INFINITE GROUP INC - Quarter Report: 2019 September (Form 10-Q)

 

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 September 30, 2019

 

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

_________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.001 par value per share	IMCI	OTC Bulletin Board
(Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer ☐ Non-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 ☐ 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 November 1, 2019.

 

 

 

 

 

 

Infinite Group, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2019
Table of Contents
PART I - FINANCIAL INFORMATION			PAGE
	Item 1. Financial Statements
		Balance Sheets – September 30, 2019 (Unaudited) and December 31, 2018	3
		Statements of Operations (Unaudited) for the three and nine months ended September 30, 2019 and 2018	4
		Statements of Changes in Stockholders’ Deficiency (Unaudited) for the three and nine months ended September 30, 2019 and 2018	5
		Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2019 and 2018	6
		Notes to Financial Statements – (Unaudited)	7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		14
	Item 4. Controls and Procedures		14
PART II - OTHER INFORMATION
	Item 6. Exhibits		14
SIGNATURES			15

 

 

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 year ended December 31, 2018, 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
	September 30,	December 31,
	2019 (Unaudited)	2018
ASSETS
Current assets:
Cash	$32,167	$29,716
Accounts receivable, net of allowances of $19,369 and $22,000	589,395	286,187
Prepaid expenses and other current assets	74,956	2,906
Total current assets	696,518	318,809
Right of Use Asset – Operating Lease, net	213,426	0
Property and equipment, net	6,968	8,627
Deposits	6,937	6,667
Total assets	$923,849	$334,103
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable	$295,847	$367,536
Accrued payroll	359,520	218,328
Accrued interest payable	905,906	839,189
Accrued retirement	251,829	244,423
Accrued expenses - other	232,407	87,581
Operating lease liability - short-term	72,957	0
Current maturities of long-term obligations	950,000	686,000
Current maturities of long-term obligations - related parties	538,775	34,350
Notes payable	332,500	332,500
Notes payable - related parties	62,000	102,000
Total current liabilities	4,001,741	2,911,907
Long-term obligations:
Notes payable:
Other	485,251	744,335
Related parties	369,000	677,955
Operating lease liability - long-term	141,801	0
Total liabilities	4,997,793	4,334,197
Stockholders' deficiency:
Common stock, $.001 par value, 60,000,000 shares authorized; 29,061,883 shares issued and outstanding	29,061	29,061
Additional paid-in capital	30,613,412	30,593,366
Accumulated deficit	(34,716,417)	(34,622,521)
Total stockholders’ deficiency	(4,073,944)	(4,000,094)
Total liabilities and stockholders’ deficiency	$923,849	$334,103
See notes to unaudited financial statements.

 

 

INFINITE GROUP, INC.   STATEMENTS OF OPERATIONS (Unaudited)
	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Sales	$1,819,699	$1,570,342	$5,286,141	$4,666,562
Cost of sales	1,197,315	1,005,542	3,386,526	3,063,893
Gross profit	622,384	564,800	1,899,615	1,602,669
Costs and expenses:
General and administrative	335,528	261,401	959,535	848,735
Selling	311,647	223,367	822,307	677,677
Total costs and expenses	647,175	484,768	1,781,842	1,526,412
Operating (loss) income	(24,791)	80,032	117,773	76,257
Interest expense:
Related parties	(20,890)	(16,454)	(69,659)	(45,428)
Other	(47,390)	(47,578)	(142,010)	(144,829)
Total interest expense	(68,280)	(64,032)	(211,669)	(190,257)
Net (loss) income	$(93,071)	$16,000	$(93,896)	$(114,000)
Net loss per share – basic and diluted	$.00	$.00	$.00	$.00
Weighted average shares outstanding – basic and diluted	29,061,883	29,061,883	29,061,883	29,061,883
See notes to unaudited financial statements.

 

 

 

 

 

 

 

 

 

 

 

INFINITE GROUP, INC.

 

STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY (Unaudited)

 

Three and Nine Months Ended September 30, 2019 and 2018

 

Three and Nine Months Ended September 30, 2019

 

			Additional
	Common Stock		Paid-in	Accumulated
	Shares	Amount	Capital	Deficit	Total
Balance - December 31, 2018	29,061,883	$29,061	$30,593,366	$(34,622,521)	$(4,000,094)
Stock based compensation	0	0	260	0	260
Net income	0	0	0	35,036	35,036
Balance - March 31, 2019	29,061,883	$29,061	$30,593,626	$(34,587,485)	$(3,964,798)
Stock based compensation	0	0	14,250	0	14,250
Net loss	0	0	0	(35,861)	(35,861)
Balance - June 30, 2019	29,061,883	$29,061	$30,607,876	$(34,623,346)	$(3,986,409)
Stock based compensation	0	0	5,536	0	5,536
Net loss	0	0	0	(93,071)	(93,071)
Balance - September 30, 2019	29,061,883	$29,061	$30,613,412	$(34,716,417)	$(4,073,944)

 

 

Three and Nine Months Ended September 30, 2018

 

			Additional
	Common Stock		Paid-in	Accumulated
	Shares	Amount	Capital	Deficit	Total
Balance - December 31, 2017	29,061,883	$29,061	$30,591,896	$(34,659,521)	$(4,038,564)
Net loss	0	0	0	(87,000)	(87,000)
Balance - March 31, 2018	29,061,883	$29,061	$30,591,896	$(34,746,521)	$(4,125,564)
Net loss	0	0	0	(43,000)	(43,000)
Balance - June 30, 2018	29,061,883	$29,061	$30,591,896	$(34,789,521)	$(4,168,564)
Net income	0	0	0	16,000	16,000
Balance - September 30, 2018	29,061,883	$29,061	$30,591,896	$(34,773,521)	$(4,152,564)

 

 

See notes to unaudited financial statements.

 

 

 

 

 

 

INFINITE GROUP, INC.   STATEMENTS OF CASH FLOWS (Unaudited)
	Nine Months Ended September 30,
	2019	2018
Cash flows from operating activities:
Net loss	$(93,896)	$(114,000)
Adjustments to reconcile net loss to net cash
used by operating activities:
Stock based compensation and loan fees	20,046	0
Depreciation and amortization	15,372	19,315
Bad debt recovery	0	(4,000)
(Increase) decrease in assets:
Accounts receivable	(303,208)	208,050
Prepaid expenses and other assets	(72,320)	(6,124)
Increase (decrease) in liabilities:
Accounts payable	(71,689)	(512,377)
Accrued expenses	352,735	243,268
Accrued retirement	7,406	7,117
Net cash used by operating activities	(145,554)	(158,751)
Cash flows from investing activities:
Purchase of property, plant and equipment	(1,945)	0
Net cash used by investing activities	(1,945)	0
Cash flows from financing activities:
Proceeds from issuance of notes payable - related party	200,000	90,000
Repayments of notes payable - related party	(50,050)	(1,340)
Net cash provided by financing activities	149,950	88,660
Net increase (decrease) in cash	2,451	(70,091)
Cash - beginning of period	29,716	73,734
Cash - end of period	$32,167	$3,643
Supplemental Disclosures of Cash Flow Information:
Cash payments for interest	$120,506	$79,354
See notes to unaudited financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2018 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, 2018 filed with the U.S. Securities and Exchange Commission (SEC). Results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2019.

 

Note 2. Management Plans - Capital Resources

The Company reported net losses of $93,896 and $114,000 for the nine months ended September 30, 2019 and 2018, respectively, and stockholders’ deficiencies of $4,073,944 and $4,000,094 at September 30, 2019 and December 31, 2018, respectively. Current maturities of long-term obligations were approximately $1,490,000 and $720,000 at September 30, 2019 and December 31, 2018, respectively. We have a working capital deficiency of approximately $3,305,000 and $2,593,000 at September 30, 2019 and December 31, 2018, respectively. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern and this substantial doubt has not been alleviated.

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.

 

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, 2018 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.

 

Revenue - Effective January 1, 2018, the Company adopted Topic 606 using the modified retrospective approach and applied the guidance to those contracts which were not completed as of January 1, 2018. Adoption of Topic 606 did not impact the timing of revenue recognition in the Company’s financial statements for the current or prior periods. Accordingly, no adjustments have been made to opening accumulated deficit or prior period amounts.

  

The Company’s total revenue recognized from contracts from customers was comprised of three major services: Managed support services, Cybersecurity Projects and software and Other IT consulting services. The categories depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. There were no material unsatisfied performance obligations at September 30, 2019 or 2018 for contracts with an expected original duration of more than one year. The following table summarizes the revenue recognized by the major services:

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Managed support services	$1,275,273	$1,224,138	$3,769,274	$3,657,509
Cybersecurity projects and software	406,926	295,138	1,089,778	865,449
Other IT consulting services	137,500	51,066	427,089	143,604
Total sales	$1,819,699	$1,570,342	$5,286,141	$4,666,562

 

Managed support services

Managed support services consist of revenue primarily from our subcontracts for services to its end clients, principally a major establishment of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments.

● We generate revenue primarily from these subcontracts through fixed price service and support agreements.  Revenues are earned and billed weekly and are generally paid within 45 days. The revenues are recognized at time of service.

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 and testing.

● Nodeware™ and Webroot™ software offerings consist of fees generated from the use of the respective software by our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Substantially all customers are billed in the month of the service and is cancellable upon notice per the respective agreements.  Substantially all payments are electronically billed, and the billed amounts are paid to the Company instantaneously via an online payment platform. If payments are made in advance, revenues related to the term associated with our software licenses is recognized ratably over the contractual period.

● Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our standalone selling price.

● Cybersecurity assessments 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 50% to 75% down payment is required before work is initiated. Down payments received are deferred until revenue is recognized. Upon completion of performance obligation of service, payment terms are 30 days.

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 nine months ended September 30, 2019, sales to one client, including sales under subcontracts for services to several entities, accounted for 63.1% of total sales (71.4% - 2018) and 32.6% of accounts receivable at September 30, 2019 (10.5% - December 31, 2018).

 

Leases - In February 2016, the FASB issued amended guidance for lease arrangements to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The new standard requires entities to recognize a liability for their lease obligations and a corresponding right-of-use asset, initially measured at the present value of the lease payments. Subsequent accounting depends on whether the agreement is deemed to be a financing or operating lease. For operating leases, a lessee recognizes its total lease expense as an operating expense over the lease term. The ASU requires that assets and liabilities be presented and disclosed separately, and the liabilities must be classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. The ASU was effective for the Company beginning on January 1, 2019, at which time we adopted the new standard using the modified retrospective approach as of the date of adoption. Upon adoption, we recognized a right-of-use asset of $265,825 and a lease liability of $265,825 related to the existing office lease that is classified as an operating lease. A summary of the impact to the Balance Sheet on January 1, 2019 and the balances as of September 30, 2019 for this asset is as follows:

 

	December 31, 2018	Effect of Change	January 1,  2019	September 30, 2019
Right of use asset – lease, net	0	265,825	265,825	213,426
Operating lease liability – short-term	0	68,848	68,848	72,957
Operating lease liability – long-term	0	196,977	196,977	141,801

 

 

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 10% of the total accounts receivable invoice sold to the Purchaser. The fee is charged at prime plus 3.6% (effective rate of 8.60% at September 30, 2019) against the average daily outstanding balance of funds advanced. The estimated future loss reserve for each receivable included in the estimated value of the retained asset is based on the payment history of the accounts receivable customer and is included in the allowance for doubtful accounts, if any. As collateral, the Company granted the Purchaser a first priority interest in accounts receivable and a blanket lien, which may be junior to other creditors, on all other assets.

 

The financing line provides the Company the ability to finance up to $2,000,000 of selected accounts receivable invoices, which includes a sublimit for one of the Company’s customers of $1,500,000. During the nine months ended September 30, 2019, the Company sold approximately $3,398,000 ($3,890,000 - September 30, 2018) of its accounts receivable to the Purchaser. As of September 30, 2019, approximately $306,400 ($363,000 - December 31, 2018) of these receivables remained outstanding. Additionally, as of September 30, 2019, the Company had approximately $188,000 available under the financing line with the financial institution ($0 - December 31, 2018). After deducting estimated fees, allowance for bad debts and advances from the Purchaser, the net receivable from the Purchaser amounted to approximately $31,000, at September 30, 2019 ($36,000 - December 31, 2018), 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 $38,382 for the nine months ended September 30, 2019 ($40,007 - September 30, 2018). These financing line fees are classified on the statements of operations as interest expense.

 

Note 5. 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 loss per share for the nine months ended:

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Numerator for basic and diluted net loss per share:
Net (loss) income	$(93,071)	$16,000	$(93,896)	$(114,000)
Denominator for basic and diluted net loss per share:
Weighted average common shares outstanding	29,061,883	29,061,883	29,061,883	29,061,883
Basic and diluted net loss/ earnings per share	$.00	$.00	$.00	$.00
Anti-dilutive shares excluded from net loss/earnings per share calculation	31,288,912	28,530,252	31,288,912	28,530,252

 

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 6. Notes Payable - Related Parties

 

On May 7, 2019, the Company entered into a note payable agreement for up to $500,000 with a related party. The note has an interest rate of 7.5% and is due on August 31, 2026. The Company borrowed $200,000 which remains outstanding. As consideration for providing this financing, the Company granted a stock option to purchase a total of 2,500,000 common shares at an exercise price of $.02 and recorded interest expense of $14,250 using the Black-Scholes option pricing model to determine the estimated fair value of the option.

 

Note 7. Stock Option Plans and Agreements

 

The Company has approved stock options plans and agreements covering up to an aggregate of 11,255,000 shares of common stock. Such 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.

On August 20, 2019, the Company’s board of directors approved the 2019 stock option plan, which grants options to purchase up to an aggregate of 1,500,000 common shares. As of September 30, 2019, 1,371,500 options to purchase shares remain unissued under the 2019 plan. Options issued to date are nonqualified since the Company has decided not to seek stockholder approval of the 2019 Plan.

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Options for 2,973,500 shares were granted for the nine months ended September 30, 2019. No options were granted for the nine months ended September 30, 2018. The following assumptions were used for the nine months ended September 30, 2019.

 

Risk-free interest rate	1.38% - 2.55%
Expected dividend yield	0%
Expected stock price volatility	100%
Expected life of options	2.75 - 3.90 years

 

The Company recorded expense for options issued to employees of $5,796 and related-party loan financing consideration of $14,250 for the nine months ended September 30, 2019 and $0 for the nine months ended September 30, 2018.

 

At September 30, 2019, there was $0 of total unrecognized compensation cost related to non-vested options. No options vested during the nine months ended September 30, 2019.

 

A summary of all stock option activity for the nine months ended September 30, 2019 follows:

 

	Number of Options Outstanding	Weighted Average Exercise Price	Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2018	7,920,000	$.09
Granted	2,973,500	.02
Forfeited	(938,000)	.23
Expired	(75,000)	.17
Outstanding at September 30, 2019	9,880,500	$.05	4.1 years	$206,400
At September 30, 2019 - vested or
expected to vest	9,880,500	$.05	4.1 years	$206,400
Exercisable	9,755,500	$.05	4.1 years	$202,300

 

Note 8. Related Party Accounts Receivable and Accrued Interest Payable

 

Accrued Interest Payable - Included in accrued interest payable is accrued interest payable to related parties of $150,360 at September 30, 2019 ($148,703 - December 31, 2018).

 

 

 

************

 

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:

Business Strategy

Our strategy is to build our business by designing, developing, and marketing cybersecurity based services, products and solutions that fill technology gaps in cybersecurity. We brought one patent pending product to market and intend to bring other proprietary products and solutions to market through a channel of domestic and international partners and distributors. Our products and solutions are designed to simplify the security needs in customer and partner environments, with a focus on the mid-tier Enterprise market and below. We enable our partners by providing recurring revenue based business models for both recurring services and through our automated and continuous security solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of security and related IT functions. 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 cybersecurity business is comprised of three components: managed security services, product development and deployment, and integration of third-party security solutions into our security offerings to our channel and customers. We provide cybersecurity services and technical consulting resources to support both our channel partners and end customers. For example, we sell our proprietary product, Nodeware, through both our direct partners and through other 3rd party partner distribution and agents so they can either sell it as a standalone solution or part of other technical services they provide to their customers. This enables the channel partner to develop a base of recurring revenue. We also provide our cybersecurity services through our channel partners as a cybersecurity overlay to the technical services they already provide.

Our goal is to maintain our base of opportunities in our VMware business in both the public and commercial sector. Opportunistically, we will continue to identify license and services engagements as they arise.

We are working to expand our managed services business with our prime partner, Perspecta, and the current federal enterprise customer and its customers. The following sections define specific strategic components of our business strategy.

 

Results of Operations

 

Comparison of the Three and Nine Months Ended September 30, 2019 and 2018

 

The following tables compares our statements of operations data for the three and nine months ended September 30, 2019 and 2018. The trends suggested by this table are not indicative of future operating results.

 

 

	Three Months Ended September 30,
					2019 vs. 2018
		As a % of		As a % of	Amount of	% Increase
	2019	Sales	2018	Sales	Change	(Decrease)
Sales	$1,819,699	100.0%	$1,570,342	100.0%	$249,357	15.9%
Cost of sales	1,197,315	65.8	1,005,542	64.0	191,773	19.1
Gross profit	622,384	34.2	564,800	36.0	57,584	10.2
General and administrative	335,528	18.4	261,401	16.6	74,127	28.4
Selling	311,647	17.1	223,367	14.2	88,280	39.5
Total costs and expenses	647,175	35.6	484,768	30.8	162,407	33.5
Operating (loss) income	(24,791)	(1.4)	80,032	5.1	(104,823)	(131.0)
Interest expense	(68,280)	(3.8)	(64,032)	(4.1)	4,248	6.6
Net (loss) income	$(93,071)	(5.1)%	$16,000	1.0%	$(109,071)	(681.7)%
Net (loss) income per share - basic and diluted	$.00		$.00		$.00

 

	Nine Months Ended September 30,
					2019 vs. 2018
		As a % of		As a % of	Amount of	% Increase
	2019	Sales	2018	Sales	Change	(Decrease)
Sales	$5,286,141	100.0%	$4,666,562	100.0%	$619,579	13.3%
Cost of sales	3,386,526	64.1	3,063,893	65.7	322,633	10.5
Gross profit	1,899,615	35.9	1,602,669	34.3	296,946	18.5
General and administrative	959,535	18.2	848,735	18.2	110,800	13.1
Selling	822,307	15.6	677,677	14.5	144,630	21.3
Total costs and expenses	1,781,842	33.7	1,526,412	32.7	255,430	16.7
Operating income	117,773	2.2	76,257	1.6	41,516	(54.4)
Interest expense	(211,669)	(4.0)	(190,257)	(4.1)	21,412	11.3
Net loss	$(93,896)	(1.8)%	$(114,000)	( 2.4)%	$(20,104)	(17.6)%
Net loss per share - basic and diluted	$.00		$.00		$.00

 

Sales

 

Our managed service and virtualization project and software license sales comprised approximately 71% of our sales in 2019 and approximately 78% in 2018. Our 2019 cybersecurity projects and software sales to SMEs, were approximately 21% of our total sales as compared to approximately 19% for 2018.

 

Sales of virtualization subcontract projects have increased during the most recent twelve months. Our virtualization subcontract project sales increased by approximately 4% and 3% during the three months and nine months ended September 30, 2019 as compared to 2018, respectively. We also had sales growth of approximately 38% and 26% from cybersecurity projects and software during the three months and nine months ended September 30, 2019 as compared to 2018, respectively. Our goal is to continue to expand our cybersecurity projects and software business by using our expanding salesforce as well as channel partners. We plan to maintain our VMware services business in both the public and commercial sectors as a preferred subcontractor to VMWare. Other IT projects comprised the balance of our sales.

 

 

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.

 

Our gross profit improved by $57,584 and $296,946 during the three months and nine months ended September 30, 2019 as compared to 2018, respectively, primarily due to improved sales and better cost containment of salaries as noted.

 

General and Administrative Expenses

 

General and administrative expenses include corporate overhead such as compensation and benefits for executive, administrative and finance personnel, rent, insurance, professional fees, travel, and office expenses. General and administrative expenses increased approximately 28% and 13% during the three months and nine months ended September 30, 2019 as compared to 2018, respectively, primarily due to new personnel and increased legal and accounting fees.

 

Selling Expenses

 

The increase in selling expenses of approximately 40% and 21% during the three months and nine months ended September 30, 2019 as compared to 2018, respectively, is primarily due to the hiring of salespeople in late 2018 and in mid-2019 to sell our cybersecurity services and software as well as a marketing manager to enhance our marketing activities.

 

Operating (Loss) Income

 

The increase in our operating income from the previous year’s operating loss is principally attributable to an improved gross margin and decreases in other expenses for the three months and nine months ended September 30, 2019 as compared to 2018 as explained above.

 

Interest Expense

 

The increase in interest expense is principally attributable to a net increase in long-term debt to fund our operations, a stock option based loan origination fee for the new debt and an increase in the interest rates. The prime rate increased from 4.0% at December 31, 2017 to 4.75% on March 22, 2018 to 5.00% on June 14, 2018 to 5.25% on September 27, 2018 and to 5.50% on December 20, 2018, which increased our financing costs under our accounts receivable financing line and our line of credit payable to a related party. The rate decreased to 5.25% on August 1, 2019 and to 5.00% on September 19, 2019.

 

Net (Loss) Income

 

The decrease is attributable to the items discussed above for the three and nine months ended September 30, 2019 as compared to 2018.

 

Liquidity and Capital Resources

 

At September 30, 2019, we had cash of $32,167 available for working capital needs and planned capital asset expenditures. At September 30, 2019, we had a working capital deficit of approximately $3,305,000 and a current ratio of .17.

 

During 2019, we financed our business activities principally through cash flows provided by operations, sales with recourse of our accounts receivable and borrowings from related parties. 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 September 30, 2019, we had financing availability, based on eligible accounts receivable, of approximately $188,000 under this line. We pay fees based on the length of time that the invoice remains unpaid.

 

We entered into unsecured line of credit financing agreements (the “LOC Agreements”) with three related parties. The LOC Agreements provide for working capital of up to $400,000 through January 1, 2020, $100,000 through July 31, 2022 and $75,000 through January 2, 2023. At September 30, 2019, we had approximately $46,000 of availability under the LOC Agreements.

 

At September 30, 2019, we have current notes payable of $332,500 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.

 

We have $950,000 of current maturities of long-term obligations to third parties. This is comprised of various notes including $264,000 due on January 1, 2020. We also have current maturities of long-term obligations of approximately $246,000 to the Pension Benefit Guaranty Corporation (the PBGC) with all principal due September 15, 2018, which the due date has not been extended. 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, which have not been renewed or amended.

 

We also have current maturities of our long-term debt to related parties of approximately $539,000 of which approximately $516,000 is due on January 1, 2020. Also included is a note payable for $25,000 due to an officer of the Company which matured on March 31, 2018 and has not been paid. We also have current notes payable to related parties of $62,000.

 

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 certain notes totaling $440,000 with certain third-party 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.

 

We have long-term obligations to third parties of $500,000 due on December 31, 2021. We have a long-term obligation of $9,000 to a related party due January 1, 2021.

 

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 is $200,000 at September 30, 2019.

 

The following table sets forth our cash flow information for the periods presented:

 

	Nine Months Ended September 30,
	2019	2018
Net cash used by operating activities	$(145,554)	$(158,751)
Net cash used by investing activities	(1,945)	0
Net cash provided by financing activities	149,950	88,660
Net increase (decrease) in cash	$2,451	$(70,091)

 

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, depending on the contract terms. Our net loss of $93,896 for 2019 was offset in part by non-cash expenses and credits of $35,418. In addition, an increase in accounts receivable and other assets of $375,528 was offset by increases in accounts payable and accrued expenses of $288,452 resulting in a use of funds of $145,554.

We market Webroot and Nodeware to our IT channel partners who resell to their customers. We are making investments in expanding our sales of cyber security and virtualization projects and VMware licenses to commercial and SLED customers. Due to the lengthy lead times typically needed to generate these new sales, we do not expect to realize a return from our sales and marketing personnel for one or more quarters. As a result, we may continue to experience operating losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows and incremental borrowings, as needed.

Cash Flows Used by Investing Activities

 

Cash used by investing activities was $1,945 during the nine months ended September 30, 2019. It was for computer hardware for new employees. We expect to invest approximately $30,000 during 2019 in computer hardware and software to update our technology to support our business.

 

Cash Flows Provided by Financing Activities

 

Cash provided by financing activities was $149,950 for the nine months ended September 30, 2019 consisting of $200,000 in borrowings from a related party offset by principal payments of $50,050 to related parties.

Credit Resources

We believe the capital resources available under our factoring line of credit, cash from additional related party and third-party loans and cash generated by improving the results of our operations provide sources to fund our ongoing operations and to support our internal growth. Although we have no assurances, we believe 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 our on-going operations for at least the next 12 months, however, substantial doubt about our ability to continue as a going concern has not been alleviated. If we experience significant growth in its sales, we believe that this may require us to increase our financing line, finance additional accounts receivable, or obtain additional working capital from other sources to support its sales growth.

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 its cash flow.

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 below in 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: November 12, 2019	/s/ James Villa
	James Villa
	Chief Executive Officer
	(Principal Executive Officer)
Date: November 12, 2019	/s/ Richard Glickman
	Richard Glickman
	Chief Accounting Officer
	(Principal Financial Officer)

 

 

	INDEX TO EXHIBITS
Exhibit No.	Description
31.1	Chief Executive Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. *
31.2	Chief Financial Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. *
32.1	Chief Executive Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. *
32.2	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.*