INFINITE GROUP INC 10-Q for FY2022 Q3
INFINITE GROUP INC (IMCI)
About this 10-Q
INFINITE GROUP INC filed this 10-Q on November 17, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.71M
- down 6.8% from $1.84M a year earlier
- Net loss
- $1.09M
- compared with a net loss of $269.81K a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM
_________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ |
Commission file number:
_________________________________________
(Exact name of registrant as specified in its charter) |
_________________________________________
| ||
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification Number) |
|
|
|
| ||
(Address of principal executive offices) |
| (Zip Code) |
(
(Registrant’s telephone number, including area code)
_________________________________________
Securities registered pursuant to Section 12(b) of the Act
Title of each class |
| Trading Symbol |
| Name of each exchange on which registered |
N/A |
| N/A |
| N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
|
| 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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The Registrant had
Infinite Group, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2022
Table of Contents
| 2 |
| Table of Contents |
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements.” All statements other than statements of historical facts contained in this report, including among others, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth and trends are forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “targets,” “potential,” “is likely,” “will,” “expect,” “seek” and similar expressions are intended to identify forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Therefore, you should not rely on any of these forward-looking statements. All forward-looking statements in this report are made only as of the date hereof or as indicated and represent our views as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise, except as required by law. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report, our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and our other filings with the Securities and Exchange Commission (the “SEC”). The terms “IGI”, the “Company”, “we”, “our”, “us”, or any derivative thereof, as used herein refer to Infinite Group, Inc., a Delaware corporation.
| 3 |
| Table of Contents |
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INFINITE GROUP, INC.
BALANCE SHEETS
ASSETS |
| |||||||
|
|
|
|
|
| |||
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (Unaudited) |
|
|
|
| ||
| 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 |
|
|
|
|
|
| ||
| 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: |
|
|
|
|
|
|
|
|
| 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.
| 4 |
| Table of Contents |
INFINITE GROUP, INC.
STATEMENTS OF OPERATIONS (Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Gross profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Total costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income (loss) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other Income and Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total interest expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total other income (expense) |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss per share basic and diluted |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average shares outstanding basic |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average shares outstanding diluted |
|
|
|
|
|
|
|
|
|
|
|
| ||||
See notes to unaudited financial statements.
| 5 |
| Table of Contents |
INFINITE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY (Unaudited)
Three and Nine Months Ended September 30, 2022 and 2021
Three and Nine Months Ended September 30, 2022
|
|
|
|
|
| Additional |
|
|
|
|
| |||||||||
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Balance - December 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Warrants issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Net loss |
|
| 0 |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance - March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise of warrants |
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
|
| ||||
| Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Warrants issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Net loss |
|
| 0 |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance - June 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Net loss |
|
| 0 |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance - September 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
Three and Nine Months Ended September 30, 2021
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
| |||||
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Balance - December 31, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Net loss |
|
| 0 |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance - March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Net loss |
|
| 0 |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance - June 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Net loss |
|
| 0 |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance - September 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
See notes to unaudited financial statements.
| 6 |
| Table of Contents |
INFINITE GROUP, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
|
| Nine Months Ended September 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 in accounts receivable allowance |
|
|
|
|
| ( |
| |
| Forgiveness of indebtedness |
|
| ( |
|
|
| ( | ) |
| (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 |
|
|
|
|
|
| ||
| Debt issuance costs |
|
| ( | ) |
|
| |
|
| Proceeds from notes payable - related parties |
|
|
|
|
|
| ||
| Repayment of notes payable - short-term |
|
| ( | ) |
|
|
| |
| Proceeds from the exercise of common stock options |
|
|
|
|
|
| ||
| Repayment of long-term obligations |
|
|
|
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
| Net cash provided by financing activities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Net (decrease) increase in cash |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
| Cash - beginning of period |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Cash - end of period |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
| Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
| Cash payments for interest |
| $ |
|
| $ |
| ||
See notes to unaudited financial statements.
| 7 |
| 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 nine months ended September 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.
At September 30, 2022, the Company is in default on principal and interest payments on the Mast Hill Fund, L.P. and Talos Victory Fund, LLC, financing arrangements. The noteholders have been notified of the failure to pay and have taken no action against the Company at this time.
During the first quarter of 2022, the Company filed an S-1 for a public offering of $
In October 2022, the Company filed an amended S-1 for a public offering of $
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 September 30, 2022 as well as cash available from additional funding from the public and private markets including related party loans, if needed, provide sources to fund its ongoing operations and to support the internal growth of the Company. The Company is evaluating and is in process of extending 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.
| 8 |
| Table of Contents |
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 its remaining notes payable based on its cash flow. Therefore, unless the Company is successful with some of these alternatives, the substantial doubt about our ability to continue as a going concern will not be alleviated.
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 September 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 September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
| 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 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.
| 9 |
| Table of Contents |
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
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 nine months ended September 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 $
| 10 |
| Table of Contents |
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 September 30, 2022, there were $
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 September 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 September 30, 2022, total remaining non-cancelable performance obligations under the Company’s contracts with customers was approximately $
Note 7. Debt Obligations
On November 3, 2021, the Company entered into a financing arrangement (the “First 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 $
During the nine months ended September 30, 2022, the Company entered into a financing arrangement (the “Second Mast Hill Loan”) with Mast Hill Fund. In exchange for a promissory note, Mast Hill agreed to lend the Company $
The Company also 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 $
The Company also 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 August 8, 2022, Company entered into a financing arrangement (the “Celtic Bank Loan Agreement”) with Celtic Bank, a Utah corporation. Pursuant to the Celtic Bank Loan Agreement, Celtic Bank agreed to lend the Company $
| 11 |
| Table of Contents |
On September 6, 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
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”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000.00, 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 $
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.
The following table sets forth the computation of basic and diluted net loss per share for the three and nine months ended:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 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
| 12 |
| Table of Contents |
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 $
11,605 options vested during the nine months ended September 30, 2022.
The Company issued
A summary of all stock option activity for the nine months ended September 30, 2022 follows:
|
| Number of |
|
| Weighted |
|
| Remaining |
| Aggregate |
| |||
|
| Options |
|
| Average |
|
| Contractual |
| Intrinsic |
| |||
|
| Outstanding |
|
| Exercise Price |
|
| Term |
| Value |
| |||
Outstanding at December 31, 2021 |
|
|
|
| $ |
|
|
|
|
|
| |||
Granted |
|
|
|
|
|
|
|
|
|
|
| |||
Exercised |
|
| ( | ) |
|
|
|
|
|
|
|
| ||
Expired |
|
| ( | ) |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Outstanding at September 30, 2022 |
|
|
|
| $ |
|
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2022- vested or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expected to vest |
|
|
|
| $ |
|
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
| $ |
|
|
| $ |
| ||||
Note 10. Warrants
On April 29, 2022, Mast Hill Fund, LP elected to purchase
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 September 30, 2022 and December 31, 2021 is as follows:
| Description |
| Classification |
| September 30, |
|
| December 31, |
| ||
|
|
|
|
|
|
|
|
| ||
| 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 |
|
|
|
| % |
|
| % | ||
| 13 |
| Table of Contents |
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 October 17, 2022, the Board of Directors (the “Board”) of Infinite Group, Inc. (the “Company”) approved a
The Reverse Stock Split was previously approved by the Company’s shareholders at the Company’s January 26, 2022 annual meeting of stockholders and does not affect the total number of shares of Common Stock that the Company is authorized to issue.
The Reverse Stock Split was announced by FINRA (the Financial Industry Regulatory Authority) on October 18, 2022, and becomes effective at the commencement of trading on the Effective Date, whereupon the shares of common stock will begin trading on a split adjusted basis.
As a result of the Reverse Stock Split, every seventy-five (75) shares of the issued and outstanding common stock of the Company will be converted into one (1) share of common stock. Any and all fractional shares resulting from the Reverse Split will be rounded up to the nearest whole share.
All share and per share data in the accompanying financial statements have been retroactively restated to reflect the effect of the reverse stock split.
************
| 14 |
| Table of Contents |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements, the accuracy of which involves risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons including, but not limited to, those discussed under the heading “Forward Looking Statements” above and elsewhere in this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report.
Overview
Impact of COVID-19
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. Please see Part II Item 1A of this Report and our other filings with the SEC for additional information regarding certain risks associated with the COVID-19 pandemic.
During the first six months of 2022, our managed support services and software license revenues were minimally affected by the impact of the COVID-19 pandemic on our customers’ operational priorities. However, the many governmental restrictions that were in place in 2020 and 2021, which limited in-person and group meetings, constrained our ability to interact with new clients in the area of cybersecurity projects, and this has had a material impact on our 2022 cybersecurity project revenue. 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. Our sales and marketing expenses increased during the first six months of 2022. We expect these expenses to continue to grow, but we expect these expenses will be lower compared to prior year periods pre-COVID-19 pandemic on travel and in-person marketing events. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition.
| 15 |
| Table of Contents |
Our Business
Headquartered in Pittsford, New York, IGI 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; |
|
|
|
| · | 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; |
|
|
|
| · | 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 |
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 strategic 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.
| 16 |
| Table of Contents |
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.
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.
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.
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.
| 17 |
| Table of Contents |
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.
Technology and Product Development
Our goal is to position our products and solutions to enable vertical and other Application Programming Interface (API) based integration, with other industry solutions. We have a technology and product development strategy aligned with our business strategy. We continue to identify other technical partners in the cybersecurity market to integrate Nodeware into, through either API or full stack integration.
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.
| 18 |
| Table of Contents |
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2022 and 2021
The following table compares our statements of operations data for the three and nine months ended September 30, 2022 and 2021. The trends suggested by this table are not indicative of future operating results.
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| 2022 vs 2021 |
|
|
| |||||||||||
|
|
|
| As a % of |
|
|
|
| As a % of |
|
| Amount of |
|
| % Increase |
| ||||||||
|
| 2022 |
|
| Sales |
|
| 2021 |
|
| Sales |
|
| Change |
|
| (Decrease) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Sales |
| $ | 1,712,212 |
|
|
| 100.0 | % |
| $ | 1,836,740 |
|
|
| 100.0 | % |
| $ | (124,528 | ) |
|
| (6.8 | )% |
Cost of sales |
|
| 1,060,872 |
|
|
| 62.0 |
|
|
| 1,136,931 |
|
|
| 61.9 |
|
|
| (76,059 | ) |
|
| (6.7 | ) |
Gross profit |
|
| 651,340 |
|
|
| 38.0 |
|
|
| 699,809 |
|
|
| 38.1 | % |
|
| (48,469 | ) |
|
| (6.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
| 529,695 |
|
|
| 30.9 |
|
|
| 528,424 |
|
|
| 28.8 |
|
|
| 1,271 |
|
|
| 0.2 |
|
Selling |
|
| 713,173 |
|
|
| 41.7 |
|
|
| 502,389 |
|
|
| 27.4 |
|
|
| 210,784 |
|
|
| 42.0 |
|
Total cost and expenses |
|
| 1,242,868 |
|
|
| 72.6 |
|
|
| 1,030,813 |
|
|
| 56.1 |
|
|
| 212,055 |
|
|
| 20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
| (591,528 | ) |
|
| (34.5 | ) |
|
| (331,004 | ) |
|
| (18.0 | ) |
|
| (260,524 | ) |
|
| (78.7 | ) |
Other income |
|
| - |
|
|
| - |
|
|
| 120,505 |
|
|
| 6.6 |
|
|
| (120,505 | ) |
|
| 100.0 |
|
Interest expense (net) |
|
| (495,764 | ) |
|
| (29.0 | ) |
|
| (59,307 | ) |
|
| (3.2 | ) |
|
| (436,457 | ) |
|
| (735.9 | ) |
Net loss |
| $ | (1,087,292 | ) |
|
| (63.5 | )% |
| $ | (269,806 | ) |
|
| (14.7 | )% |
| $ | (817,486 | ) |
|
| (303.0 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted |
| $ | (2.41 | ) |
|
|
|
|
| $ | (0.67 | ) |
|
|
|
|
| $ | (1.74 | ) |
|
|
|
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2022 vs 2021 |
|
|
|
| ||||||
|
|
|
|
| As a % of |
|
|
|
|
| As a % of |
|
| Amount of |
|
| % Increase |
| ||||||
|
| 2022 |
|
| Sales |
|
| 2021 |
|
| Sales |
|
| Change |
|
| (Decrease) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Sales |
| $ | 5,075,774 |
|
|
| 100.0 | % |
| $ | 5,458,586 |
|
|
| 100.0 | % |
| $ | (382,812 | ) |
|
| (7.0 | )% |
Cost of sales |
|
| 3,241,751 |
|
|
| 63.9 |
|
|
| 3,319,069 |
|
|
| 60.8 |
|
|
| (77,318 | ) |
|
| (2.3 | ) |
Gross profit |
|
| 1,834,023 |
|
|
| 36.1 |
|
|
| 2,139,517 |
|
|
| 39.2 | % |
|
| (305,494 | ) |
|
| (14.3 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
| 1,746,995 |
|
|
| 34.4 |
|
|
| 1,534,527 |
|
|
| 28.1 |
|
|
| 212,468 |
|
|
| 13.8 |
|
Selling |
|
| 1,973,755 |
|
|
| 38.9 |
|
|
| 1,397,156 |
|
|
| 25.6 |
|
|
| 576,599 |
|
|
| 41.3 |
|
Total cost and expenses |
|
| 3,720,750 |
|
|
| 73.3 |
|
|
| 2,931,683 |
|
|
| 53.7 |
|
|
| 789,067 |
|
|
| 26.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
| (1,886,727 | ) |
|
| (37.2 | ) |
|
| (792,166 | ) |
|
| (14.5 | ) |
|
| (1,094,561 | ) |
|
| (138.2 | ) |
Other income |
|
| - |
|
|
| - |
|
|
| 120,505 |
|
|
| 2.2 |
|
|
| (120,505 | ) |
|
| 100.0 |
|
Interest expense (net) |
|
| (901,998 | ) |
|
| (17.8 | ) |
|
| (166,875 | ) |
|
| (3.1 | ) |
|
| (735,123 | ) |
|
| (440.5 | ) |
Net loss |
| $ | (2,788,725 | ) |
|
| (54.9 | )% |
| $ | (838,536 | ) |
|
| (15.4 | )% |
| $ | (1,950,189 | ) |
|
| (232.6 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted |
| $ | (6.28 | ) |
|
|
|
|
| $ | (2.14 | ) |
|
|
|
|
| $ | (4.17 | ) |
|
|
|
|
| 19 |
| Table of Contents |
Sales
Our managed support service sales increased by 2.1% from $1,114,851 during the three months ended September 30, 2021 to $1,138,418 during the corresponding period of 2022. For the nine month period ended September 30, managed support service sales increased 3.1% from $3,243,183 in 2021 to $3,343,032 for the same period in 2022. Managed support service sales comprised approximately 66% of our sales in both the three and nine months ended September 30, 2022, and approximately 61% for the three months ended September 30, 2021, and 59% for the nine months ended September 30, 2021. The increase in our managed support service sales during the three and nine months ended September 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.
Our cybersecurity projects and software sales, primarily to SMEs, decreased by 18.5% to $573,794 during the three months ended September 30, 2022, from $704,889 during the corresponding period in 2021. These same sales decreased by 17.3% to $1,732,742 during the nine months ended September 30, 2022, from $2,096,403 for the nine month period ended September 30, 2021, respectively. The decrease in cybersecurity projects and software sales during the three and nine months ended September 30, 2022 was attributable to the timing of the completion of projects for revenue recognition. We expect the revenue to grow due to increased projects in the sales pipeline, completion of projects in the coming months, and increased orders for Nodeware.
Other IT consulting services sales declined during the three months ended September 30, 2022, decreasing by $17,000 from the same period in 2021. These same sales declined during the nine months ended September 30, 2022 by $119,000 from the same period in 2021. The decline in other IT consulting services sales for the three and nine months ended September 30, 2022 was due to the termination of a consulting contract, which occurred during the second quarter of 2021.
Cost of Sales and Gross Profit
Cost of sales principally represents compensation expense for our employees. Cost of sales decreased by 6.7% to $1,060,872 during the three months ended September 30, 2022 from $1,136,772 during the corresponding period of 2021. The decrease in cost of sales during the three months ended September 30, 2022 from 2021 was due to a reduction in headcount of marketing and sales personnel. Cost of sales decreased during the nine months ended September 30, 2022 from the same period in 2021, by 2.3%, decreasing from $3,318,989 to $3,241,751.
Our gross profit decreased by $48,468 to $651,341 from the three months ended September 30, 2021 to 2022. Gross profit decreased by $305,494 to $1,834,023 from the nine months ended September 30, 2021 to 2022. In both periods, the decrease was primarily due to the decrease in sales previously referenced above.
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 $529,695 for the three months ended September 30, 2022 increased slightly from $528,424 for the same quarter of 2021. During the comparative three month periods, there was an increase in legal and accounting expenses including other public company related fees, of $70,000. Rental and lease expenses also increased $21,000. These were offset in part by decreases in consulting fees of $39,000, corporate marketing expenses of $13,000, and salary expense reductions of $45,000 resultant from the transfer of certain personnel from the administrative group to the sales group. The balance of the changes were minor and distributed across multiple expense categories.
For the nine months ended September 30, 2022, general and administrative costs were 13.8% higher than the same period in 2021, increasing to $1,746,995 from $1,534,527. These were primarily due to an increase in legal and accounting expenses including other public company related fees, of $363,000. Rental and lease expenses also increased $42,000. These were offset in part by decreases in consulting fees of $65,000, a decrease in corporate marketing expenses of $41,000, and salary expense reductions of $80,000 resultant from the transfer of certain personnel from the administrative group to the sales group. The balance of the changes were minor and distributed across multiple expense categories.
Selling Expenses
Selling expenses of $713,173 for the three months ended September 30, 2022 increased 42% from $502,389 for the same quarter of 2021. The hiring of new personnel contributed approximately $32,000 to the quarter over quarter increase, while increased marketing expenses were $90,000, and stock option expenses of approximately $91,000 were recognized in the third quarter of 2022. For the nine months ended September 30, 2022, Selling expenses of $1,973,755 increased 41% from $1,397,156 for the same period in 2021. This increase is primarily related to the hiring of additional salespeople during 2021 which resulted in an increase over the prior year of approximately $281,000. In addition, marketing expenses were up by $184,000 over the same nine months in 2021, and recognition of stock option expenses were up by approximately $106,000 over the prior year. The balance of the changes were minor and distributed across multiple expense categories.
Operating Income (Loss)
For the three months ended September 30, 2022 and 2021, operating loss was $591,528 and $331,004, respectively, for an increase in the loss by $260,524. For the nine months ended September 30, 2022, the operating loss was $1,886,727, an increase in the loss by $1,094,561 from $792,166 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 nine months ended September 30, 2022 as compared to 2021, as discussed above.
| 20 |
| Table of Contents |
Interest Expense
Net interest expense of $495,764 for the three months ended September 30, 2022, increased 736% from expense of $59,307 for the same quarter of 2021. Net interest expense of $901,998 for the nine months ended September 30, 2022, increased 441% from expense of $166,875 for the same period of 2021. The increase in interest expense is primarily attributable to the bridge loans taken in the last four quarters. The net interest expense for the three months ended September 30, 2022 included additional interest due to the default on the four bridge loans. The amount of this additional interest was approximately $205,000.
Net Loss
For the three months ended September 30, 2022 and 2021, net loss was $1,087,292 and $269,806, respectively, an increase in the loss by $817,486. For the nine months ended September 30, 2022 and 2021, net loss was $2,788,725 and $838,536, respectively. The increase is in both comparable periods is attributable primarily to the selling, general and administrative, and interest items discussed above.
Liquidity and Capital Resources
At September 30, 2022, we had cash of $6,584. At September 30, 2022, we had a working capital deficit of approximately $5,460,000 and a current ratio of 0.12.
During 2022, our primary source of liquidity is cash provided by collections of accounts receivable, bridge loans 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 September 30, 2022, based on eligible accounts receivable, we had $0 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 September 30, 2022, we had current notes payable of $229,000 to related parties. $100,000 of this debt is due on January 1, 2023. The remaining $129,000 are in the form of demand notes with an interest rate of 6%.
At September 30, 2022, we had current notes payable of approximately $1,248,000 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 September 30, 2022, the unamortized balance of the deferred notes costs was approximately $221,000. 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 September 30, 2022 was approximately $963,000. Currently, we are in default on principal and interest payments on these loans for a total of approximately $381,000 at September 30, 2022. The noteholder has taken no action against the Company at this time.
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 September 30, 2022, the unamortized balance of the deferred note cost was approximately $69,000. See our Form 8-K from April 12, 2022, for more information regarding this loan. The gross note payable to Talos amount at September 30, 2022 was approximately $296,000. Currently, we are in default on principal and interest payments on this loan of approximately $71,000 at September 30, 2022. The noteholder has taken no action against the Company at this time.
Notes payable also includes a loan from Celtic Bank, with an initial obligation amount of $150,552. This includes funds received of $139,400 plus a fixed one-time loan fee of $11,152. See our Form 8-K from August 8, 2022, for more information regarding this loan. As of September 30, 2022, the gross note payable to Celtic Bank was approximately $124,000.
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 $75,000 through January 2, 2023 and $100,000 through July 31, 2022. At September 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 September 30, 2022.
| 21 |
| Table of Contents |
At September 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 $240,700), and approximately $500,000 due on December 31, 2021 which have not been renewed or amended.
At September 30, 2022, we had $295,000 of current maturities of long-term obligations to related parties. $200,000 is due on January 1, 2023. $70,000 is due on January 2, 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 September 30, 2022.
The following table sets forth our cash flow information for the periods presented:
|
| Nine Months Ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net cash used by operating activities |
| $ | (699,104 | ) |
| $ | (84,256 | ) |
Net cash used by investing activities |
|
| (166,405 | ) |
|
| (192,811 | ) |
Net cash provided by financing activities |
|
| 772,661 |
|
|
| 300,830 |
|
Net increase (decrease) in cash |
| $ | (92,848 | ) |
| $ | 23,763 |
|
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 $2,788,725 for the nine months ended September 30, 2022, was offset in part by non-cash expenses and credits of $780,544. In addition, the cash impact of our net loss was further offset by a decrease in accounts receivable and other assets of $174,611. Combined with increases in accrued payroll, deferred revenue and other expenses payable, for a total of $377,460, and an increase in accounts payable of $757,007, resulted in cash used by operating activities of $699,103.
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, as needed.
Cash Flows Used by Investing Activities
In the quarters ended September 30, 2022 and 2021, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The decrease of $26,405 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
On August 8, 2022, the Company entered into a loan agreement with Celtic Bank. We received $139,400 from this loan, which is comprised of a gross obligation of $150,552, less one-time fees of $11,152. Through September 30, 2022, we have paid $26,285 against the obligation.
During the nine months ended September 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 approximately 210,000 on the Mast Hill Fund L.P. bridge loan established in November 2021.
| 22 |
| Table of Contents |
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 September 30, 2022, we had financing availability, based on eligible accounts receivable, of approximately $0 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 September 30, 2022.
During May 2019, we originated a line of credit note payable for $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 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.
We plan to evaluate alternatives which may include renegotiating the terms of our notes, seeking conversion of the notes to shares of common stock and seeking funds to repay our notes. We continue to evaluate repayment of our notes payable based on our cash flow. Therefore, there is currently substantial doubt about our ability to continue as a going concern.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 23 |
| Table of Contents |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on us or our business.
Item 1A. Risk Factors
As of the date of this Report, other than as set forth below, there have been no material changes with respect to those risk factors previously disclosed in our (i) Registration Statement on Form S-1 initially filed with the SEC on January 14, 2022, as amended (File No. 333-262167) (the "Registration Statement"), (ii) Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022, and (iii) Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2022, and June 30, 2022, as filed with the SEC on May 16, 2022, August 15, 2022, respectively. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risks could arise that may also affect our results of operations or financial condition. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.
Although our unaudited financial statements have been prepared on a going concern basis, our management believes that our recurring losses and negative cash flows from operations and other factors have raised substantial doubt about our ability to continue as a going concern as of September 30, 2022.
As of September 30, 2022, we had a working capital deficit of $5,464,828 and a stockholders' deficiency of $6,367,284. We reported a net loss of approximately $2,789,000 for the nine months ended September 30, 2022. These factors raise substantial doubt about our ability to continue as a going concern.
Our unaudited financial statements for the three and nine months ended September 30, 2022 were prepared on a going concern basis in accordance with generally accepted accounting principles in the United States. The going concern basis assumes that we will continue in operation for the next 12 months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. Thus, our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Our recurring losses, negative cash flow, need for additional capital, and the uncertainties surrounding our ability to raise such capital raise substantial doubt about our ability to continue as a going concern. For us to continue operations beyond the next 12 months and be able to discharge our liabilities and commitments in the normal course of business, we must establish profitable operations through increased sales, decrease expenses, generate cash from operations or raise additional funds when needed. We intend to improve our financial condition and ultimately improve our financial results by increasing revenues through expanding sales and reducing expenses. If we are unable to raise additional capital, increase sales or reduce expenses, we will be unable to continue to fund our operations, develop our products, realize value from our assets, and discharge our liabilities in the normal course of business. If we become unable to continue as a going concern, we could have to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financial statements, and stockholders could lose all or part of their investment in our common stock.
We will need to raise additional capital and if we are able to raise additional capital in the future, our shareholders could be diluted or securities we issue may have rights senior to the rights of a holder of common stock. If we fail to raise additional capital, it would materially and adversely affect our ability to continue to fund our operations and pursue our business plan.
As of September 30, 2022, we had approximately $6,600 in unrestricted cash and cash equivalents, which may not be sufficient to fund the Company's planned operations through one year after the date the unaudited financial statements are issued. We will need to raise additional capital in the short- and long-term in order to fund our operations and execute on our business strategy. Any potential financing may include common stock, preferred shares, warrants to purchase common stock or preferred shares, debt securities, convertible securities, rights to purchase the foregoing securities, equity investments from strategic partners, or some combination of the foregoing. Any issuance of equity we may undertake in the future to raise additional capital could cause the price of our common stock to decline, or require us to issue shares at a price that is lower than that paid by holders of our common stock in the past, which would result in those newly issued shares being dilutive, and such dilution could be significant. If we obtain funds through a credit facility or through the issuance of debt or preferred securities, these securities would likely have rights senior to the rights of a common stockholder, which could impair the value of our common stock.
| 24 |
| Table of Contents |
Due to our history of recurring losses from operations, negative cash flows from operations, and a significant accumulated deficit, our management concluded that there is substantial doubt about our ability to continue as a going concern. This determination could further materially limit our ability to raise additional funds. There can be no assurance that we will become profitable or be able to continue as a going concern. Further, we cannot assure that any additional financing, whether from the issuance of equity securities, debt or convertible debt financing, or other means of financing, will be available on a timely basis, in the amounts needed, on reasonable terms, on terms acceptable to us, or at all. If we fail to raise additional capital, it would materially and adversely affect our ability to continue to fund our operations and pursue our business plan, and may even lead to a bankruptcy filing and/or reorganization of our business and capital structure.
We are in default in payment of approximately $1.5 million in principal and interest payments due under the terms of unsecured bridge loans issued to the Company at various times during the past year.
Currently, we are in default on principal and interest payments with 2 different noteholders. The noteholders have been notified of the failure to pay and have taken no action against the Company at this time. There can be no assurances that these noteholders and other noteholders will not take any action against the Company. The noteholders may, in their sole discretion, determine to accept payment part in Common Stock and part in cash. Any action by these noteholders could have a material adverse effect on our liquidity, financial condition and results of operations, and could cause us to become bankrupt or insolvent. Since all of our assets are subject to liquidation by the creditors, liquidation could result in no assets being left for the shareholders after the creditors receive their required payment. As such, any failure to secure a resolution or an acceleration of our indebtedness will restrict our ability to operate as a going concern.
The COVID-19 pandemic could have a material adverse effect on our results of operations, financial position, and cash flows.
The COVID-19 pandemic has created significant uncertainty and economic disruption. 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. The primary effect of the shutdowns of conventions and conferences due to the COVID-19 pandemic has been the limitations on the Company’s ability to grow sales as fast as was originally anticipated. This has alleviated during 2022.
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and the Form S-1/A filed with the Securities and Exchange Commission on November 1, 2022 for comprehensive listings of the Company’s other risk factors. Except as set forth above, there are no material changes for the nine months ended September 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended September 30, 2022, a non-executive exercised stock options of the Company. The issuance was for 334 shares at a price of $3.00.
During the three months ended September 30, 2022, Andrew Hoyen, President, exercised stock options for common stock of the Company. The issuance was for 5,334 shares at a price of $3.00, for a total of $16,000.
The securities described above were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), as set forth in Section 4(a)(2) of the Securities Act relative to transactions by an issuer not involving any public offering, to the extent an exemption from registration was required. The recipients of the securities described in the transactions 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.
| 25 |
| Table of Contents |
Item 3. Defaults Upon Senior Securities.
The Company is in default on convertible notes to third parties of $150,000 due on December 31, 2016. The accrued interest on these notes was approximately $116,000 at September 30, 2022.
The Company is in default on long-term notes to third parties of $265,000 due on January 1, 2018. The accrued interest on these notes was approximately $241,000 at September 30, 2022.
The Company is in default on long-term notes to third parties of $500,000 due on December 31, 2021. The accrued interest on these notes was approximately $82,000 at September 30, 2022.
The Company is in default on payments due under a promissory note entered into with Mast Hill Fund, L.P., defined above as the First Mast Hill Loan, of $161,280 due September 3, 2022. The total principal and accrued interest, including default interest, on the promissory note was approximately $302,000 at September 30, 2022. See Note 7 for further disclosure regarding the First Mast Hill Loan.
The Company is in default on payments due under a promissory note entered into with Mast Hill Fund, L.P., defined above as the Second Mast Hill Loan, of $177,600 due as of September 15, 2022. The total principal and accrued interest, including default interest, on the promissory notes was approximately $450,000 at September 30, 2022. See Note 7 for further disclosure regarding the Second Mast Hill Loan.
The Company is in default on payments due under a promissory note entered into with Mast Hill Fund, L.P., defined above as the Third Mast Hill Loan, of $42,600 due as of September 27, 2022. The total principal and accrued interest, including default interest, on the promissory notes was approximately $419,000 at September 30, 2022. See Note 7 for further disclosure regarding the Third Mast Hill Loan.
The Company is in default on payments due under a promissory note entered into with Talos Victory Fund, LLC, defined above as the Talos Loan, of $71,040 due as of September 12, 2022. The total principal and accrued interest, including default interest, on the promissory notes was approximately $354,000 at September 30, 2022. See Note 7 for further disclosure regarding the Talos Loan.
Item 6. Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K.
For the exhibits that are filed herewith or incorporated herein by reference, see the Index to Exhibits located below in this report. The Index to Exhibits is incorporated herein by reference.
| 26 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Infinite Group, Inc. | |||
| (Registrant) |
| |
| Date: November 17, 2022 | /s/ James Villa | ||
|
| James Villa | |
| Chief Executive Officer | |||
| (Principal Executive Officer) |
| Date: November 17, 2022 | /s/ Richard Glickman | ||
|
| Richard Glickman | |
| VP Finance and Chief Accounting Officer | |||
| (Principal Financial Officer and Principal Accounting Officer) |
| 27 |
| Table of Contents |
INDEX TO EXHIBITS
Exhibit No. |
| Description |
|
|
|
| ||
| ||
| ||
| ||
| Chief Executive Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. * | |
| ||
| Chief Executive Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. * | |
| ||
101.INS |
| XBRL Instance Document.* |
101.SCH |
| XBRL Taxonomy Extension Schema Document.* |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document.* |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document.* |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document.* |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document.* |
* Filed as an exhibit hereto.
| 28 |
EXHIBIT 31.1
CERTIFICATION
I, James Villa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Infinite Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
|
|
|
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 17, 2022
|
| /s/ James Villa |
|
|
| James Villa |
|
|
| Chief Executive Officer |
|
|
| (Principal Executive Officer) |
|
EXHIBIT 31.2
CERTIFICATION
I, Richard Glickman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Infinite Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
|
|
|
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 17, 2022
|
| /s/ Richard Glickman |
|
|
| Richard Glickman |
|
|
| VP Finance and Chief Accounting Officer |
|
|
| (Principal Financial Officer and Principal Accounting Officer) |
|
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Infinite Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2022 as filed with the Securities and Exchange Commission (“SEC”) on the date hereof (the "Report"), I, James Villa, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.
Dated: November 17, 2022
| /s/ James Villa |
|
| James Villa |
|
| Chief Executive Officer |
|
| (Principal Executive Officer) |
|
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Infinite Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2022 as filed with the Securities and Exchange Commission (“SEC”) on the date hereof (the "Report"), I, Richard Glickman, VP Finance and Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.
Dated: November 17, 2022
| /s/ Richard Glickman |
|
| Richard Glickman |
|
| VP Finance and Chief Accounting Officer |
|
| (Principal Financial Officer and Principal Accounting Officer) |
|