant Agent for the exchange of some or all of such Holder’s Global Pre-Funded Warrants for a Warrant Certificate evidencing the same number of Pre-Funded Warrants, which request shall be in the form attached hereto as Exhibit B (a “Warrant Certificate Request Notice” and the date of delivery of such Warrant Certificate Request Notice by the Holder, the “Warrant Certificate Request Notice Date” and the deemed surrender upon delivery by the Holder of a number of Global Pre-Funded Warrants for the same number of Pre-Funded Warrants evidenced by a Warrant Certificate, a “Warrant Exchange”), the Warrant Agent shall promptly effect the Warrant Exchange and shall promptly issue and deliver to the Holder a Warrant Certificate for such number of Pre-Funded Warrants in the name set forth in the Warrant Certificate Request Notice. Such Warrant Certificate shall be dated the date of issuance of the Warrant Certificate, shall include the initial exercise date of the Pre-Funded Warrants, shall be executed by an authorized signatory of the Company and shall be reasonably acceptable in all respects to such Holder. In connection with a Warrant Exchange, the Company agrees to deliver, or to direct the Warrant Agent to deliver, the Warrant Certificate to the Holder within three (3) Business Days of the Warrant Certificate Request Notice pursuant to the delivery instructions in the Warrant Certificate Request Notice (“Warrant Certificate Delivery Date”). If the Company fails for any reason to deliver to the Holder the Warrant Certificate subject to the Warrant Certificate Request Notice by the Warrant Certificate Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of shares of Common Stock issuable upon exercise of the Pre-Funded Warrants (the “Warrant Shares”) evidenced by such Warrant Certificate (based on the VWAP (as defined in the Pre-Funded Warrants) of the Common Stock on the Warrant Certificate Request Notice Date), $10 per Business Day for each Business Day after such Warrant Certificate Delivery Date until such Warrant Certificate is delivered or, prior to delivery of such Warrant Certificate, the Holder rescinds such Warrant Exchange. The Company covenants and agrees that, upon the date of delivery of the Warrant Certificate Request Notice, the Holder shall be deemed to be the holder of the Warrant Certificate and, notwithstanding anything to the contrary set forth herein, the Warrant Certificate shall be deemed for all purposes to contain all of the terms and conditions of the Pre-Funded Warrants evidenced by such Warrant Certificate and the terms of this Agreement.
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2.2.5. Execution. The Warrant Certificates shall be executed on behalf of the Company by any authorized officer of the Company (an “Authorized Officer”), which need not be the same authorized signatory for all of the Warrant Certificates, either manually or by facsimile signature. The Warrant Certificates shall be countersigned by an authorized signatory of the Warrant Agent, which need not be the same signatory for all of the Warrant Certificates, and no Warrant Certificate shall be valid for any purpose unless so countersigned. In case any Authorized Officer of the Company that signed any of the Warrant Certificates ceases to be an Authorized Officer of the Company before countersignature by the Warrant Agent and issuance and delivery by the Company, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be an Authorized Officer of the Company authorized to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such an Authorized Officer.
2.2.6. Registration of Transfer. At any time at or prior to the Expiration Date (as defined below), a transfer of any Pre-Funded Warrants may be registered and any Warrant Certificate or Warrant Certificates may be split up, combined or exchanged for another Warrant Certificate or Warrant Certificates evidencing the same number of Pre-Funded Warrants as the Warrant Certificate or Warrant Certificates surrendered. Any Holder desiring to register the transfer of Pre-Funded Warrants or to split up, combine or exchange any Warrant Certificate shall make such request in writing delivered to the Warrant Agent, and shall surrender to the Warrant Agent the Warrant Certificate or Warrant Certificates evidencing the Pre-Funded Warrants the transfer of which is to be registered or that is or are to be split up, combined or exchanged and, in the case of registration of transfer, shall provide a signature guarantee. Thereupon, the Warrant Agent shall countersign and deliver to the person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested. The Company and the Warrant Agent may require payment, by the Holder requesting a registration of transfer of Pre-Funded Warrants or a split-up, combination or exchange of a Warrant Certificate (but, for purposes of clarity, not upon the exercise of the Pre-Funded Warrants and issuance of Warrant Shares to the Holder), of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with such registration of transfer, split-up, combination or exchange, together with reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto.
2.2.7. Loss, Theft and Mutilation of Warrant Certificates. Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security in customary form and amount, and reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto, and upon surrender to the Warrant Agent and cancellation of the Warrant Certificate if mutilated, the Warrant Agent shall, on behalf of the Company, countersign and deliver a new Warrant Certificate of like tenor to the Holder in lieu of the Warrant Certificate so lost, stolen, destroyed or mutilated. The Warrant Agent may charge the Holder an administrative fee for processing the replacement of lost Warrant Certificates. The Warrant Agent may receive compensation from the surety companies or surety agents for administrative services provided to them.
2.2.8. Proxies. The Holder of a Pre-Funded Warrant may grant proxies or otherwise authorize any person, including the Participants and beneficial holders that may own interests through the Participants, to take any action that a Holder is entitled to take under this Agreement or the Pre-Funded Warrants; provided, however, that at all times that Pre-Funded Warrants are evidenced by a Global Pre-Funded Warrant, exercise of those Pre-Funded Warrants shall be effected on their behalf by Participants through DTC in accordance the procedures administered by DTC.
3. Terms and Exercise of Pre-Funded Warrants.
3.1. Exercise Price. Each Pre-Funded Warrant shall entitle the Holder, subject to the provisions of the applicable Warrant Certificate and of this Warrant Agreement, to purchase from the Company the number of Common Stock stated therein, at the price of $0.001 per whole share of Common Stock, subject to the subsequent adjustments provided in the Global Pre-Funded Warrant. The term “Exercise Price” as used in this Warrant Agreement refers to the price per share at which Common Stock may be purchased at the time a Pre-Funded Warrant is exercised.
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3.2. Duration of Warrants. A Pre-Funded Warrant may be exercised only during the period (“Exercise Period”) commencing on the date of issuance and ending on the Termination Date. For purposes of this Warrant Agreement, the “Termination Date” shall have the meaning set forth in the Global Pre-Funded Warrant. Each Pre-Funded Warrant not exercised on or before the Termination Date shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall cease at the close of business on the Termination Date.
3.3. Exercise of Pre-Funded Warrants.
3.3.1. Exercise. Subject to the provisions of the Global Pre-Funded Warrant, a Holder (or a Participant or a designee of a Participant acting on behalf of a Holder) may exercise Pre-Funded Warrants by delivering to the Warrant Agent, not later than 5:00 P.M., Eastern Standard Time, on any business day during the Exercise Period a notice of exercise of the Pre-Funded Warrants to be exercised (i) in the form attached to the Global Pre-Funded Warrant or (ii) via an electronic warrant exercise through the DTC system (each, an “Election to Purchase”) and, unless the cashless exercise procedure is specified in the applicable Election to Purchase, delivery of the aggregate Exercise Price of the Warrant Shares specified in the applicable Election to Purchase. All other requirements for the exercise of a Pre-Funded Warrant shall be as set forth in the Pre-Funded Warrant. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender a Pre-Funded Warrant Certificate to the Warrant Agent until the Holder has purchased all of the Warrant Shares available thereunder and the applicable Pre-Funded Warrant Certificate has been exercised in full, in which case, the Holder shall surrender the Pre-Funded Warrant Certificate to the Warrant Agent for cancellation within three (3) Trading Days of the date on which the final Election to Purchase is delivered to the Warrant Agent. Partial exercises of a Pre Funded Warrant Certificate resulting in purchases of a portion of the total number of Warrant Shares available thereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable thereunder in an amount equal to the applicable number of Warrant Shares purchased.
3.3.2. The Warrant Agent shall, by 5:00 p.m., New York City time, on the Trading Day following the Exercise Date of any Pre-Funded Warrant, advise the Company, the transfer agent and registrar for the Company’s Common Stock, in respect of (i) the number of Warrant Shares indicated on the Notice of Exercise as issuable upon such exercise with respect to such exercised Pre-Funded Warrants, (ii) the instructions of the Holder or Participant, as the case may be, provided to the Warrant Agent with respect to the delivery of the Warrant Shares and the number of Pre-Funded Warrants that remain outstanding after such exercise and (iii) such other information as the Company or such transfer agent and registrar shall reasonably request. The Company shall issue the Warrant Shares in compliance with the terms of the Pre-Funded Warrant.
3.3.3. Valid Issuance. All Warrant Shares issued by the Company upon the proper exercise of a Pre-Funded Warrant in conformity with this Warrant Agreement shall be validly issued, fully paid and non-assessable.
3.3.4. No Fractional Exercise. Notwithstanding any provision contained in this Warrant Agreement to the contrary, no fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Pre-Funded Warrants. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
3.3.5. No Transfer Taxes. The Company shall not be required to pay any stamp or other tax or governmental charge required to be paid in connection with any transfer involved in the issue of the Warrant Shares upon the exercise of Pre-Funded Warrants; and in the event that any such transfer is involved, the Company shall not be required to issue or deliver any Warrant Shares until such tax or other charge shall have been paid or it has been established to the Company’s satisfaction that no such tax or other charge is due.
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3.3.6. Date of Issuance. The Company will treat an exercising Holder as a beneficial owner of the Warrant Shares as of the Exercise Date, and for purposes of Regulation SHO, a holder whose interest in the Pre-Funded Warrant is a beneficial interest in certificate(s) representing the Pre-Funded Warrant held in book-entry form through DTC shall be deemed to have exercised its interest in the Pre-Funded Warrant upon instructing its broker that is a DTC participant to exercise its interest in the Pre-Funded Warrant, except that, if the Exercise Date is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the open of business on the next succeeding date on which the stock transfer books are open.
4. Adjustments. Upon every adjustment of the Exercise Price or the number of Warrant Shares issuable upon exercise of a Pre-Funded Warrant, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares purchasable at such price upon the exercise of a Pre-Funded Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event specified in Section 3 of the Pre-Funded Warrant, then, in any such event, the Company shall give written notice to the Warrant Agent. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event. The Warrant Agent shall be entitled to rely conclusively on, and shall be fully protected in relying on, any certificate, notice or instructions provided by the Company with respect to any adjustment of the Exercise Price or the number of shares issuable upon exercise of a Pre-Funded Warrant, or any related matter, and the Warrant Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with any such certificate, notice or instructions or pursuant to this Warrant Agreement. The Warrant Agent shall not be deemed to have knowledge of any such adjustment unless and until it shall have received written notice thereof from the Company.
5. Restrictive Legends; Fractional Pre-Funded Warrants. In the event that a Warrant Certificate surrendered for transfer bears a restrictive legend, the Warrant Agent shall not register that transfer until the Warrant Agent has received an opinion of counsel for the Company stating that such transfer may be made and indicating whether the Pre-Funded Warrants must also bear a restrictive legend upon that transfer. The Warrant Agent shall not be required to effect any registration of transfer or exchange which will result in the transfer of or delivery of a Warrant Certificate for a fraction of a Pre-Funded Warrant.
6. Other Provisions Relating to Rights of Holders of Pre-Funded Warrants.
6.1. No Rights as Stockholder. Except as otherwise specifically provided herein, a Holder, solely in its capacity as a holder of Pre-Funded Warrants, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant Agreement be construed to confer upon a Holder, solely in its capacity as the registered holder of Pre-Funded Warrants, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of share capital, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights or rights to participate in new issues of shares, or otherwise, prior to the issuance to the Holder of the Warrant Shares which it is then entitled to receive upon the due exercise of Pre-Funded Warrants.
6.2. Reservation of Common Stock. The Company shall at all times reserve and keep available a number of its authorized but unissued Common Stock that will be sufficient to permit the exercise in full of all outstanding Pre-Funded Warrants issued pursuant to this Warrant Agreement.
7. Concerning the Warrant Agent and Other Matters.
7.1. Any instructions given to the Warrant Agent orally, as permitted by any provision of this Warrant Agreement, shall be confirmed in writing by the Company as soon as practicable. The Warrant Agent shall not be liable or responsible and shall be fully authorized and protected for acting, or failing to act, in accordance with any oral instructions which do not conform with the written confirmation received in accordance with this Section 7.1.
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7.2. (a) Whether or not any Pre-Funded Warrants are exercised, for the Warrant Agent’s services as agent for the Company hereunder, the Company shall pay to the Warrant Agent such fees as may be separately agreed between the Company and Warrant Agent and the Warrant Agent’s out of pocket expenses in connection with this Warrant Agreement, including, without limitation, the fees and expenses of the Warrant Agent’s counsel. While the Warrant Agent endeavors to maintain out-of-pocket charges (both internal and external) at competitive rates, these charges may not reflect actual out-of-pocket costs, and may include handling charges to cover internal processing and use of the Warrant Agent’s billing systems. (b) All amounts owed by the Company to the Warrant Agent under this Warrant Agreement are due within 30 days of the invoice date. Delinquent payments are subject to a late payment charge of one and one-half percent (1.5%) per month commencing 45 days from the invoice date. The Company agrees to reimburse the Warrant Agent for any attorney’s fees and any other costs associated with collecting delinquent payments. (c) No provision of this Warrant Agreement shall require Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under this Warrant Agreement or in the exercise of its rights.
7.3. As agent for the Company hereunder the Warrant Agent: (a) shall have no duties or obligations other than those specifically set forth herein or as may subsequently be agreed to in writing by the Warrant Agent and the Company; (b) shall be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value, or genuineness of the Pre-Funded Warrants or any Warrant Shares; (c) shall not be obligated to take any legal action hereunder; if, however, the Warrant Agent determines to take any legal action hereunder, and where the taking of such action might, in its judgment, subject or expose it to any expense or liability it shall not be required to act unless it has been furnished with an indemnity reasonably satisfactory to it; (d) may rely on and shall be fully authorized and protected in acting or failing to act upon any certificate, instrument, opinion, notice, letter, telegram, telex, facsimile transmission or other document or security delivered to the Warrant Agent and believed by it to be genuine and to have been signed by the proper party or parties; (e) shall not be liable or responsible for any recital or statement contained in the Registration Statement or any other documents relating thereto; (f) shall not be liable or responsible for any failure on the part of the Company to comply with any of its covenants and obligations relating to the Pre-Funded Warrants, including without limitation obligations under applicable securities laws; (g) may rely on and shall be fully authorized and protected in acting or failing to act upon the written, telephonic or oral instructions with respect to any matter relating to its duties as Warrant Agent covered by this Warrant Agreement (or supplementing or qualifying any such actions) of officers of the Company, and is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Company or counsel to the Company, and may apply to the Company, for advice or instructions in connection with the Warrant Agent’s duties hereunder, and the Warrant Agent shall not be liable for any delay in acting while waiting for those instructions; any applications by the Warrant Agent for written instructions from the Company may, at the option of the Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent under this Warrant Agreement and the date on or after which such action shall be taken or such omission shall be effective; the Warrant Agent shall not be liable for any action taken by, or omission of, the Warrant Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than five business days after the date such application is sent to the Company, unless the Company shall have consented in writing to any earlier date) unless prior to taking any such action, the Warrant Agent shall have received written instructions in response to such application specifying the action to be taken or omitted; (h) may consult with counsel satisfactory to the Warrant Agent, including its in-house counsel, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by it hereunder in good faith and in accordance with the advice of such counsel; (i) may perform any of its duties hereunder either directly or by or through nominees, correspondents, designees, or subagents, and it shall not be liable or responsible for any misconduct or negligence on the part of any nominee, correspondent, designee, or subagent appointed with reasonable care by it in connection with this Warrant Agreement; (j) is not authorized, and shall have no obligation, to pay any brokers, dealers, or soliciting fees to any person; and (k) shall not be required hereunder to comply with the laws or regulations of any country other than the United States of America or any political subdivision thereof.
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7.4. (a) In the absence of gross negligence or willful or illegal misconduct on its part, the Warrant Agent shall not be liable for any action taken, suffered, or omitted by it or for any error of judgment made by it in the performance of its duties under this Warrant Agreement. Anything in this Warrant Agreement to the contrary notwithstanding, in no event shall Warrant Agent be liable for special, indirect, incidental, consequential or punitive losses or damages of any kind whatsoever (including but not limited to lost profits), even if the Warrant Agent has been advised of the possibility of such losses or damages and regardless of the form of action. Any liability of the Warrant Agent will be limited in the aggregate to the amount of fees paid by the Company hereunder. The Warrant Agent shall not be liable for any failures, delays or losses, arising directly or indirectly out of conditions beyond its reasonable control including, but not limited to, acts of government, exchange or market ruling, suspension of trading, work stoppages or labor disputes, fires, civil disobedience, riots, rebellions, storms, electrical or mechanical failure, computer hardware or software failure, communications facilities failures including telephone failure, war, terrorism, insurrection, earthquakes, floods, acts of God or similar occurrences. (b) In the event any question or dispute arises with respect to the proper interpretation of the Pre-Funded Warrants or the Warrant Agent’s duties under this Warrant Agreement or the rights of the Company or of any Holder, the Warrant Agent shall not be required to act and shall not be held liable or responsible for its refusal to act until the question or dispute has been judicially settled (and, if appropriate, it may file a suit in interpleader or for a declaratory judgment for such purpose) by final judgment rendered by a court of competent jurisdiction, binding on all persons interested in the matter which is no longer subject to review or appeal, or settled by a written document in form and substance satisfactory to Warrant Agent and executed by the Company and each such Holder. In addition, the Warrant Agent may require for such purpose, but shall not be obligated to require, the execution of such written settlement by all the Holders and all other persons that may have an interest in the settlement.
7.5. The Company covenants to indemnify the Warrant Agent and hold it harmless from and against any loss, liability, claim or expense (“Loss”) arising out of or in connection with the Warrant Agent’s duties under this Warrant Agreement, including the costs and expenses of defending itself against any Loss, unless such Loss shall have been determined by a court of competent jurisdiction to be a result of the Warrant Agent’s gross negligence or willful misconduct.
7.6. Unless terminated earlier by the parties hereto, this Agreement shall terminate 90 days after the earlier of the Expiration Date and the date on which no Pre-Funded Warrants remain outstanding (the “Termination Date”). On the business day following the Termination Date, the Agent shall deliver to the Company any entitlements, if any, held by the Warrant Agent under this Warrant Agreement. The Agent’s right to be reimbursed for fees, charges and out-of-pocket expenses as provided in this Section 8 shall survive the termination of this Warrant Agreement.
7.7. If any provision of this Warrant Agreement shall be held illegal, invalid, or unenforceable by any court, this Warrant Agreement shall be construed and enforced as if such provision had not been contained herein and shall be deemed an Agreement among the parties to it to the full extent permitted by applicable law.
7.8. The Company represents and warrants that: (a) it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation; (b) the offer and sale of the Pre-Funded Warrants and the execution, delivery and performance of all transactions contemplated thereby (including this Warrant Agreement) have been duly authorized by all necessary corporate action and will not result in a breach of or constitute a default under the articles of association, bylaws or any similar document of the Company or any indenture, agreement or instrument to which it is a party or is bound; (c) this Warrant Agreement has been duly executed and delivered by the Company and constitutes the legal, valid, binding and enforceable obligation of the Company; (d) the Pre-Funded Warrants will comply in all material respects with all applicable requirements of law; and (e) to the best of its knowledge, there is no litigation pending or threatened as of the date hereof in connection with the offering of the Pre-Funded Warrants.
7.9. In the event of inconsistency between this Warrant Agreement and the descriptions in the Pre-Funded Warrant, as it may from time to time be amended, the terms of this Warrant Agreement shall control.
7.10. Set forth in Exhibit C hereto is a list of the names and specimen signatures of the persons authorized to act for the Company under this Warrant Agreement (the “Authorized Representatives”). The Company shall, from time to time, certify to the Warrant Agent the names and signatures of any other persons authorized to act for the Company under this Warrant Agreement.
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7.11. Except as expressly set forth elsewhere in this Warrant Agreement, all notices, instructions and communications under this Agreement shall be in writing, shall be effective upon receipt and shall be addressed, if to the Company, to its address set forth beneath its signature to this Agreement, or, if to the Warrant Agent, to Issuer Direct, One Glenwood Avenue, Suite 1001, Raleigh, North Carolina 27603, or to such other address of which a party hereto has notified the other party.
7.12. (a) This Warrant Agreement shall be governed by and construed in accordance with the laws of the State of New York. All actions and proceedings relating to or arising from, directly or indirectly, this Warrant Agreement may be litigated in courts located within the Borough of Manhattan in the City and State of New York. The Company hereby submits to the personal jurisdiction of such courts and consents that any service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder. Each of the parties hereto hereby waives the right to a trial by jury in any action or proceeding arising out of or relating to this Warrant Agreement. (b) This Warrant Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. This Warrant Agreement may not be assigned, or otherwise transferred, in whole or in part, by either party without the prior written consent of the other party, which the other party will not unreasonably withhold, condition or delay; except that (i) consent is not required for an assignment or delegation of duties by Warrant Agent to any affiliate of Warrant Agent and (ii) any reorganization, merger, consolidation, sale of assets or other form of business combination by the Warrant Agent or the Company shall not be deemed to constitute an assignment of this Warrant Agreement. (c) No provision of this Warrant Agreement may be amended, modified or waived, except in a written document signed by both parties. The Company and the Warrant Agent may amend or supplement this Warrant Agreement without the consent of any Holder for the purpose of curing any ambiguity, or curing, correcting or supplementing any defective provision contained herein or adding or changing any other provisions with respect to matters or questions arising under this Agreement as the parties may deem necessary or desirable and that the parties determine, in good faith, shall not adversely affect the interest of the Holders. All other amendments and supplements shall require the vote or written consent of Holders of at least 50.1% of the then outstanding Pre-Funded Warrants, provided that adjustments may be made to the Pre-Funded Warrant terms and rights in accordance with Section 4 without the consent of the Holders.
7.13. Payment of Taxes. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of Warrant Shares upon the exercise of Pre-Funded Warrants, but the Company may require the Holders to pay any transfer taxes in respect of the Pre-Funded Warrants or such shares. The Warrant Agent may refrain from registering any transfer of Pre-Funded Warrants or any delivery of any Warrant Shares unless or until the persons requesting the registration or issuance shall have paid to the Warrant Agent for the account of the Company the amount of such tax or charge, if any, or shall have established to the reasonable satisfaction of the Company and the Warrant Agent that such tax or charge, if any, has been paid.
7.14. Resignation of Warrant Agent.
7.14.1. Appointment of Successor Warrant Agent. The Warrant Agent, or any successor to it hereafter appointed, may resign its duties and be discharged from all further duties and liabilities hereunder after giving thirty (30) days’ notice in writing to the Company, or such shorter period of time agreed to by the Company. The Company may terminate the services of the Warrant Agent, or any successor Warrant Agent, after giving thirty (30) days’ notice in writing to the Warrant Agent or successor Warrant Agent, or such shorter period of time as agreed. If the office of the Warrant Agent becomes vacant by resignation, termination or incapacity to act or otherwise, the Company shall appoint in writing a successor Warrant Agent in place of the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the Warrant Agent, then the Warrant Agent or any Holder may apply to any court of competent jurisdiction for the appointment of a successor Warrant Agent at the Company’s cost. Pending appointment of a successor to such Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent (but not including the initial Warrant Agent), whether appointed by the Company or by such court, shall be a person organized and existing under the laws of any state of the United States of America, in good standing, and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by federal or state authority. After appointment, any successor Warrant Agent shall be vested with all the authority, powers, rights, immunities, duties, and obligations of its predecessor Warrant Agent with like effect as if originally named as Warrant Agent hereunder, without any further act or deed, and except for executing and delivering documents as provided in the sentence that follows, the predecessor Warrant Agent shall have no further duties, obligations, responsibilities or liabilities hereunder, but shall be entitled to all rights that survive the termination of this Warrant Agreement and the resignation or removal of the Warrant Agent, including but not limited to its right to indemnity hereunder. If for any reason it becomes necessary or appropriate or at the request of the Company, the predecessor Warrant Agent shall execute and deliver, at the expense of the Company, an instrument transferring to such successor Warrant Agent all the authority, powers, and rights of such predecessor Warrant Agent hereunder; and upon request of any successor Warrant Agent the Company shall make, execute, acknowledge, and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such authority, powers, rights, immunities, duties, and obligations.
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7.14.2. Notice of Successor Warrant Agent. In the event a successor Warrant Agent shall be appointed, the Company shall give notice thereof to the predecessor Warrant Agent and the transfer agent for the Common Stock not later than the effective date of any such appointment.
7.14.3. Merger or Consolidation of Warrant Agent. Any person into which the Warrant Agent may be merged or converted or with which it may be consolidated or any person resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party or any person succeeding to the shareowner services business of the Warrant Agent or any successor Warrant Agent shall be the successor Warrant Agent under this Warrant Agreement, without any further act or deed. For purposes of this Warrant Agreement, “person” shall mean any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust or other entity, and shall include any successor (by merger or otherwise) thereof or thereto.
8. Miscellaneous Provisions.
8.1. Persons Having Rights under this Warrant Agreement. Nothing in this Warrant Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the parties hereto any right, remedy, or claim under or by reason of this Warrant Agreement or of any covenant, condition, stipulation, promise, or agreement hereof.
8.2. Examination of the Warrant Agreement. A copy of this Warrant Agreement shall be available at all reasonable times at the office of the Warrant Agent designated for such purpose for inspection by any Holder. Prior to such inspection, the Warrant Agent may require any such holder to provide reasonable evidence of its interest in the Pre-Funded Warrants.
8.3. Counterparts. This Warrant Agreement may be executed in any number of original, facsimile or electronic counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
8.4. Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant Agreement and shall not affect the interpretation thereof.
9. Certain Definitions. As used herein, the following terms shall have the following meanings:
(a) “Trading Day” means any day on which the Common Stock is traded on the Trading Market, or, if the Trading Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market in the United States on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00 P.M., Eastern Standard Time).
(b) “Trading Market” means NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange.
[Signature Page Follows]
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IN WITNESS WHEREOF, this Warrant Agent Agreement has been duly executed by the parties hereto as of the day and year first above written.
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| INFINITE GROUP, INC. |
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| ISSUER DIRECT |
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EXHIBIT A
GLOBAL PRE-FUNDED WARRANT
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EXHIBIT B
WARRANT CERTIFICATE REQUEST NOTICE
To: ___________ as Warrant Agent for __________ (the “Company”)
The undersigned Holder of Common Stock Purchase Pre-Funded Warrants (“Pre-Funded Warrants”) in the form of Global Pre-Funded Warrants issued by the Company hereby elects to receive a Warrant Certificate evidencing the Pre-Funded Warrants held by the Holder as specified below:
1. Name of Holder of Pre-Funded Warrants in form of Global Pre-Funded Warrants: _____________________________
2. Name of Holder in Warrant Certificate (if different from name of Holder of Warrants in form of Global Pre-Funded Warrants): ________________________________
3. Number of Pre-Funded Warrants in name of Holder in form of Global Pre-Funded Warrants: ___________________
4. Number of Pre-Funded Warrants for which Warrant Certificate shall be issued: __________________
5. Number of Pre-Funded Warrants in name of Holder in form of Global Pre-Funded Warrants after issuance of Warrant Certificate, if any: ___________
6. Warrant Certificate shall be delivered to the following address:
______________________________
______________________________
______________________________
______________________________
The undersigned hereby acknowledges and agrees that, in connection with this Warrant Exchange and the issuance of the Warrant Certificate, the Holder is deemed to have surrendered the number of Pre-Funded Warrants in form of Global Pre-Funded Warrants in the name of the Holder equal to the number of Pre-Funded Warrants evidenced by the Warrant Certificate.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ____________________________________________________
Signature of Authorized Signatory of Investing Entity: ______________________________
Name of Authorized Signatory: ________________________________________________
Title of Authorized Signatory: _________________________________________________
Date: _______________________________________________________________
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EXHIBIT C
AUTHORIZED REPRESENTATIVES
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| Richard Glickman |
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EXHIBIT 5.1
September 9, 2022
Infinite Group, Inc.
175 Sully’s Trail, Suite 202
Pittsford, New York 14534
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| Re: | Registration Statement on Form S-1 |
Ladies and Gentlemen:
We have acted as counsel to Infinite Group, Inc., a Delaware corporation (the “Company”), in connection with the preparation and filing with the Securities and Exchange Commission, pursuant to the Securities Act of 1933, as amended (the “Securities Act”), of the Company’s Registration Statement on Form S-1 (File No. 333-262167) (the “Registration Statement”). The Registration Statement covers the underwritten public offering and sale of the following securities (the “Securities”):
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| 1. | up to 3,000,000 Units (as defined herein) consisting of either | ||||
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| a. | (the “Common Units”), with each Common Unit to consist of: | ||
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| i. | one share of common stock, par value $0.0001 per share (the “Common Stock,” and all shares of Common Stock contained within the Units are the “Shares”); and |
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| ii. | three Redeemable Warrants; |
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| 2. | up to 450,000 additional Shares and/or additional Pre-funded Warrants, and/or up to 1,350,000 additional Redeemable Warrants pursuant to the over-allotment option of the Underwriter (as defined below) described in the Registration Statement; | ||||
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| 3. | up to 120,000 warrants each to purchase one share of Common Stock at an exercise price equal to 125% of the public offering price per Unit (the “Underwriter’s Warrants” and together with the Redeemable Warrants, and the Pre-funded Warrants, the “Warrants”); | ||||
| 1600 BAUSCH & LOMB PLACE ROCHESTER, NY 14604-2711 PHONE: 585.232.6500 FAX: 585.232.2152 |
| rochester, ny • buffalo, ny • albany, ny • corning, ny • new york, ny |
Infinite Group, Inc.
September 9, 2022
Page 2
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| 4. | shares of Common Stock issuable upon exercise of the Redeemable Warrants (the “Redeemable Warrant Shares”); | ||
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| 5. | shares of Common Stock issuable upon exercise of the Pre-funded Warrants (the “Pre-funded Warrant Shares”); and | ||
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| 6. | shares of Common Stock issuable upon exercise of the Underwriter’s Warrants (the “Underwriter’s Warrant Shares” and together with the Redeemable Warrant Shares, and Pre-funded Warrant Shares, the “Warrant Shares”). | ||
We understand that the Securities are to be sold to the Underwriter as described in the Registration Statement pursuant to an underwriting agreement (the “Underwriting Agreement”), substantially in the form filed as an exhibit to the Registration Statement, to be entered into by and among the Company and Aegis Capital Corp. (the “Underwriter”).
In connection with the foregoing, we have examined originals or copies of such corporate records of the Company, certificates and other communications of public officials, certificates of officers of the Company and such other documents as we have deemed relevant or necessary for the purpose of rendering the opinions expressed herein. As to questions of fact material to those opinions, we have, to the extent we deemed appropriate, relied on certificates of officers of the Company and on certificates and other communications of public officials. We have assumed the genuineness of all signatures on, and the authenticity of, all documents submitted to us as originals, the conformity to authentic original documents of all documents submitted to us as copies thereof, the due authorization, execution and delivery by the parties thereto other than the Company of all documents examined by us, and the legal capacity of each individual who signed any of those documents. In addition, we have assumed that (a) each of the Underwriting Agreement, Warrants, Warrant Agent Agreement, and Pre-funded Warrant Agent Agreement (the “Transaction Documents”) will be duly executed and delivered by all parties thereto, (b) the Underwriter has the power, corporate or otherwise, to enter into and perform its obligations under the Underwriting Agreement and that the Underwriting Agreement will be a valid and binding obligation of the Underwriter, (c) there will not have occurred, prior to the date of the issuance of the Warrant Shares: (i) any change in law affecting the validity or enforceability of the Warrants or (ii) any amendments to the Transaction Documents, (d) at the time of the issuance and sale of the Securities: (i) the Company is validly existing and in good standing under the law of the State of Delaware, (ii) the Company has not amended its certificate of incorporation or bylaws, (iii) the board of directors of the Company and any committee thereof has not taken any action to amend, rescind or otherwise reduce its prior authorization of the issuance of the Securities, (iv) the board of directors of the Company and any committee thereof has taken all necessary action to approve a specific number of Securities to be sold and a specific price for the sale of the Securities, and (v) the Company will receive consideration in excess of par value for the issuance of the Shares, (e) the Registration Statement becomes and remains effective, and the prospectus which is a part of the Registration Statement, and the prospectus delivery requirements with respect thereto, fulfill all of the requirements of the Securities Act, throughout all periods relevant to the opinion, (f) the Securities will be offered in the manner and on the terms identified or referred to in the Registration Statement, including all amendments thereto, and (g) all offers and sales of the Securities will be made in compliance with the securities laws of the states having jurisdiction thereof.
Based upon the foregoing, and subject to the additional qualifications set forth below, we are of the opinion that:
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| 1. | the Units have been duly authorized for issuance and, when issued and paid for in accordance with the terms of the Underwriting Agreement, will be valid and legally binding obligations of the Company; |
Infinite Group, Inc.
September 9, 2022
Page 3
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| 2. | the Shares have been duly authorized for issuance and, when issued and paid for in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable; |
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| 3. | the Redeemable Warrants have been duly authorized for issuance and, when issued, sold and delivered by the Company in accordance with and in the manner described in the Registration Statement, the Warrant Agent Agreement and the Underwriting Agreement, will be validly issued and will constitute a valid and binding agreement of the Company enforceable against the Company in accordance with its terms; |
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| 4. | the Pre-funded Warrants have been duly authorized for issuance and, when issued, sold and delivered by the Company in accordance with and in the manner described in the Registration Statement, the Pre-funded Warrant Agent Agreement and the Underwriting Agreement, will be validly issued and will constitute a valid and binding agreement of the Company enforceable against the Company in accordance with its terms; |
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| 5. | the Underwriter’s Warrants have been duly authorized for issuance and, when issued, sold and delivered by the Company in accordance with and in the manner described in the Registration Statement and the Underwriting Agreement, will be validly issued and will constitute a valid and binding agreement of the Company enforceable against the Company in accordance with its terms; |
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| 6. | the Redeemable Warrant Shares have been duly authorized for issuance and, when issued and delivered by the Company upon valid exercise of the Redeemable Warrants and against receipt of the exercise price therefor, in accordance with and in the manner described in the Registration Statement, the Warrant Agent Agreement and Redeemable Warrants, will be validly issued, fully paid and non-assessable; |
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| 7. | the Pre-funded Warrant Shares have been duly authorized for issuance and, when issued and delivered by the Company upon valid exercise of the Pre-funded Warrants and against receipt of the exercise price therefor, in accordance with and in the manner described in the Registration Statement, the Pre-funded Warrant Agent Agreement and Pre-funded Warrants, will be validly issued, fully paid and non-assessable; and |
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| 8. | the Underwriter’s Warrant Shares have been duly authorized for issuance and, when issued and delivered by the Company upon valid exercise of the Underwriter’s Warrant and against receipt of the exercise price therefor, in accordance with and in the manner described in the Registration Statement and the Underwriter’s Warrant, will be validly issued, fully paid and non-assessable. |
The opinions rendered in paragraphs 1, 3, 4, and 5 above are subject to (i) bankruptcy, insolvency, moratorium, fraudulent conveyance, fraudulent transfer and other similar laws affecting the rights and remedies of creditors generally, and (ii) constitutional and public policy limitations and general principles of equity (regardless of whether enforcement may be sought in a proceeding in equity or at law). In addition, we express no opinion as to: the right to collect any payment to the extent that such payment constitutes a penalty, premium, forfeiture or late payment charge; the enforceability of the governing law and forum selection provisions contained in any of the Transaction Documents; waivers of right to trial by jury or defense; or any purported right of indemnification or exculpation with respect to illegal acts, intentional torts, violation of securities laws, negligence or willful misconduct.
The opinions expressed herein are limited exclusively to the applicable provisions of the Delaware General Corporate Law (the “DGCL”) and the law of the State of New York as currently in effect, and we are expressing no opinion as to the effect of the laws of any other jurisdiction.
Infinite Group, Inc.
September 9, 2022
Page 4
This opinion letter has been prepared in accordance with the customary practice of lawyers who regularly give, and lawyers who regularly advise opinion recipients concerning, opinions of the type contained herein.
This opinion letter deals only with the specified legal issues expressly addressed herein, and you should not infer any opinion that is not explicitly addressed herein from any matter stated in this letter.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and the reference to this firm under the caption “Legal Matters” in the prospectus contained in the Registration Statement. In giving such consent, we do not hereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act and the rules and regulations thereunder. This opinion is rendered to you as of the date hereof and we assume no obligation to advise you or any other person hereafter with regard to any change after the date hereof in the circumstances or the law that may bear on the matters set forth herein even though the change may affect the legal analysis or legal conclusion or other matters in this letter.
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| Very truly yours, |
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| /s/ Harter Secrest & Emery LLP |
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statement (No. 333-262167) on Form S-1 of Infinite Group, of our report dated March 15, 2022, except for Note 14 as to which the date is April 1, 2022, relating to the financial statements, of Infinite Group, Inc., appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to our firm under the heading “Experts”.
Rochester, New York
September 9, 2022