Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_________________________________________
FORM 10-Q
_________________________________________
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
for
the quarterly period ended June 30, 2017
Commission file number: 0-21816
_________________________________________
INFINITE GROUP, INC.
(Exact
name of registrant as specified in its charter)
_________________________________________
175
Sully’s Trail, Suite 202
Pittsford,
New York 14534
(585)
385-0610
A
Delaware Corporation
IRS Employer Identification Number: 52-1490422
_________________________________________
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes ☒
No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒
No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large
Accelerated filer ☐
Non-accelerated
filer ☐
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Accelerated
filer ☐
Smaller
reporting company ☒
Emerging growth
company ☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐
No ☒
Indicate the number
of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date. There were 29,061,883
shares of the issuer’s common stock, par value $.001 per
share, outstanding as of August 11, 2017.
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Infinite
Group, Inc.
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Quarterly
Report on Form 10-Q
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For the
Period Ended June 30, 2017
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Table
of Contents
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PART I
- FINANCIAL INFORMATION
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PAGE
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Item 1.
Financial Statements
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Balance
Sheets – June 30, 2017 (Unaudited) and December 31,
2016
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3
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Statements
of Operations (Unaudited) for the three and six months ended June
30, 2017 and 2016
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4
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Statements
of Cash Flows (Unaudited) for the three and six months ended June
30, 2017 and 2016
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5
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Notes
to Financial Statements – (Unaudited)
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6
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Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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9
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Item 3.
Quantitative and Qualitative Disclosures About Market
Risk
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12
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Item 4.
Controls and Procedures
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12
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PART II
- OTHER INFORMATION
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Item 6.
Exhibits
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12
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SIGNATURES
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13
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INDEX
TO EXHIBITS
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13
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FORWARD-LOOKING STATEMENTS
Certain
statements made in this Quarterly Report on Form 10-Q are
“forward-looking statements” regarding the plans and
objectives of management for future operations and market trends
and expectations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by
such forward-looking statements. The forward-looking statements
included herein are based on current expectations that involve
numerous risks and uncertainties. Our plans and objectives are
based, in part, on assumptions involving the expansion of our
business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive
and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which
are beyond our control. Although we believe that our assumptions
underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, there can be
no assurance that the forward-looking statements included in this
report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as
a representation by us or any other person that our objectives and
plans will be achieved. We undertake no obligation to revise or
update publicly any forward-looking statements for any reason. See
“Risk Factors” in our annual report on Form 10-K for
the fiscal year ended December 31, 2016, filed with the Securities
and Exchange Commission (“SEC”), for a more detailed
discussion of uncertainties and risks that may have an impact on
future results. The terms “we”, “our”,
“us”, or any derivative thereof, as used herein refer
to Infinite Group, Inc., a Delaware corporation.
PART
I
FINANCIAL INFORMATION
Item 1. Financial Statements
INFINITE
GROUP, INC.
BALANCE
SHEETS
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Current
assets:
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Cash
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$5,967
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$42,436
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Accounts
receivable, net of allowances of $50,000-2017;
$70,000-2016
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656,717
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243,477
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Prepaid expenses
and other current assets
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17,765
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16,076
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Total current
assets
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680,449
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301,989
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Property
and equipment, net
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24,714
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26,079
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Software,
net
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52,500
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105,000
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Deposits
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8,985
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8,985
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Total
assets
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$766,648
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$442,053
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LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
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Current
liabilities:
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Accounts
payable
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$955,688
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$346,701
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Accrued
payroll
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246,807
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219,454
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Accrued interest
payable
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718,954
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671,437
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Accrued
retirement
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230,258
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225,720
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Accrued expenses -
other
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65,050
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81,754
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Current maturities
of long-term obligations
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1,080,999
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836,999
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Notes
payable
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362,500
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368,279
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Notes payable -
related parties
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54,000
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0
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Total current
liabilities
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3,714,256
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2,750,344
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Long-term
obligations:
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Notes
payable:
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Other
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909,503
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1,150,225
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Related
parties
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515,977
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534,326
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Total
liabilities
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5,139,736
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4,434,895
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Commitments
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Stockholders'
deficiency:
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Common stock, $.001
par value, 60,000,000 shares authorized; 29,061,883 shares issued
and outstanding
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29,061
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29,061
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Additional paid-in
capital
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30,572,523
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30,562,618
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Accumulated
deficit
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(34,974,672)
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(34,584,521)
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Total
stockholders’ deficiency
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(4,373,088)
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(3,992,842)
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Total liabilities
and stockholders’ deficiency
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$766,648
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$442,053
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See
notes to unaudited financial statements.
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INFINITE
GROUP, INC.
STATEMENTS
OF OPERATIONS (Unaudited)
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Three
Months Ended June 30,
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Six
Months Ended June 30,
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Sales
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$1,566,128
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$1,799,489
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$3,213,156
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$3,663,251
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Cost of
sales
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1,093,703
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1,305,046
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2,262,234
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2,689,645
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Gross
profit
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472,425
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494,443
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950,922
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973,606
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Costs
and expenses:
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General and
administrative
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280,152
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290,750
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576,956
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650,630
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Selling
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326,693
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194,162
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643,747
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416,643
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Total costs and
expenses
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606,845
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484,912
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1,220,703
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1,067,273
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Operating
(loss) income
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(134,420)
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9,531
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(269,781)
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(93,667)
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Interest
expense:
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Related
parties
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(12,331)
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(14,234)
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(25,380)
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(28,672)
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Other
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(48,249)
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(49,019)
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(94,990)
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(97,388)
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Total interest
expense
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(60,580)
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(63,253)
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(120,370)
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(126,060)
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Net
loss
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$(195,000)
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$(53,722)
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$(390,151)
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$(219,727)
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Net
loss per share – basic and diluted
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$(.01)
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$.00
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$(.01)
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$(.01)
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Weighted
average shares outstanding – basic and diluted
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29,061,883
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28,732,213
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29,061,883
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27,653,043
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See notes to unaudited financial statements.
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INFINITE
GROUP, INC.
STATEMENTS
OF CASH FLOWS (Unaudited)
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Six
Months Ended June 30,
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Cash
flows from operating activities:
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Net
loss
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$(390,151)
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$(219,727)
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Adjustments to
reconcile net loss to net cash
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used by
operating activities:
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Stock based
compensation
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9,905
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7,937
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Depreciation and
amortization
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71,412
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39,916
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Reduction of
accounts receivable allowances
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(20,000)
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0
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(Increase) decrease
in assets:
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Accounts
receivable
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(393,240)
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(24,782)
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Prepaid expenses
and other assets
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(1,689)
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3,335
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Increase (decrease)
in liabilities:
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Accounts
payable
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608,987
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(8,849)
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Accrued
expenses
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58,166
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91,691
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Accrued
retirement
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4,538
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4,360
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Net
cash used by operating activities
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(52,072)
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(106,119)
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Cash
flows from investing activities:
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Purchases of
property and equipment
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(5,608)
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(4,073)
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Net
cash used by investing activities
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(5,608)
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(4,073)
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Cash
flows from financing activities:
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Proceeds from notes
payable - related parties
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29,000
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0
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Proceeds from notes
payable - other
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0
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200,000
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Repayments of notes
payable - related parties
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(2,010)
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(24,903)
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Repayments of notes
payable - other
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(5,779)
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(25,000)
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Net
cash provided by financing activities
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21,211
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150,097
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Net
(decrease) increase in cash
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(36,469)
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39,905
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Cash - beginning of
period
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42,436
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13,510
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Cash
- end of period
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$5,967
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$53,415
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Supplemental
Disclosures of Cash Flow Information:
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Cash payments for
interest
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$56,425
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$69,944
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See
notes to unaudited financial statements.
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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 of 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, 2016 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, 2016 filed with the U.S. Securities and Exchange
Commission ("SEC"). Results of operations for the three and six
months ended June 30, 2017 are not necessarily indicative of the
operating results that may be expected for the year ending December
31, 2017.
Note 2. Management Plans - Capital Resources
The
Company reported net losses of $390,151 and $219,727 for the six
months ended June 30, 2017 and 2016, respectively, and
stockholders’ deficiencies of $4,373,088 and $3,992,842 at
June 30, 2017 and December 31, 2016, respectively. Accordingly,
there is substantial doubt about the Company’s ability to
continue as a going concern.
Continue to Improve Operations and Capital Resources
The
Company's goal is to increase sales and generate cash flow from
operations on a consistent basis. The Company uses a formal
financial review and budgeting process as a tool for improvement
that has aided expense reduction and internal performance. The
Company’s business plans require improving the results of its
operations in future periods.
During
June 2017, the Company raised $29,000 of additional working capital
from related parties. In July 2017, the Company completed a
financing with an officer of the Company to provide up to $100,000
of additional working capital. In consideration for providing the
financing, the Company granted the officer a stock option for
400,000 shares of its common stock exercisable at $.04 per share,
which was the closing price of the Company’s common stock on
the grant date.
On
September 30, 2016, the Company extended the scheduled maturity of
its $400,000 unsecured line of credit financing agreement (the
“LOC Agreement”) with a member of its board of
directors (“Board”) from December 31, 2017 to January
1, 2020. The Company also extended the maturity dates of notes
payable of $146,300 and $264,000 from January 1, 2017 to January 1,
2020.
In
August 2016, the Company amended its financing agreement with its
financial institution resulting in a reduction of its financing
rate and an increase in its advance rate. See Note 5. Sale of Certain Accounts
Receivable.
The
Company believes the capital resources available under its
factoring line of credit, cash from additional related party and
third party loans and cash generated by improving the results of
its operations provide sources to fund its ongoing operations and
to support the internal growth of the Company. Although the Company
has no assurances, the Company believes that related parties, who
have previously provided working capital, and third parties will
continue to provide working capital loans on similar terms, as in
the past, as may be necessary to fund its on-going operations for
at least the next 12 months. If the Company experiences significant
growth in its sales, the Company believes that this may require it
to increase its financing line, finance additional accounts
receivable, or obtain additional working capital from other sources
to support its sales growth.
Note
3. Summary of Significant Accounting Policies
There
are several accounting policies that the Company believes are
significant to the presentation of its financial statements. These
policies require management to make complex or subjective judgments
about matters that are inherently uncertain. Note 3 to the
Company’s audited financial statements for the year ended
December 31, 2016 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 - The Company reclassifies amounts in its
financial statements to comply with recently adopted accounting
pronouncements.
Fair Value of Financial Instruments - The carrying amounts
reported in the balance sheets for cash, accounts receivable,
accounts payable, and accrued expenses approximate fair value
because of the immediate short-term maturity of these financial
instruments. The carrying value of notes payable and convertible
notes payable approximates the fair value based on rates currently
available from financial institutions and various
lenders.
Recent Accounting Pronouncements Not Yet Adopted - In May
2014, the FASB issued Accounting Standards Update (ASU) No.
2014-09, Revenue from Contracts with Customers (Topic 606) which
provides new accounting guidance on revenue from contracts
with customers. The guidance requires an entity to recognize the
amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. The updated
guidance will replace most existing revenue recognition guidance in
U.S. GAAP when it becomes effective. This guidance is effective for
fiscal years and interim periods within those fiscal years
beginning after December 15, 2017 and will be required to be
applied retrospectively. Additional ASUs have been issued to amend
or clarify this ASU as follows:
●
ASU
No. 2016-12 “Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients” was
issued in May 2016. ASU No. 2016-12 amends the new revenue
recognition standard to clarify the guidance on assessing
collectability, presenting sales taxes, measuring noncash
consideration, and certain transition matters.
●
ASU
No. 2016-10 “Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing” was
issued in April 2016. ASU No. 2016-10 addresses implementation
issues identified by the FASB-International Accounting Standards
Board Joint Transition Resource Group for Revenue
Recognition.
●
ASU
No. 2016-08 “Revenue from Contracts with Customers (Topic
606) - Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)” was issued in March
2016. ASU No. 2016-08 requires an entity to
determine whether the nature of its promise to provide goods or
services to a customer is performed in a principal or agent
capacity and to recognize revenue in a gross or net manner based on
its principal/agent designation.
The
Company does not believe this guidance will have a material effect
on the Company’s financial statements when
adopted.
In
February 2016, the FASB issued amended guidance for lease
arrangements to increase transparency and comparability by
providing additional information to users of financial statements
regarding an entity's leasing activities. The revised guidance
seeks to achieve this objective by requiring reporting entities to
recognize lease assets and lease liabilities on the balance sheet
for substantially all lease arrangements. The guidance, which is
required to be adopted in the first quarter of 2019, will be
applied on a modified retrospective basis beginning with the
earliest period presented. Early adoption is permitted. The Company
is evaluating the effect that this standard will have on its
financial statements and related disclosures.
Note 4. Sales and Cost of Sales
The
Company designates certain sales of third party software and
project credits as agent sales where the Company does not have the
performance obligation to deliver the software or credits to the
end user. Accordingly, cost of sales is recorded as a reduction of
sales and only the gross profit is included in sales in the
accompanying statements of operations. For the three and six months
ended June 30, 2017, the Company designated agent sales of
$634,278. The related accounts receivables and accounts payable are
recorded on a gross basis in the accompanying balance sheet at June
30, 2017.
Note 5. 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.
Through
August 28, 2016, the retained amount was equal to 15% of the total
accounts receivable invoice sold to the Purchaser. The fee was
charged at prime plus 4% against the average daily outstanding
balance of funds advanced. On August 29, 2016, the Company amended
its financing agreement with the Purchaser. The retained amount was
revised to 10% of the total accounts receivable invoice sold to the
Purchaser. The fee is charged at prime plus 3.6% (effective rate of
7.85% at June 30, 2017) against the average daily outstanding
balance of funds advanced. The estimated future loss reserve for
each receivable included in the estimated value of the retained
asset is based on the payment history of the accounts receivable
customer and is included in the allowance for doubtful accounts, if
any. As collateral, the Company granted the Purchaser a first
priority interest in accounts receivable and a blanket lien, which
may be junior to other creditors, on all other assets.
The
financing line provides the Company the ability to finance up to
$2,000,000 of selected accounts receivable invoices, which includes
a sublimit for one of the Company’s customers of $1,500,000.
During the six months ended June 30, 2017, the Company sold
approximately $2,589,000 ($3,180,000 – June 30, 2016) of its
accounts receivable to the Purchaser. As of June 30, 2017,
approximately $99,000 ($328,000 - December 31, 2016) of these
receivables remained outstanding. Additionally, as of June 30,
2017, the Company had approximately $7,000 available under the
financing line with the financial institution ($143,000 –
December 31, 2016). After deducting estimated fees, allowance for
bad debts and advances from the Purchaser, the net receivable from
the Purchaser amounted to $9,915, at June 30, 2017 ($31,462 –
December 31, 2016), and is included in accounts receivable in the
accompanying balance sheets.
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 $23,748 for the six months ended June 30, 2017
($38,561 – June 30, 2016). These financing line fees are
classified on the statements of operations as interest
expense.
Note 6. Earnings Per Share
Basic
earnings per share is based on the weighted average number of
common shares outstanding during the periods presented. Diluted
earnings per share is based on the weighted average number of
common shares outstanding, as well as dilutive potential common
shares which, in the Company’s case, comprise shares issuable
under convertible notes payable and stock options. The treasury
stock method is used to calculate dilutive shares, which reduces
the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options and warrants assumed
to be exercised. In a loss period, the calculation for basic and
diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.
The following table sets forth the computation of basic and diluted
net loss per share.
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Three
months ended
June
30,
|
Six
months ended
June
30,
|
|
|
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|
|
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Numerator
for basic and diluted net loss per share:
|
|
|
|
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Net
loss
|
$(195,000)
|
$(53,722)
|
$(390,151)
|
$(219,727)
|
|
Denominator
for basic and diluted net loss per share:
|
|
|
|
|
|
Weighted
average common shares outstanding
|
29,061,883
|
28,732,213
|
29,061,883
|
27,653,043
|
|
Basic
and diluted net loss per share
|
$(.01)
|
$.00
|
$(.01)
|
$(.01)
|
|
|
|
|
|
|
|
Anti-dilutive
shares excluded from net loss per share
|
28,969,276
|
28,222,483
|
28,969,276
|
28,222,483
|
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 7. Software Purchase
On
February 6, 2015, the Company purchased all rights to cyber
security network vulnerability assessment reporting software (the
“Software”). Under the purchase agreement, the Company
agreed to pay the Seller the base purchase price of $180,000, of
which $100,000 was paid in cash at the closing and the remaining
$80,000 of which was paid by delivery at the closing of the
Company’s secured promissory note. As security for its
obligations under the promissory note, the Company granted the
Seller a security interest in the Software. After April 7, 2015,
the note accrues interest at 10% per annum. The remaining balance
of $20,000 was payable on the note on June 30, 2016 but was not
paid then although the balance was subsequently reduced during 2016
by $7,500. To date, the Seller has not taken any action to collect
the amount past due on the note or to enforce the security interest
in the Software. At June 30, 2017, the total principal amount
payable under the note is $12,500 with accrued interest payable of
$7,835 ($7,215 at December 31, 2016). The asset cost of $180,000 is
amortized over its estimated useful life. The remaining balance at
June 30, 2017 is $52,500 ($105,000 at December 31, 2016).
Amortization expense over the next six months is expected to be
$52,500.
Note 8. Notes Payable - Related Parties
The
balance of the note payable to a member of the Company’s
board of directors was $384,055 at June 30, 2017 ($386,065 at
December 31, 2016). Principal and
interest are paid monthly using an amortization schedule requiring
annual principal payments of approximately $8,000 with all
remaining outstanding amounts due on January 1, 2020. The current
portion of approximately $10,000 is offset by the current portion
of deferred financing costs of approximately $8,000. The effective
rate of interest was 7.10% at June 30, 2017. On June 29,
2017, the Company borrowed $20,000 under the terms of a 6%
unsecured demand note from this board member.
During
June 2017, the Company borrowed $9,000 under the terms of a 6%
unsecured demand note from an executive officer.
A 7% note payable of $25,000 due to a related party matures on
March 31, 2018 and is classified as a current liability in the
accompanying balance sheet at June 30, 2017.
Note 9. Stock Option Plans and Agreements
The
Company has approved stock options plans and agreements covering up
to an aggregate of 9,782,000 shares of common stock. Plan options
may be designated at the time of grant as either incentive stock
options or nonqualified stock options. Stock based compensation
consists of charges for stock option awards to employees, directors
and consultants.
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following
assumptions were used for the six months ended June 30, 2017 and
2016.
|
|
|
|
|
Risk-free interest
rate
|
1.50%
|
1.07%
-1.50%
|
|
Expected dividend
yield
|
0%
|
0%
|
|
Expected stock
price volatility
|
100%
|
100%
|
|
Expected life of
options
|
|
|
The
Company recorded expense for options issued to employees and
independent service providers of $2,784 and $1,173 for the three
months ended June 30, 2017 and 2016, respectively, and $9,905 and
$7,937 for the six months ended June 30, 2017 and 2016,
respectively.
At June
30, 2017, there was approximately $9,400 of unrecognized
compensation cost related to non-vested options. This cost is
expected to be recognized over a weighted average period of
approximately one year. The total fair value of shares that vested
during the six months ended June 30, 2017 was approximately $4,000.
The weighted average fair value of options granted during the six
months ended June 30, 2017 was approximately $.03 ($.06 during the
six months ended June 30, 2016). No options were exercised during
the six months ended June 30, 2017 and 2016.
A
summary of all stock option activity for the six months ended June
30, 2017 follows.
|
|
Number
of Options Outstanding
|
Weighted
Average Exercise Price
|
Remaining
Contractual Term
|
Aggregate
Intrinsic Value
|
|
Outstanding at
December 31, 2016
|
8,583,000
|
$.12
|
|
|
|
Granted
|
150,000
|
$.045
|
|
|
|
Expired
|
(26,500)
|
$.26
|
|
|
|
Forfeited
|
(12,500)
|
$.04
|
|
|
|
Outstanding at June
30, 2017
|
8,694,000
|
$.12
|
3.8
years
|
$5,100
|
|
|
|
|
|
|
|
At June 30,
2017:
|
|
|
|
|
|
Vested or expected
to vest
|
6,306,000
|
$.09
|
4.9
years
|
$5,100
|
|
Exercisable
|
6,116,000
|
$.09
|
4.9
years
|
$5,100
|
Note 10. Related Party - Accrued Interest Payable
Accrued
Interest Payable – Included in accrued interest payable is
accrued interest payable to related parties of $89,396
at June
30, 2017 ($81,347 - December 31, 2016).
Note 11. Subsequent Events
On July
18, 2017, the Company entered into an unsecured line of credit
financing agreement (the “Agreement”) with its Chief
Operating Officer. The Agreement provides for working capital of up
to $100,000 through July 31, 2022. Borrowings bear interest at 6%.
The interest rate is adjusted annually, on January 1st of each
year, to a rate equal to the prime rate in effect on December 31st
of the immediately preceding year, plus one and one quarter
percent, and in no event, is the interest rate less than 6% per
annum. Interest is payable quarterly. As payment of an origination
fee under the Agreement, the Company granted a stock option to
purchase a total of 400,000 shares of the Company's common stock,
par value $.001 per share at $.04 per share valued at $9,960. Such
option became fully vested and exercisable on July 31, 2017. On
July 18, 2017, the Company borrowed $30,000 under the Agreement
used for working capital.
On July
18, 2017, the Board of Directors (the “Board”)
appointed its Chief Operating Officer to the Board, filling an
existing vacancy on the Board. In connection with this appointment,
the Board granted an option to purchase 100,000 shares of the
Company’s common stock at an exercise price of $.04 per share
of which was immediately vested.
************
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
This
discussion contains forward-looking statements, the accuracy of
which involves risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking
statements for many reasons including, but not limited to, those
discussed under the heading “Forward Looking
Statements” above and elsewhere in this report. We disclaim
any obligation to update information contained in any
forward-looking statements.
The
following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction
with our financial statements and the notes thereto appearing
elsewhere in this report.
Business
Headquartered
in Pittsford, New York, Infinite Group, Inc. is a provider of
managed IT and virtualization services and a developer and provider
of cybersecurity tools and solutions to private businesses and
government agencies. As part of these services we:
|
●
|
design,
develop and market solutions and products that solve and simplify
network cybersecurity needs of small and medium sized enterprises
("SMEs"), government agencies, and certain large commercial
enterprises. We are a master distributor for Webroot, a cloud based
security platform solution, where we market to and provide support
for over 350 reseller partners across North America;
|
|
●
|
provide
level 2 Microsoft and Hewlett Packard server and software-based
managed services supporting enterprise customers through our
partnership with Hewlett Packard Enterprise Company ("HPE");
and
|
|
●
|
are an
Enterprise Level sales and professional services partner with
VMware selling virtualization licenses and solutions, and providing
virtualization services support to commercial and government
customers including the New York State and Local Government and
Education ("SLED") entities and the the New York State
Office of General Services (“NYS OGS”). These
activities take place in our professional services organization
("PSO").
|
Business Strategy
Our
strategy is to build our business by designing, developing, and
marketing IT security based products and solutions that fill
technology gaps in cybersecurity. During 2016, we brought one
product, Nodeware, to market. Nodeware is an automated, continuous
plug and play network vulnerability management system that consists
of hardware and software. It is intended to fill a need in the SBE
market. It assesses vulnerabilities in a computer network using
scanning technology to capture a comprehensive view of the security
exposure of a network and infrastructure. Nodeware is used to
eliminate security gaps for SMEs. We sell Nodeware in the
commercial sector through our current channel
partners.
Our
cybersecurity services business provides services and technical
resources to support both our channel partners and end
customers.
Our
goal is to expand our VMware business in both the public and
commercial sector by building VMware license sales volume and
services concurrently.
We are
working to expand our managed services business with our current
federal enterprise customer and with other customers of HPE. From
time to time we are in various stages of the proposal process with
potential enterprise customers including responding to requests for
information, quotations, draft statements of work, and
pricing.
Results of Operations
Comparison of Three and Six Month Periods ended June 30, 2017 and
2016
The
following tables compare our statements of operations data for the
three and six months ended June 30, 2017 and 2016. The trends
suggested by this table are not indicative of future operating
results.
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$1,566,128
|
100.0%
|
$1,799,489
|
100.0%
|
$(233,361)
|
(13.0)%
|
|
Cost of
sales
|
1,093,703
|
69.8
|
1,305,046
|
72.5
|
(211,343)
|
(16.2)
|
|
Gross
profit
|
472,425
|
30.2
|
494,443
|
27.5
|
(22,018)
|
(4.5)
|
|
General and
administrative
|
280,152
|
17.9
|
290,750
|
16.2
|
(10,598)
|
(3.6)
|
|
Selling
|
326,693
|
20.9
|
194,162
|
10.8
|
132,531
|
68.3
|
|
Total costs and
expenses
|
606,845
|
38.7
|
484,912
|
26.9
|
121,933
|
25.1
|
|
Operating (loss)
income
|
(134,420)
|
(8.6)
|
9,531
|
0.5
|
(143,951)
|
(1,510.3)
|
|
Interest
expense
|
(60,580)
|
(3.9)
|
(63,253)
|
(3.5)
|
2,673
|
(4.2)
|
|
Net
loss
|
$(195,000)
|
(12.5)%
|
$(53,722)
|
(3.0)%
|
$(141,278)
|
263.0%
|
|
Net loss per share
- basic and diluted
|
$(.01)
|
|
$.00
|
|
$(.01)
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$3,213,156
|
100.0%
|
$3,663,251
|
100.0%
|
$(450,095)
|
(12.3)%
|
|
Cost of
sales
|
2,262,234
|
70.4
|
2,689,645
|
73.4
|
(427,411)
|
(15.9)
|
|
Gross
profit
|
950,922
|
29.6
|
973,606
|
26.6
|
(22,684)
|
(2.3)
|
|
General and
administrative
|
576,956
|
18.0
|
650,630
|
17.8
|
(73,674)
|
(11.3)
|
|
Selling
|
643,747
|
20.0
|
416,643
|
11.4
|
227,104
|
54.5
|
|
Total costs and
expenses
|
1,220,703
|
38.0
|
1,067,273
|
29.1
|
153,430
|
14.4
|
|
Operating
loss
|
(269,781)
|
(8.4)
|
(93,667)
|
(2.6)
|
(176,114)
|
(188.0)
|
|
Interest
expense
|
(120,370)
|
(3.7)
|
(126,060)
|
(3.4)
|
5,690
|
(4.5)
|
|
Net
loss
|
$(390,151)
|
(12.1)%
|
$(219,727)
|
(6.0)%
|
$(170,424)
|
77.6%
|
|
Net loss per share
- basic and diluted
|
$(.01)
|
|
$(.01)
|
|
$.00
|
|
Sales
For the
three months ended June 30, 2017 and 2016, respectively,
our:
●
managed service and
virtualization project sales comprised approximately 80% and 89% of
our total sales; and
●
commercial sales to
SMEs, have grown to approximately 17% of our total sales from 11%;
and
For the
six months ended June 30, 2017 and 2016, respectively,
our:
●
managed service and
virtualization project sales comprised approximately 79% and 88% of
our total sales; and
●
commercial sales to
small and medium sized enterprises ("SMEs"), have grown to
approximately 16% from 10%.
In
addition, we had agent sales of VMware licenses and project credits
of approximately $634,00 for the three and six months ended June
30, 2017. Since these are designated as agent sales only the gross
profit is included in sales.
Sales
of virtualization subcontract projects have continued to decrease
since 2015 because VMware has continued to assign fewer projects to
us. Our virtualization subcontract project sales decrease of
approximately 68% from 2016 to 2017 was offset in part by sales
growth of approximately 48% from our commercial SME businesses
during the six months ended June 30, 2017 as compared to 2016. Our
goal is to expand our VMware business in both the public and
commercial sector by building VMware license sales volume and
services concurrently directly with customers rather than relying
on subcontract project services. Our commercial SME business
continues to establish new relationships with channel partners who
purchase IT solutions from us. We began to close sales of Nodeware
with our channel partners during 2017. We expect future sales from
security assessments and related projects by our cybersecurity
personnel.
One of
our priorities is to increase sales. Accordingly, beginning in
2016, we hired additional commercial sales personnel to increase
commercial sales of Webroot, Nodeware and cybersecurity projects in
the SME market. Our investments in personnel began to generate
commercial SME operating income in 2016 continuing into
2017.
Cost
of Sales and Gross Profit
Cost of
sales principally represents the cost of employee services related
to our IT Services Group. In smaller amounts, we also incurred cost
of sales for third party software licenses for our commercial SME
partners. As virtualization project sales decreased, related
personnel cost of sales also decreased.
For the
three and six months ended June 30, 2017, our gross profit
decreased by $22,018 and $22, 684, respectively, as our sales
decreased during these periods.
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 decreased in 2017
consisting of various expense items including reductions in
consulting expense of approximately $9,700, employee salaries and
benefits of approximately $12,200 and our accounts receivable
allowance of $20,000 for the six months ended June 30,
2017.
Selling
Expenses
The
increase in selling expenses in 2017 is principally due to the
addition of employee salaries and benefits totaling approximately
$115,000 and $200,000 for the three and six months ended June 30,
2017 as we launched Nodeware and expanded our commercial SME
marketing efforts.
Operating
Loss
The
increase in our operating loss for 2017 is principally attributable
to an increase in operating expenses of $121,933 and $153,430 for
the three and six months ended June 30, 2017 as compared to 2016
and a decrease in our gross profit.
Interest
Expense
The
decrease in interest expense is principally attributable to a net
decrease in financing of our accounts receivable since the volume
of our financings decreased. This was partially offset by increased
interest expense associated with proceeds from a working capital
note payable that originated in 2016.
Net Loss
The
increase is attributable to the items discussed above for the three
and six months ended June 30, 2017 as compared to
2016.
Liquidity and Capital Resources
At June
30, 2017, we had cash of $5,967 available for working capital needs
and planned capital asset expenditures. During 2017, we financed
our business activities principally through cash flows provided by
operations and sales with recourse of our accounts receivable. Our
primary source of liquidity is cash provided by collections of
accounts receivable and our factoring line of credit. We maintain an accounts
receivable financing line of credit with an independent financial
institution that allows us to sell selected accounts receivable
invoices to the financial institution with full recourse against us
in the amount of $2,000,000, including a sublimit for one major
client of $1,500,000. This provides us with the cash needed to
finance certain of our on-going costs and expenses. At June 30,
2017, we had financing availability, based on eligible accounts
receivable, of approximately $7,000 under this line. We pay fees
based on the length of time that the invoice remains
unpaid.
On
December 1, 2014, we entered into an unsecured line of credit
financing agreement (the “LOC Agreement”) with a member
of our board of directors. The LOC Agreement provides for working
capital of up to $400,000 through January 1, 2020. At June 30,
2017, we had $15,945 of availability under the LOC Agreement. On
June 29, 2017, we borrowed $20,000 under the terms of a demand note
from this board member.
During
June 2017, we borrowed $9,000 under the terms of a 6% unsecured
demand note from an executive officer.
At June
30, 2017, we had a working capital deficit of approximately
$3,034,000 and a current ratio of .18. This increase in the working
capital deficit from $2,448,000 at December 31, 2016 is principally
due to the scheduled maturity on January 1, 2018 of a $265,000 note
payable due to a third party and $25,000 due on March 31, 2018 to a
related party and increases in accrued expenses
payable.
At June
30, 2017, we have current notes payable of $362,500 to third
parties, which includes convertible notes payable of $290,000. Also
included is $12,500 in principal amount of a note payable due on
June 30, 2016 but not paid. 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.
At June
30, 2017, we have current maturities of long-term obligations of
$1,080,999. Included in this balance is approximately $816,000 due
to the Pension Benefit Guaranty Corporation (the "PBGC") of which
$570,000 is due to the PBGC in accordance with the October 2011
Settlement Agreement. Payments are contingent upon our earning free
cash flow in excess of defined amounts which vary by year. No
amounts have been owed or paid on this obligation through June 30,
2017. However, if no amounts are obligated to be paid for 2017, we
anticipate that we will write off the balance when our agreement
with the PBGC is satisfied and, if so, realize a noncash gain at
that time. If this occurs, this will provide a contribution of
$570,000 to our net income and improve our working capital. Since
we are not current with our periodic payments to the PBGC, all
principal on our note payable of $246,000 was recorded as a current
liability at June 30, 2017. We have maturities of our long-term
notes to third parties of $265,000 due on January 1, 2018 and
$175,000 due on August 31, 2018. We plan to renegotiate the terms
of the notes payable, seek funds to repay the notes or use a
combination of both alternatives. Previously, we have extended
notes totaling $440,000 with the lenders. 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.
On July
18, 2017, we entered into an unsecured line of credit financing
agreement (the “Agreement”) with our Chief Operating
Officer. The Agreement provides for working capital of up to
$100,000 through July 31, 2022 with interest at 6%. On July 18,
2017, we borrowed $30,000 under the Agreement with proceeds used
for working capital.
Our
objective is to improve our working capital position through
profitable operations. We believe the capital resources available
under our factoring line of credit, cash from additional related
party loans and cash generated by improving the results of our
operations will be sufficient to fund our ongoing operations and to
support the internal growth we expect to achieve for at least the
next 12 months. However, if we do not improve the results of our
operations in future periods, we expect that additional working
capital will be required to fund our business. There is no
assurance that in the event we need additional funds that adequate
additional working capital will be available or, if available, will
be offered on acceptable terms.
We
anticipate financing growth from acquisitions of other businesses,
if any, and our longer-term internal growth through one or more of
the following sources: cash from collections of accounts
receivable; additional borrowing from related parties; issuance of
equity; use of our existing accounts receivable credit facility; or
a refinancing of our accounts receivable credit
facility.
The
following table sets forth our cash flow information for the
periods presented:
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
Net cash used by
operating activities
|
$(52,072)
|
$(106,119)
|
|
Net cash used by
investing activities
|
(5,608)
|
(4,073)
|
|
Net cash provided
by financing activities
|
21,211
|
150,097
|
|
Net (decrease)
increase in cash
|
$(36,469)
|
$39,905
|
Cash
Flows Used by Operating Activities
Net
cash used by operations during the six months ended June 30, 2017
was $52,072. Our operating cash flow is primarily affected by the
overall profitability of our contracts and sales, our ability to
invoice and collect from our clients in a timely manner, and our
ability to manage our vendor payments. We bill our clients weekly
or monthly after services are performed, depending on the contract
terms. Our cash used by operating activities in 2017 included our
net loss of $390,151 for the six months ended June 30, 2017. Our
net loss was offset in part by non-cash items of $81,317 and an
increase in accounts receivable of $393,240 primarily due to sales
of VMware credits in June 2017 that were paid to us in July 2017
and an increase in accounts payable of $608,987 primarily due to
sales of VMware credits that we paid to the supplier in July 2017.
In addition, accrued expenses payable increased by $62,704 due to
increases in accrued payroll due to the routine timing of payroll
disbursements after June 30, 2017 and accrued interest
payable.
We
continue to employ sales personnel to increase commercial SME sales
and cybersecurity assessment and virtualization project sales. Due
to the lengthy lead times typically needed to generate new sales in
these areas, we do not expect to realize a return from new sales
personnel for one or more quarters. As a result, we may experience
net losses from these investments in personnel until sufficient
sales are generated. We expect to fund the cost for sales personnel
from our operating cash flows and incremental borrowings, as
needed.
Cash
Flows Used by Investing Activities
Cash
used by investing activities was $5,608 for computer hardware and
software during the six months ended June 30, 2017. We expect to
continue to invest in computer hardware and software to update our
technology to support our business but do not anticipate
significant expenditures on an annual basis at our current level of
operations.
Cash
Flows Provided by Financing Activities
Cash
provided by financing activities was $21,211 for the six months
ended June 30, 2017 consisting of new loans from related parties of
$29,000 offset by principal payments of $2,010 to related parties
and $5,779 on other notes payable.
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.
PART II - OTHER INFORMATION
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 on page 15 of this
report. The Index to Exhibits is incorporated herein by
reference.
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
August 11, 2017
|
/s/
James Villa
|
|
|
James
Villa
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
Date
August 11, 2017
|
/s/
James Witzel
|
|
|
James
Witzel
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|
|
INDEX TO EXHIBITS
|
|
Exhibit No.
|
Description
|
|
10.1
|
Line of
Credit and Note Agreement between the Company and Andrew Hoyen
dated July 18, 2017 (1)
|
|
10.2
|
Stock
option agreement between the Company and Andrew Hoyen dated July
18, 2017 for 400,000 common shares (1)
|
|
10.3
|
Stock
option agreement between the Company and Andrew Hoyen dated July
18, 2017 for 100,000 common shares (1)
|
|
|
Chief
Executive Officer Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. *
|
|
|
Chief
Financial 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. *
|
|
|
Chief
Financial 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.
|
(1)
Incorporated by reference to the Company's Current Report on Form
8-K filed on July 21, 2017.