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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Infinite Group Inc (CE) | USOTC:IMCI | OTCMarkets | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.005 | 0.00 | 00:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
Commission File Number 0-21816
Infinite Group, Inc. |
175 Sully’s Trail, Suite 202
Pittsford, NY 14534
(585) 385-0610
A Delaware Corporation
IRS Employer Identification Number: 52-1490422
Securities registered pursuant to Section 12(b) of the Act
N/A | N/A | N/A | ||
(Title of each class) | (Trading Symbol) | (Name of each exchange on which | ||
registered) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated Filer | ☒ | Smaller reporting company | ☒ |
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant (based upon the closing price on the Over the Counter Bulletin Board of $11.25 on June 30, 2022 the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $5,034,000.
As of March 31, 2023, 476,608 shares of the registrant’s common stock, $.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
INFINITE GROUP, INC.
Form 10-K
TABLE OF CONTENTS
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FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth herein under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The terms “Infinite Group”, “IGI”, “we”, “our”, “us”, or any derivative thereof, as used herein refer to Infinite Group, Inc., a Delaware corporation.
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PART I
Item 1. Business
Overview
Headquartered in Pittsford, New York, Infinite Group is a developer of cybersecurity software and related cybersecurity consulting, advisory, and managed information security services. We principally sell our software and services through indirect channels such as Managed Service Providers (“MSPs”), Managed Security Services Providers (“MSSPs”), agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the cybersecurity market at a time when competition and consolidation in these markets are on the rise. Our strategy to differentiate our cybersecurity software and services from our competitors is to combine customized software and professional services, and grow our business by designing, developing, and marketing cybersecurity software-as-a-service (“SaaS”) solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI CyberLabs (“CyberLabs”), to fill technology gaps we identify, and then we bring these software and services to market through our existing channel partner and customer relationships. Our software and services are designed to simplify and manage the security needs of our customers and channel partners in a variety of environments. We focus on the small and medium-sized enterprises market. We support our channel partners by providing recurring-revenue business models for both services and through our cybersecurity SaaS solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions.
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As part of these software and service offerings we:
| · | Internally developed and brought to market Nodeware®, a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware provides an economical solution for small and medium-sized enterprises as compared to more costly solutions focused on enterprise-sized customers, and is designed to accommodate the varying network needs of our end customers’ organizations and networks. Nodeware’s flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. We intend to continue to develop our intellectual property to serve as the core to our proprietary software and services. In addition to our proprietary software and services we also act as a master distributor for other cybersecurity software, principally Webroot a cloud-based endpoint security platform solution, where we market to and provide support for over 225 small channel partners across North America. For the twelve months ended December 31, 2022, our software revenue was approximately $1,152,000, with approximately37% of that being related to Nodeware; |
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| · | Provide cybersecurity consulting and advisory services to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology. As part of our consulting and advisory services, we are contracted to support existing information technology and executive teams at both the customer and channel partner level, and provide security leadership and guidance. We validate overall corporate and infrastructure cybersecurity with the goal of maintaining and securing the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from threats and incidents. For the twelve months ended December 31, 2022, our cybersecurity consulting services revenue, excluding software sales, was approximately $1,409,000; and |
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| · | Provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, by providing in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment. For the twelve months ended December 31, 2022, our managed support services revenue was approximately $4,442,000. |
Sales and Marketing Strategy
Approximately 94% of our business comes from our channel sales and approximately 6% from direct sales to end customers. Managed support services accounts for approximately 63% of total sales, while cybersecurity software and services accounts for approximately 37% of total sales.
Virtually all managed information security support services revenue is derived from one customer, a major independent agency of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments as a subcontractor through our channel partner, Peraton. We are working to expand our managed information security support services business with our channel partner Peraton, and to potentially grow the current federal enterprise customer and to expand to other Peraton customers.
We sell our cybersecurity software and services, including Nodeware, through our channel partners, which include direct channel partners, Telarus, TD SYNNEX, and Staples, and through our direct cybersecurity services teams. Our cybersecurity services include Chief Information Security Team as a Service (CISOTaaS ™), PenLogic™ penetration testing services, security assessments, incident response and others, and are provided through our channel partners and direct to end customers as a cybersecurity solution to the technical services they provide. Our channel partners utilize our expertise in cybersecurity to bring additional services to their end customers that are beyond their normal scope of offerings, and building our network of channel partners allows us the ability to efficiently gain access to a greater number of customers. We continue to drive development of our cybersecurity business through channel and direct marketing, social media programs, and fostering our extensive cybersecurity industry relationships. We are not reliant on any one customer for our cybersecurity software and services sales given that we work with a number of channel partners and direct customers. In addition to our cybersecurity software and services, we provide from time to time other information technology consulting services to existing clients.
Recent Developments
In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware Cloud security solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing channel partner relationships.
In accordance with our strategic roll-up strategy, on January 31, 2022, we entered into an agreement to acquire the issued and outstanding equity securities of Pratum, Inc. (“Pratum”), an Iowa corporation and an information securities firm. Pratum provides cybersecurity consulting and advisory services, risk assessments, and managed extended detection and response (“XDR”) services, which we believe is a strategic fit for us. The aggregate purchase price under the Pratum agreement is $8,500,000, subject to customary purchase price adjustments for, among other things, indebtedness of Pratum as of the closing. $8,000,000 will be paid to Pratum’s shareholder at closing and $500,000 will be deposited at closing with an escrow agent to be held in escrow for a period of six months. It was anticipated that the transaction would close in the first half of 2022. On June 15, 2022, the agreement was terminated, and the transaction did not close.
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During the year ended December 31, 2022, we had sales of approximately $7.0 million, an operating loss of approximately $2.3 million and a net loss of approximately $3.6 million, due primarily to increased investment in sales and marketing for Nodeware and related services, together with increased costs associated with our preparations to list on NASDAQ and with assessing potential acquisition targets. We had full year sales of approximately $7.0 million in 2022 and $7.2 million in 2021, generating operating loss of approximately $2.3 million and $1.4 million and net loss of approximately $3.6 million and $1.6 million, respectively.
On December 15, 2021, our board of directors (the “Board”) approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock and recommended that the stockholders of the Company authorize the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On January 26, 2022, the company’s stockholder voted to authorize the reverse stock split. The record date of the split is October 17, 2022, with a final ratio of 75-1 for the reverse stock split. The reverse stock split will not impact the number of authorized shares of common stock which will remain at 60,000,000 shares. All option, share and per share information in this prospectus does not give effect to the reverse stock split.
On November 3, 2021, we entered into a financing arrangement (the “Bridge Loan”) with Mast Hill Fund, L.P. (the “Lender”), a Delaware limited partnership. In exchange for a promissory note, Lender agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022.
On February 15, 2022, we entered into a second financing arrangement together with the Bridge Loan, (the “Loans”) with Lender. In exchange for a promissory note, Lender agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. As additional consideration for the second Mast Hill Loan, the Company issued the “Lender” a 5-year warrant to purchase 12,334 shares of Company common stock at a fixed price of $12.00 per share. J.H. Darbie & Co., Inc. ( “Finder”), a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $14,650.00 (4.39% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 1,619 shares of Company common stock at a fixed price of $14.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for more information regarding the Loans.
On May 27, 2022, we entered into a third financing arrangement together with the Loans, with Lender. In exchange for a promissory note, Lender agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for more information regarding the Loans.
On November 23, 2022, we entered into a fourth financing arrangement together with the Loans, with Lender. In exchange for a promissory note, Lender agreed to lend the Company $566,000, which bears interest at a rate of eight percent (8%) per annum, less $56,600 original issue discount. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $3.55 per share. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for more information regarding the Loans.
On April 12, 2022, we entered into a financing arrangement with Talos Victory Fund, LLC, a Delaware limited partnership. In exchange for a promissory note, Talos agreed to lend the Company $296,000.00, which bears interest at a rate of eight percent (8%) per annum, less $29,600.00 original issue discount. Under the terms of the Loan, amortization payments are due beginning August 12, 2022, and each month thereafter with the final payment due on April 12, 2023. Additionally, in the event of a default under the Loan or if the Company elects to pre-pay the Loan, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to Lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The Loan is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. As additional consideration for the financing, the Company issued Lender a 5-year warrant to purchase 9,867 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances, representing 40% warrant coverage on the principal amount of the Loan. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender. J.H. Darbie & Co., Inc. ( “Finder”), a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $11,320.00 (4.25% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 1,295 shares of Company common stock at a fixed price of $14.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant.
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On August 8, 2022, Company entered into a financing arrangement (the “Celtic Bank Loan Agreement”) with Celtic Bank, a Utah corporation. Pursuant to the Celtic Bank Loan Agreement, Celtic Bank agreed to lend the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the agreement, payments became due on August 15, 2022, and consisted of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher, with the final payment due on February 6, 2024. The loan is subject to customary events of default. No material relationship exists between the Company or its affiliates and Lender, other than in respect to the processing of credit card payments through Stripe, Inc.’s payment processing platform, and the Celtic Bank Loan Agreement.
On September 6, 2022, the Company and Donald W. Reeve (“Lender”), a director of the Company, entered into two note modification agreements (each a “Modification” and collectively, the “Modifications”) with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The 2020 Note, the 2021 Note and the Modifications were each approved by the disinterested members of the Board of Directors. The Modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note to January 1, 2023. The Modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616.44 will be due. Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.
On March 29, 2023, the Company, as seller, received a $1,330,463.78 as a purchase price (the “Purchase Price”) for the sale of the Company’s rights, title and interest per a Risk Participation of ERC Claim Agreement, dated March 27, 2023 (“Agreement”) by and between the Company and 1861 Acquisition LLC (the “Buyer,” together with the Company the “Parties”). The Agreement transferred all of the Company’s rights to receive any and all payments, proceeds or distributions of any kind (without set-off, deduction or withholding of any kind), including interest, from the United States Internal Revenue Service (the “IRS”) in respect of the employee retention credits duly and timely claimed by Seller on account of qualified wages paid by Seller and identified as a “Claim for Refund” under Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the third (3rd) and fourth (4th) quarters of 2020, and the first (1st), second (2nd) and third (3rd) quarters of 2021 (the “Tax Refund Claim”) in the aggregate amount of $1,662,698.28 (“Transferred Interests”). Notwithstanding anything to the contrary contained in the Agreement, (i) the relationship between Company and Buyer under the Agreement with respect to the Transferred Interests is that of seller and purchaser, with the Company having irrevocably transferred to Buyer the right to receive from the Company 100% of the monies or property received by the Company with respect to the Tax Refund Claim in exchange for the Purchase Price, and (ii) the Agreement shall not constitute an assignment or transfer or agreement to assign or transfer all or any part of the Company’s legal title in and to the Tax Refund Claim.
On March 17, 2023, the Company, as borrower, entered into an Amended and Restated Line of Credit Note and Agreement (the “New Note”) effective as of October 1, 2022, which amended and restated that certain Line of Credit Note and Agreement dated March 14, 2016 (the “Original Note”) by and between the Company and James V. Leonardo (the “Holder,” together with the Company the “Parties”). The New Note has a principal amount of $250,000 (the ‘Principal Amount”) and accrues interest on the unpaid Principal Amount at a rate of ten percent (10%) per annum. Also on March 17, 2023, James Villa, the Company’s Chief Executive Officer, entered into a personal guarantee with the Holder to personally guarantee the obligations of the Company under the New Note. Under the terms of the New Note, the Company has agreed to make a one-time payment of $16,667 for interest accrued on the Original Note for the four-month period covering June 2022 through September 2022. The Company has also agreed to make quarterly interest payments of $6,250, commencing on December 31, 2022, and continuing through and including September 30, 2023. For consideration received by the Parties for entry into the New Note, the Parties, along with James Villa and RES Exhibit Services, LLC (“RES”), an entity owned by the Holder, entered into a Letter Agreement (the “Agreement”) on March 17, 2023. Under the terms of the Agreement, all prior amounts owed to the Company by RES were set off against amounts owed by the Company to the Holder under the Original Note.
On February 3, 2023, the Company, as borrower, entered into a financing arrangement with Mast Hill Fund, L.P. In exchange for a promissory note, Mast Hill agreed to lend the Company $118,000, which bears interest at a rate of eight percent (8%) per annum, less $11,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning June 3, 2023, and each month thereafter with the final payment due on February 3, 2024. Additionally, in the event of a default under the Loan or if the Company elects to pre-pay the Loan, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $2.00 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to Lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The Loan is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. As additional consideration for the financing, the Company issued Lender a 5-year warrant to purchase 59,000 shares of Company common stock at a fixed price of $2.00 per share, subject to price adjustments for certain actions, including dilutive issuances, representing 100% warrant coverage on the principal amount of the Loan. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan and similar loans between the Company and Lender entered into on November 3, 2021, February 11, 2022, May 31, 2022, and November 23, 2022, respectively. J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $3,100.00 (2.92% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 3,098 shares of Company common stock at a fixed price of $2.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. The Company and the Lender are parties to promissory notes dated November 3, 2021, February 11, 2022, May 27, 2022, and November 23, 2022. On February 3, 2023, the Company and the Lender entered into an amendment with respect to the February 11, 2022 Note (the “Note”) waiving any Event of Default (as defined in the Note) under Section 4.17 of the Note that occurred prior to February 3, 2023. In addition, the amendment extended the maturity date of the Note to May 30, 2023. The Company shall pay $200,000 of the existing balance of the Note on or before March 31, 2023, to reduce the balance of the note by $200,000. If the company fails to make the payment, then the (i) the principal of the Note shall be increased by $30,000 (the “Increased Principal Portion”) as of April 1, 2023, and (ii) the Company shall repay the Increased Principal Portion on or before April 16,2023. Except as set forth above, the terms of the Notes remain the same.
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Business Strategy
We have a threefold business strategy composed of:
| · | providing differentiated cybersecurity software and services to small to mid-sized enterprises who lack the internal resources to focus on cybersecurity related matters by combining customized software and professional services; |
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| · | designing, developing, and marketing cybersecurity SaaS solutions, including our Nodeware solution; and |
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| · | identifying other cybersecurity companies to acquire as part of a strategic roll-up strategy. |
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the market at a time when competition and consolidation in these markets is on the rise. Our software and services are designed to simplify the security needs of our customers and channel partners, with a focus on the small to mid-sized enterprises, and we believe our ability to integrate our product and service offerings differentiates them from our competitors. In addition, we support our channel partners by providing recurring-revenue business models for both services and our cybersecurity SaaS solutions.
Cybersecurity is a constantly evolving field, so we devote significant efforts in developing proprietary software and services to meet our customer and channel partners’ evolving needs. These efforts have resulted in the development of our patented and patent-pending Nodeware solution. We expect to continue to make significant investments in developing other intellectual property to serve as the core to other proprietary software and services.
Historically, a significant portion of our revenues has been derived through our managed support services, however, we believe our cybersecurity SaaS solutions, including Nodeware, present an opportunity for significant growth. We believe that Nodeware’s ability to be deployed in an underserved market segment, across a wide variety of networks and the ability to integrate it into existing and new cybersecurity software and services, will allow us to significantly grow this segment of our business. Similarly, we believe Nodeware’s SaaS recurring revenue business model and its flexibility as a standalone or integrated solution makes it an attractive part of our channel partners’ portfolio of products. Accordingly, in 2022 we made significant investments in Nodeware sales and marketing to grow our team of cybersecurity sales and technical consultants. As a result, we are seeing the pipeline growth expected from focused efforts, which we anticipate will continue revenue growth in 2023 and beyond.
We believe the market for cybersecurity services for small and medium-sized enterprises is fragmented and does not currently meet the needs of this customer base. The market is fragmented and is beginning to consolidate, which is why we are seeking to strategically acquire other cybersecurity technology and services companies.
The following sections define specific components of our business strategy.
Nodeware®
Nodeware is a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware’s flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware assesses vulnerabilities in a computer network using proprietary scanning technology to capture a comprehensive view of the security exposure of a network infrastructure. Users receive alerts and view network information through a proprietary, web enabled dashboard. Continuous and automated internal scanning and external on demand scanning are components of this offering. As described below, Nodeware has one patent and one patent pending. We intend to develop other intellectual property that serve as the core to other proprietary software and services to market through a channel of domestic and international partners and distributors.
Nodeware provides an economical solution for small and medium-sized enterprises as compared to costly solutions focused on enterprise sized customers and is designed to accommodate the varying network needs of our end customers’ organizations and networks. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. Nodeware creates an opportunity for our channel partners to sell and use a product that provides greater visibility into the network security of an end customer. Since 2018, we have continued to expand our portfolio of channel partners, which now includes Telarus, TD SYNNEX, Staples, and a growing list of MSPs, MSSPs, agents and distributors and government contractors.
In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of Nodeware, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements across other current future subsidiaries as IGI’s strategic roll up of cybersecurity companies comes to fruition. This also enhances our ability to bring new cloud and SaaS cybersecurity related solutions to market through our growing channel partner relationships.
Cybersecurity Services
In addition to Nodeware, we provide cybersecurity consulting services that include incident response, security awareness training, cybersecurity risk management, IT governance and compliance, security assessment services, (CISOTaaS ™) and PenLogic™ penetration testing services offerings to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology, in North America. Our cybersecurity consulting projects leverage different technology platforms and processes, such as Nodeware, to create documentation and processes that a customer can use to continually improve overall IT governance and corporate security. We validate overall network and infrastructure security with the goal of maintaining the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from cybersecurity threats and incidents. We continue to enhance our cybersecurity services based on feedback from customers and changes in the market.
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Managed Support Services
We also provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, where we assume the responsibility for providing a defined set of cybersecurity services. These services typically include in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment.
Intellectual Property
We believe that our intellectual property is an asset that will contribute to the growth and profitability of our business. We rely on a combination of patented, patent-pending and confidentiality procedures, trademarks and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks.
In May 2016, we filed a provisional patent application for our proprietary product, Nodeware, and launched it commercially in November 2016. In May 2017, we filed a utility patent application for Nodeware: U.S. Patent No. 10,999,307, was issued on May 4, 2021, for NETWORK ASSESSMENT SYSTEMS AND METHODS THEREOF U.S. Patent Application Serial No. 15/600,297, filed May 19, 2017, claiming priority of U.S. Provisional Patent Application Serial No. 62/338,904, filed May 19, 2016. The patent will remain in effect for four years from the date of issue and may be extended for up to twenty years from the filing date. Therefore, the expiration date of the subject patent, assuming all milestones to extend are met, is July 19, 2037.
In December 2019, we filed a second provisional patent application and in December 2020 we filed the subsequent action on the patent on Nodeware. In 2020 and 2021, we created updates and improvements to the platform in response to COVID-19 needs and impact such as a downloadable Windows executable version along with Windows, Mac, and Linux Agents that could be downloaded to a remote PC or server. A number of enhancements related to data management, threat intelligence, and user functionality were part of these updates.
The efforts we have taken to protect our intellectual property may not be sufficient or effective. As a result of this uncertainty and overall significance to the financial statements, these costs have been expensed.
The U.S. patent system permits the filing of provisional and non-provisional patent applications. A non-provisional patent application is examined by the United States Patent and Trademark Office and can mature into a patent once that office determines that the claimed invention meets the standards for patentability.
Our current patent and trademark portfolio consists of a patent for the Nodeware solution and process for scanning for vulnerabilities and a pending patent covering the methodologies associated with identifying and cataloging the assets on or across any physical or cloud network, together with a registered trademark for the “Nodeware” name and other trademarks and tradenames associated with our company and products. We intend to continue to work to enhance our intellectual property position on the Nodeware solution and in other appropriate cybersecurity technology we generate.
Research and Development
Our research and development efforts are focused on ensuring our software and services continually adapt to ever-evolving cybersecurity threats, developing new and improved functionality to meet our customers’ needs, and to enable robust and efficient integration with other industry solutions. Our research and development team is responsible for the design, development, testing and quality of our software, including Nodeware, and works to ensure that our software is available, reliable and stable.
We believe the timely development of new features and the enhancement of our existing solution(s) that address continuously evolving cybersecurity risks is essential to maintaining our competitive position. Our research and development team works closely with our channel partners, customers, and internal teams to collect user feedback to enhance our development process to continually incorporate suggestions and feedback. We also believe our research and development teams’ focus on developing new products will help us expand our business and improve our market position. We invest substantial resources in research and development to ensure that the functionalities of Nodeware can be robustly and efficiently integrated with other industry solutions because we believe this is key to our ability to expand the presence of Nodeware and our other software and services in the cybersecurity market. We utilize an agile development process to deliver numerous releases, fixes and feature updates on a regular basis and capitalize qualifying costs of developing larger scale projects. Our research and development team is primarily based in Pittsford, New York, and we maintain additional research and development capabilities in certain other locations who supplement our core team.
In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing direct customer and channel partner relationships. We believe a continued focus on intellectual property development creates differentiation in the market for cybersecurity.
Costs incurred prior to reaching technological feasibility are expensed as incurred, and subsequently they are capitalized until product launch.
Certifications
We possess certifications with our business and technology partners and our technical support personnel maintain a number of relevant certifications and qualifications in certain software applications and in the cybersecurity space. We believe having these certifications and qualifications demonstrates to our channel partners and customers that we have the appropriate level of expertise to support their needs. These certifications are examples of our concerted effort to grow and expand our cybersecurity specialization, and include the following:
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CISSP® - Certified Information Systems Security Professionals. The CISSP® certification is a credential for those with technical and managerial competence, skills, experience, and credibility to design, engineer, implement, and manage overall information security programs to protect organizations from increasingly sophisticated attacks. It is a globally recognized standard of achievement. Certain employees in our cybersecurity group have this certification.
GCIH - GIAC Certified Incident Handler. The GCIH certification is a credential for incident handlers who manage security incidents by understanding common attack techniques, vectors and tools as well as defending against and/or responding to such attacks when they occur. The GCIH certification focuses on detecting, responding, and resolving computer security incidents including:
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Certain of our employees in our cybersecurity group have this certification.
CEH – Certified Ethical Hacker. CEH and CEH Master programs are comprehensive ethical hacking certifications to help information security professionals grasp the fundamentals of ethical hacking. The certification serves to assist our consultants to systematically attempt to inspect network infrastructures with the consent of its owner to find security vulnerabilities which a malicious hacker could potentially exploit. The course helps assess the security posture of an organization by identifying vulnerabilities in the network and system infrastructure to determine if unauthorized access is possible. Certain employees in our cybersecurity group have this certification.
CISA – Cybersecurity and Infrastructure Agency leads the national effort to understand, manage, and reduce risk to our cyber and physical infrastructure.
CRISC – Certified in Information Systems and Risk Controls and is a certification in enterprise risk management.
CMMC-AB RP – Cybersecurity Maturity Model Certification is a unified standard for implementing cybersecurity across the defense industrial base, which includes over 300,000 companies in the supply chain.
OSCP – Offensive Security Certified Professional is a certification program that focuses on hands-on offensive information security skills.
GIAC – Global Information Assurance Certification is an information security certification entity that specializes in technical and practical certification for cybersecurity professionals.
- | Penetration Tester (GPEN) |
- | Certified Intrusion Analyst (GCIA) |
- | Certified Incident Handler (GCIH) |
- | Certified Enterprise Defender (GCED) |
- | Security Essentials (GSEC) |
- | Python Coder (GPYC) |
CompTIA Security+ (SEC+) is a global certification that validates the baseline skills in order to perform core security functions.
Regulations
We follow standard regulations and standards as part of our ongoing processes: NYS Shield Act, Sarbanes Oxley , National Institute of Standards and Technology Cybersecurity Framework, and Payment Card Industry (“PCI”) level 4 self-assessment.
Competition
We face competition from many companies in the evolving cybersecurity market. We compete with other MSPs and IT professional services firms who have cybersecurity offerings, MSSPs, and cybersecurity product and software developers operating in the North American market. We have competitors who are both publicly listed and private companies, and that are regional and national in coverage. Many of our larger competitors have substantially greater capital resources, research and development staff, sales, and marketing resources, facilities, and experience than we do. We obtain a portion of our business based on proposals submitted in response to requests from potential and current clients, who will typically also receive proposals from our competitors. Specifically, Nodeware faces direct competition from companies such as Rapid 7, Qualys, and Tenable in the vulnerability management market.
Company Information Available on the Internet
We maintain a website at https://igicybersecrity.com. Through a link to the Investor Relations section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available, free of charge, as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission (SEC). We also maintain a web site for our cybersecurity product, Nodeware, and related services at https://www.nodeware.com. The content of our websites shall not be deemed part of this report and is not incorporated by reference into this report.
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Employees
As of December 31, 2022, we have 55 full-time employees, including 35 in information technology services, 3 in executive management, 5 in accounting, finance and administration, 2 in software development and 10 in marketing and sales. We are not subject to any collective bargaining agreements, and we believe that relations with our employees and independent contractors are good. We believe that we are currently staffed at an appropriate level to administratively implement and carry out our business plan for the next 12 months. However, we expect to add employees in sales, technical support, marketing and cybersecurity consulting to meet growing demands.
Our ability to develop and market our services, and to establish and maintain a competitive position in our businesses will depend, in large part, upon our ability to attract and retain qualified technical, marketing and managerial personnel, of which there can be no assurance.
General Information
We were incorporated under the laws of the state of Delaware on October 14, 1986. Our principal corporate headquarters are located at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534 and our phone number is (585) 385-0610. Our business is in the field of delivering cybersecurity services, licensing and selling our cybersecurity solutions, including Nodeware, and distributing third party software licenses.
Item 1A. Risk Factors
In addition to the other information provided in our reports, you should consider the following factors carefully in evaluating our business and us. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, such as competitive conditions, may also impair our business operations. If any of the following risks occur, our business, financial condition, or results of operations could be materially adversely affected.
Risks Related to our Business and Financial Condition
In the past, we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern and it is possible that conditions and events in the future may negatively impact our ability to continue as a going concern.
As of December 31, 2022, we had a working capital deficit of approximately $6.0 million. We reported a net loss of approximately $3,562,000 for the twelve months ended December 31, 2022. We reported a stockholders’ deficiency of $6,864,214 as of December 31, 2022. We had net loss of approximately $1,569,000 in 2021. At December 31, 2021, we had a stockholders’ deficiency of $4,097,889. These factors raise substantial doubt about our ability to continue as a going concern.
During the year, we engaged in multiple short term funding arrangements, which netted the Company approximately $1,190,000. We are exploring additional sources of financing, including debt and equity, and anticipate significant growth of business. To that end, in March 2023, we, as seller, received $1,330,464 as a purchase price for the sale of the Company’s rights, title and interest to an Employee Retention Credit claim made with the United States Internal Revenue Service. However, we have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. In the future, if we are unable to obtain sufficient funding to support our operations, we could be forced to delay, reduce or eliminate all our research and development programs, product portfolio expansion or commercialization efforts, and our financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. Our report from our independent registered public accounting firm contains statements expressing substantial doubt about our ability to continue as a going concern. Future report could also contain this wording. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.
Our results of operations may be negatively impacted by the COVID-19 pandemic.
The COVID-19 pandemic has resulted, and is likely to continue to result, in economic disruption on a global basis. It has already changed traditional global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19 and its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses. While the travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19, have been generally lifted, there continues to be a disruption in business activity globally. New strains and variants of the coronavirus continue to spread around the world. The rollout of vaccines around the globe is encouraging, but their long-term impact on the political environment, business environment, and the Company is still uncertain.
During 2022, our managed support services, cybersecurity projects and software license revenues were minimally impacted by the impact of the COVID-19 pandemic on our customers’ operational priorities. We are continuing to adapt our operations to meet the challenges of these changing priorities. While employees at our headquarters are physically present in the office more than they were in 2021, other locations have had to go fully remote due to the changing nature of IT work during the pandemic. Our sales and marketing expenses increased significantly during 2022, and we expect these expenses to continue to grow. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition.
If we are unable to raise sufficient capital, we will be unable to fully fund our operations and to otherwise execute our business plan.
Until such time, if ever, that we can generate substantial revenues, we expect to finance our cash needs primarily through equity offerings and debt financings. Our ability to raise capital, whether through equity or through debt, is based, in part, on market events and conditions out of our control. We do not have any future committed source of external funds.
If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce, or terminate our future product and service development or commercialization efforts.
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Our efforts to commercialize our Nodeware solution may not be successful.
We have one patent granted and one patent pending relating to our Nodeware solution. The efforts we have taken to protect our intellectual property may not be sufficient or effective. Additionally, there is no guarantee that our Nodeware solution will perform as expected or as needed.
In order to protect our interest in Nodeware, we sell licenses permitting customers’ access. Licenses are protected through our EULA (end user licensing agreement), reseller/partner contracts, and through the cloud platform it resides in, enabling us to manage subscriptions, use and distribution of the platform. We face a risk of reputational harm and potential intellectual property theft if a licensee mistakenly or intentionally misuses our products. Licensing may also add an expense to our overall cost structure that is not supported by the market for like products.
If we do not successfully develop enhancements or new software, or scale our platform effectively, our operating results and our business may be harmed.
The cybersecurity market is characterized by rapid technological advances, customer price sensitivity, short product and service life cycles, intense competition, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards and regulatory mandates. Any of these factors could create downward pressure on pricing and gross margins, and could adversely affect our renewal rates, as well as our ability to attract new customers. Our future success will depend on our ability to enhance existing software, introduce new software on a timely and cost-effective basis, meet changing customer needs, integrate, and extend our core technology into new applications, and anticipate and respond to emerging cybersecurity threats. We must also continually change and improve our software and services in response to changes in operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools and computer language technology. In addition, our future growth depends upon our ability to continue to meet the expanding needs of our customers and to scale our software and services to meet these expanding needs and expanding customer base. As a result, we must continue to dedicate significant financial and other resources to our research and development efforts.
We may not be able to anticipate future market needs and opportunities, develop enhancements or new software to meet such needs or opportunities, or scale our platforms to maintain the performance of our software and services, in a timely manner or at all. To the extent that we do not successfully develop enhancements or new software, or scale our platform effectively, our operating results and our business may be harmed.
If we are unable to protect our intellectual property rights, our business could be harmed, or we could be required to incur significant expenses to enforce our rights.
We believe that our intellectual property is an asset that may contribute to the growth and profitability of our business. We rely on a combination of patented, patent-pending and confidentiality procedures, trademarks, and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks. Despite our efforts, the steps we have taken to protect our intellectual property rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain. Enforcing our intellectual property rights, if necessary, is difficult, time-consuming, resource-intensive, expensive, and uncertain. Litigation may become necessary and, if so, it may come at a substantial cost and cause diversion of management’s resources, which could harm our business.
We may need to defend against intellectual property infringement claims or misappropriation claims, which may be time-consuming, resource-intensive, and expensive.
Although we have not in the past been subject to claims that any of our products or services infringe intellectual property rights of a third-party, we could be subject to such claims in the future. It’s possible that litigation could result. We do not know whether we will prevail in such proceedings given the highly complex, technical issues and inherent uncertainties in intellectual property litigation. Enforcing our intellectual property rights, if necessary, is difficult, time-consuming, resource-intensive, expensive, and uncertain.
If a challenge to our intellectual property rights results in an adverse outcome, then we could be required to stop the use of our products, services, or technology, pay damages for infringement, and expend resources developing products, services, or technology that are non-infringing.
We experience fluctuations in quarterly and annual operating results.
Our quarterly and annual operating results have fluctuated in the past and likely will fluctuate in the future. The demand for our products is driven largely by the demand for cybersecurity solutions. Accordingly, the cybersecurity industry is affected by market conditions that are often outside our control. Our results of operations may fluctuate significantly from period to period due to a number of factors, including general economic, industry and market conditions, the introduction or adoption of new technologies that compete with our software and services, the length and expense of our sales cycle for our software and services, the loss of a key customer and publicity regarding security breaches generally and the level of perceived threats to IT security. As a result of these factors and other risks discussed in this section, or the cumulative effect of some of these factors, may result in fluctuations in our operating results.
In addition, we recognize revenues from subscriptions over the term of the relevant service period, which is typically one year. As a result, most of our reported revenues in each quarter are derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a shortfall in demand for our solutions in any period may not significantly reduce our revenues for that period, but could negatively affect revenues in future periods. Accordingly, the effect of significant downturns in bookings may not be fully reflected in our results of operations until future periods.
This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of securities analysts or investors, for a particular period. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the trading price of our common stock could fall and we could face costly lawsuits, including securities class action suits.
We do not maintain directors and officers liability insurance, which may subject us to significant exposure if one of our directors or officers is sued.
As of the date of this filing, we do not maintain directors and officers liability insurance. In addition to protecting the individual director or officer against personal losses, it can also cover the legal fees and costs an organization may incur as a result of the lawsuit.
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If a legal action is commenced against one of our directors or officers, including, but not limited to, an action alleging a violation of securities law, we may incur the legal fees and costs associated with defending against the action, which may harm our business. In addition, a potential action could be time-consuming, resource-intensive, expensive, and uncertain.
We currently accrue a liability for a discontinued Simple IRA plan.
Through December 31, 2012, we offered a Simple (Savings Incentive Match Plan for Employees) IRA plan as a retirement plan for eligible employees and offered a voluntary match. We did not make all required voluntary matches prior to terminating the Simple IRA plan and we have accrued liability for the voluntary match portion of the Simple IRA plan, including interest, which was $286,605 as of December 31, 2022. There can be no assurance that the accrued liability amount will be sufficient to satisfy the Company’s potential liability.
We have used and may use our existing credit facility to finance our growth.
We have an accounts receivable credit facility with a financial institution, which enables us to sell accounts receivable to the financial institution with full recourse against us. The fee charged is prime plus 3.6% (effective rate of 11.1% at December 31, 2022) against the average daily outstanding balance of funds advanced. We also granted the financial institution a first priority interest in accounts receivable and a blanket lien. The fee charged is based, in part, on market events and conditions out of our control. The terms of the credit facility are subject to change.
During the years ended December 31, 2022 and 2021, we sold approximately $3,973,000 and $3,630,000, respectively, of our accounts receivable to the financial institution.
Because of the high relative cost, use of the credit facility, in the aggregate, may harm our business.
We rely on one customer for a large portion of our revenues.
We depend on one customer for a large portion of our revenue. Through the 12 months ending December 31, 2022, sales to this customer, including sales under subcontracts, accounted for 63% of total sales and 27% of accounts receivable. During 2021, sales to this customer, including sales under subcontracts, accounted for 60% of total sales and 15% of accounts receivable. The loss of this customer could have a significant impact on our revenues and harm our business and results of operations.
We rely on our channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.
Our success significantly depends upon establishing and maintaining relationships with a variety of channel partners and we anticipate that we will continue to depend on these partners in order to grow our business.
For the twelve months ended December 31, 2022, approximately 94% of our business comes from our channel sales and approximately 6% from direct sales to end customers, and the percentage of revenues derived from channel partners may increase in future periods. Our agreements with our channel partners are generally non-exclusive and do not prohibit them from working with our competitors or offering competing solutions, and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors, do not effectively market and sell our software and services, or fail to meet the needs of our customers, then our ability to grow our business and sell our software and services may be adversely affected. In addition, the loss of one or more of our larger channel partners, who may cease marketing our software and services with limited or no notice, and our possible inability to replace them, could adversely affect our sales. Moreover, our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our software and services, which can be complex. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our software and services or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations. Even if we are successful, these relationships may not result in greater customer usage of our software and services or increased revenues.
In addition, the financial health of our channel partners and our continuing relationships with them are important to our success. Some of these channel partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency and/or the inability of such distributors to obtain credit to finance purchases of our software and services. In addition, weakness in the end-user market could negatively affect the cash flows of our channel partners who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Our business could be harmed if the financial condition of some of these channel partners substantially weakened and we were unable to timely secure replacement channel partners.
We are highly leveraged, which increases our operating deficit and makes it difficult for us to grow.
At December 31, 2022, we had current liabilities of approximately $6.6 million and long-term liabilities of $1.9 million and stockholders’ deficiency of $6,864,214. At December 31, 2022, we had a working capital deficit of approximately $6.0 million and a current ratio of 0.09. At December 31, 2021, we had current liabilities of approximately $4.1 million and long-term liabilities of $1.5 million and stockholders’ deficiency of $4,097,889. At December 31, 2021, we had a working capital deficit of approximately $3.1 million and a current ratio of .25.
Working capital shortages may impair our business operations and growth strategy, and accordingly, our business operations.
If we acquire businesses or business assets and do not successfully integrate the acquisitions, our results of operations could be adversely affected.
We may grow our business by acquiring or investing in other companies and businesses and assets that we feel have synergy and will complement our business plan. As such, we periodically evaluate potential business combinations and investments in other companies and assets. We may be unable to profitably manage the businesses and assets that we may acquire or invest in. We may fail to integrate these businesses and assets successfully without incurring substantial expenses, delays or other problems that could negatively impact our results of operations.
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Our investments in cybersecurity and other business initiatives may not be successful.
We have invested in and continue to invest in cybersecurity capabilities to add new software and services to address the needs of our clients, including our newly introduced product, Nodeware. Our investments may not be successful or increase our revenues. If we are not successful in creating value from our investments by increasing sales, our financial condition and prospects could be harmed.
If we fail to adequately manage the size of our business, it could have a severe negative impact on our financial results or stock price.
Our management believes that to be successful we must appropriately manage the size of our business. This may mean reducing costs and overhead in certain economic periods, and selectively growing in periods of economic expansion. In addition, we will be required to implement operational, financial and management information procedures and controls that are efficient and appropriate for the size and scope of our operations. The management skills and systems currently in place may not be adequate and we may not be able to manage any significant reductions or growth effectively.
We may have difficulties in managing our growth.
Our future growth depends, in part, on our ability to expand, train and manage our employee base and provide support to an expanded client base. We must also enhance and implement new operating and software systems to accommodate our growth and expansion of IT product and service offerings. If we cannot manage growth effectively, it could have a material adverse effect on our results of operations, business and financial condition. In addition, acquisitions, investments and expansion involve substantial infrastructure costs and working capital. We cannot provide assurance that we will be able to integrate acquisitions, if any, and expansions efficiently. Similarly, we cannot provide assurance that any investments or expansion will enhance our profitability. If we do not achieve sufficient sales growth to offset the increased expenses associated with our expansion, our results will be adversely affected.
We depend on the continued services of our key personnel.
Our future success depends, in part, on the continuing efforts of our senior executive officers. The loss of any of these key employees may materially adversely affect our business. We do not maintain key-person insurance for any member of our senior management team. From time to time, there may be changes in our senior management team resulting from the termination or departure of executives. Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of the services of our senior management or other key employees for any reason could significantly delay or prevent the achievement of our development and strategic objectives and harm our business, financial condition and results of operations.
Our future success depends on our ability to continue to retain and attract qualified employees.
We believe that our future success depends upon our ability to continue to train, retain, effectively manage and attract highly skilled technical, managerial, sales and marketing personnel. This includes skills for our new initiatives in cybersecurity. Employee turnover is generally high in the IT services industry. If our efforts in these areas are not successful, our costs may increase, our sales efforts may be hindered, and the quality of our client service may suffer. Although we invest significant resources in recruiting and retaining employees, there is often significant competition for certain personnel in the IT services industry. From time to time, we experience difficulties in locating enough highly qualified candidates in desired geographic locations, or with required specific expertise.
We believe that our growth will depend, to a significant extent, on our success in recruiting and retaining a sufficient number of qualified sales personnel and their ability to obtain new customers, manage our existing customer base and expand the sales of our software and services. We plan to continue to expand our sales force and make a significant investment in our sales and marketing activities. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the competitive markets where we do business. Competition for highly skilled personnel is frequently intense and we may not be able to compete for these employees. If we are unable to recruit and retain a sufficient number of productive sales personnel, sales of our software and services and the growth of our business may be harmed. Additionally, if our efforts do not result in increased revenues, our operating results could be negatively impacted due to the upfront operating expenses associated with expanding our sales force.
If we are required to collect higher sales and use or other taxes on the software and services we sell, we may be subject to liability for past sales and our future sales may decrease.
Taxing jurisdictions, including state and local entities, have differing rules and regulations governing sales and use or other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our SaaS solutions in various jurisdictions is unclear. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to state and international jurisdictions for which we may not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our software and services or otherwise harm our business and operating results.
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Risks Related to our Industry
As a provider of cybersecurity software and services, we are subject to a heightened threat of cyberattacks intended to disrupt our internal operations or IT services provided to customers, and any such disruption could reduce our revenue, increase our expenses, damage our reputation.
We sell cybersecurity software and services, including third-party software as well as our internally developed software, Nodeware. As a result, we have been and will be a target of cyber-attacks designed to impede the performance of our products, penetrate our network security or the security of our cloud platform or our internal systems, or that of our customers, misappropriate proprietary information and/or cause interruptions to our services. Because of the significant military action against Ukraine launched by Russia, the risk of such cyber-attacks is increased.
For example, because Nodeware is a network vulnerability management solution, a successful cyber-attack on us may be perceived as a victory for the cyber attacker, thereby increasing the likelihood that we may be a target of more cyber-attacks, even absent financial motives. Further, if our systems are breached as a result of third-party action, employee error or misconduct, attackers could learn critical information about how our primary product operates to help protect our customers’ IT infrastructures from cyber risk, thereby making our customers more vulnerable to cyber-attacks. In addition, if actual or perceived breaches of our network security occur, they could adversely affect the market perception of our Nodeware solution, negatively affecting our reputation, and may expose us to the loss of our proprietary information or information belonging to our customers, investigations or litigation and possible liability, including injunctive relief and monetary damages. Such security breaches could also divert the efforts of our technical and management personnel. In addition, such security breaches could impair our ability to operate our business and provide products to our customers. If this happens, our reputation could be harmed, our revenue could decline, and our business could suffer.
Our information technology systems may be subject to intentional disruption or other security incidents that could result in liability and adversely impact our reputation and future sales.
We and our service providers face threats from a variety of sources, including attacks on our networks and systems from numerous sources, including traditional “hackers,” sophisticated nation-state and nation-state supported actors, other sources of malicious code (such as viruses and worms), and phishing attempts. We and our service providers could be a target of cyber-attacks or other malfeasance designed to impede the performance of our software and services, penetrate our network security or the security of our cloud platform or our internal systems, misappropriate proprietary information and/or cause interruptions to our services. Our software, platforms, and system, and those of our service providers, may also suffer security incidents as a result of non-technical issues, including intentional or inadvertent acts or omissions by our employees or service providers. With the increase in personnel working remotely during the current COVID-19 pandemic, we and our service providers are at increased risk for security breaches. . Because of the significant military action against Ukraine launched by Russia, the risk of such cyber-attacks, malfeasance, security incidents, and security breaches is increased. The conditions caused by the Russian invasion of Ukraine could also result in disruption or other security incidents for our service providers.
We are taking steps to monitor and enhance the security of our software and services, cloud platform, and other relevant systems, IT infrastructure, networks, and data; however, the unprecedented scale of remote work may require additional personnel and resources, which nevertheless cannot be guaranteed to fully safeguard our software and services, our cloud platform, or any systems, IT infrastructure networks, or data upon which we rely. Further, because our operations involve providing cybersecurity software and services to our customers, we may be targeted for cyber-attacks and other security incidents. A breach in our data security or an attack against our service availability, or that of our third-party service providers, could impact our networks or networks secured by our software and services, creating system disruptions or slowdowns and exploiting security vulnerabilities of our software and services, and the information stored on our networks or those of our third-party service providers could be accessed, publicly disclosed, altered, lost, or stolen, which could subject us to liability and cause us financial harm. If an actual or perceived disruption in the availability of our software and services or the breach of our security measures or those of our service providers occurs, it could adversely affect the market perception of our software and services, result in a loss of competitive advantage, have a negative impact on our reputation, or result in the loss of customers, channel partners and sales, and it may expose us to the loss or alteration of information, litigation, regulatory actions and investigations and possible liability. Any such actual or perceived security breach or disruption could also divert the efforts of our technical and management personnel. We also may incur significant costs and operational consequences of investigating, remediating, eliminating and putting in place additional tools and devices designed to prevent actual or perceived security incidents, as well as the costs to comply with any notification obligations resulting from any security incidents. In addition, any such actual or perceived security breach could impair our ability to operate our business and provide software and services to our customers. If this happens, our reputation could be harmed, our revenues could decline and our business could suffer.
Although we maintain insurance coverage that may be applicable to certain liabilities in the event of a security breach or other security incident, we cannot be certain that our insurance coverage will be adequate for liabilities that actually are incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material and adverse effect on our business, including our financial condition, operating results and reputation.
If our software and services fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.
If our software and services fail to detect vulnerabilities in our customers’ IT infrastructures, or if our software and services fail to identify and respond to new and increasingly complex methods of attacks, our business and reputation may suffer. There is no guarantee that our software and services will detect all vulnerabilities. Additionally, our cybersecurity software and services may falsely detect vulnerabilities or threats that do not actually exist. For example, some of our software and services rely on information on attack sources aggregated from third-party data providers who monitor global malicious activity originating from a variety of sources, including anonymous proxies, specific IP addresses, botnets and phishing sites. If the information from these data providers is inaccurate, the potential for false indications of security vulnerabilities increases. These false positives, while typical in the industry, may impair the perceived reliability or usability of our software and services and may therefore adversely impact market acceptance of our software and services and could result in negative publicity, loss of customers and sales, increased costs to remedy any incorrect information or problem, or claims by aggrieved parties. Similar issues may be generated by the misuse of our tools to identify and exploit vulnerabilities.
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Further, our software and services sometimes are tested against other security products, and may fail to perform as effectively, or to be perceived as performing as effectively, as competitive products for any number of reasons, including misconfiguration. To the extent current or potential customers, channel partners, or others believe there has been an occurrence of an actual or perceived failure of our software and services to detect a vulnerability or otherwise to function as effectively as competitive products in any particular test or indicates our software and services do not provide significant value, our business, competitive position, and reputation could be harmed.
In addition, our software and services do not currently extend to cover mobile devices or personal devices that employees may bring into an organization. As such, our software and services would not identify or address vulnerabilities in mobile devices, such as mobile phones or tablets, or personal devices, and our customers’ IT infrastructures may be compromised by attacks that infiltrate their networks through such devices.
An actual or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our software and services, could adversely affect the market’s perception of our cybersecurity software and services.
If our solutions fail to help our customers achieve and maintain compliance with regulations and industry standards, our revenues and operating results could be harmed.
We generate a portion of our revenues from software and services that help organizations achieve and maintain compliance with regulations and industry standards. For example, some of our customers subscribe to our software and services to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council, or the PCI Council, which apply to companies that store cardholder data. Industry organizations like the PCI Council may significantly change their security standards with little or no notice, including changes that could make their standards more or less onerous for businesses. Governments may also adopt new laws or regulations, or make changes to existing laws or regulations, that could impact the demand for or value of our solutions.
If we are unable to adapt our software and services to changing regulatory standards in a timely manner, or if our solutions fail to assist with or expedite our customers’ compliance initiatives, our customers may lose confidence in our solutions and could switch to products offered by our competitors. In addition, if regulations and standards related to data security, vulnerability management and other IT, security and compliance requirements are relaxed or the penalties for non-compliance are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our solutions. In any of these cases, our revenues and operating results could be harmed.
Our cybersecurity software and services are delivered from a third-party vendor, and any disruption of service at their facilities would interrupt or delay our ability to deliver our software and services to our customers which could reduce our revenues and harm our operating results.
Our existing data center facilities providers have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with the facilities providers on commercially reasonable terms or if in the future we add additional data center facility providers, we may experience costs or downtime in connection with the loss of an existing facility or the transfer to, or addition of, new data center facilities.
Any disruptions or other performance problems with our software and services could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenues, cause us to issue credits to customers, subject us to potential liability and cause customers to terminate their subscriptions or not renew their subscriptions.
If the market for cloud solutions for IT, security and compliance does not evolve as we anticipate, our revenues may not grow and our operating results would be harmed.
Our success depends to a significant extent on the willingness of organizations to increase their use of cloud solutions for their IT, security, and compliance. To date, some organizations have been reluctant to use cloud solutions because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with these solutions. If other cloud service providers experience security incidents, loss of customer data, disruptions in service delivery or other problems, the market for cloud solutions as a whole, including our solutions, may be negatively impacted. Moreover, many organizations have invested substantial personnel and financial resources to integrate on-premise software into their businesses, and as a result may be reluctant or unwilling to migrate to a cloud solution, such as Nodeware. Organizations that use on-premise security products, such as network firewalls, security information and event management products or data loss prevention solutions, may also believe that these products sufficiently protect their IT infrastructure and deliver adequate security. Therefore, they may continue spending their IT security budgets on these products and may not adopt our software and services in addition to or as a replacement for such products.
If customers do not recognize the benefits of our cloud software and our services over traditional on-premise enterprise software products, and as a result we are unable to increase sales of subscriptions to our software and services, then our revenues may not grow or may decline, and our operating results would be harmed.
We use third-party software and data that may be difficult to replace or cause errors or failures of our software and services that could lead to lost customers or harm to our reputation and our operating results.
We license third-party software as well as security and compliance data from various third parties to deliver our software and services. In the future, this software or data may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software or data could result in delays in the provisioning of our software and services until equivalent technology or data is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in or failures of this third-party software or data could result in errors or defects in our software and services or cause our software and services to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.
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We will need to maintain our relationships with third-party software and data providers, and to obtain software and data from such providers that do not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver effective solutions to our customers and could harm our operating results.
Our software contains third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our software and services.
Our software contains software licensed to us by third-parties under so-called “open source” licenses, including the GNU General Public License, the GNU Lesser General Public License, the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming that what we believe to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms. If we combine our proprietary software with open source software in certain ways, we could, in some circumstances, be required to release the source code of our proprietary software to the public. Disclosing the source code of our proprietary software could make it easier for cyber attackers and other third parties to discover vulnerabilities in or to defeat the protections of our solutions, which could result in our solutions failing to provide our customers with the security they expect from our services. This could harm our business and reputation. Disclosing our proprietary source code also could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of sales for us. Any of these events could have a material adverse effect on our business, operating results and financial condition.
Our software and services could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our software and services.
We may collect, store, process and use our customers’ employees or customers’ personally identifiable information and other data in our transactions with them, and we may rely on third parties that are not directly under our control to do so as well. While we take reasonable measures intended to protect the security, integrity and confidentiality of the personal information and other sensitive information we collect, store or transmit, we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third parties will not gain unauthorized access to this information. If we or our third-party service providers were to experience a breach, disruption or failure of systems compromising our customers’ data, or if one of our third-party service providers or partners were to access our customers’ personal data without our authorization, our brand and reputation could be adversely affected, use of our software and services could decrease and we could be exposed to a risk of loss, litigation and regulatory proceedings.
Despite our compliance efforts, we may fail to achieve compliance with applicable privacy or data protection laws and regulations as they evolve, or adhere to contractual obligations regarding the collection, processing, storage and transfer of data (including data from our customers, prospective customers, partners and employees), either due to internal or external factors such as resource limitations or a lack of vendor cooperation. Any actual or perceived failure to comply with these laws or obligations could result in enforcement action against us, including fines, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to any existing customers and prospective customers), any of which could harm our business, results of operations, and financial condition. Further, privacy concerns may inhibit market adoption of our software and services, particularly in certain industries and foreign countries.
We depend on prime contracts or subcontracts with the federal, state, and local governments for a substantial portion of our sales, and our business would be seriously harmed if the government ceased doing business with us or our prime contractors or significantly decreased the amount of business it does with us or our prime contractors.
We derived approximately 63% of our sales in 2022 and 59% of our sales in 2021 from contracts as either a prime contractor or a subcontractor from government contracts. We expect that we will continue to derive a substantial portion of our sales for the foreseeable future from work performed under government contracts, as we have in the past, and from marketing efforts focused on commercial enterprises. If we or our prime contractors were suspended or prohibited from contracting with federal, state or local governments, or if our reputation or relationship with the federal, state or local governments and commercial enterprises were impaired, or if any of the foregoing otherwise ceased doing business with us or our prime contractors or significantly decreased the amount of business it does with us or our prime contractors, our business, prospects, financial condition and operating results would be materially adversely affected.
We operate in a highly competitive environment and, as a result, we may not be able to compete effectively or maintain or increase our sales.
We operate in a highly competitive environment with numerous competitors, some of which have greater resources or better brand recognition than we do. This competitive environment subjects us to various risks, including the ability to provide our software and services at competitive prices that allow us to maintain our profitability. Because of this competitive environment, we may have limited ability to increase prices in response to increased costs without losing competitive position which may adversely affect our margins and financial performance. In addition, price reductions by our competitors may result in the reduction of our prices and a corresponding reduction in our profitability. As a result, we may face periods of intense competition in the future, which could have a material adverse effect on our profitability and results of operations.
Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, revenues may vary from period to period, which may cause our operating results to fluctuate and could harm our business.
The timing of sales of our software and services can be difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large transactions. We sell our cybersecurity software and services primarily to IT departments that are managing a growing set of user and compliance demands, which has increased the complexity of customer requirements to be met and confirmed during the sales cycle and prolonged our sales cycle. Further, the length of time that potential customers devote to their testing and evaluation, contract negotiation and budgeting processes varies significantly, which has also made our sales cycle long and unpredictable. The length of the sales cycle for our software and services typically ranges from six to twelve months but can be more than eighteen months. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result we could lose other sales opportunities or incur expenses that are not offset by an increase in revenues, which could harm our business.
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Our business could be adversely affected by changes in budgetary priorities of the federal, state and local governments.
Because we derive a significant portion of our sales from contracts with federal, state and local governments, we believe that the success and development of our business will continue to depend on our successful participation in their contract programs. Changes in federal, state and local government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs which call for the types of services that we provide or a change in government contracting policies, could cause U.S. Governmental agencies as well as state and local governments to reduce their expenditures under contracts, to exercise their right to terminate contracts at any time without penalty, not to exercise options to renew contracts or to delay or not originate new contracts. Any of those actions could seriously harm our business, prospects, financial condition or operating results. Moreover, although our contracts with governmental entities may contemplate that our services will be performed over a period of several years, government entities usually must approve funds for a given program each government fiscal year and may significantly reduce or eliminate funding for a program. Significant reductions in these appropriations could have a material adverse effect on our business. Additional factors that could have a serious adverse effect on our government contracting business include, but may not be limited to:
| · | changes in government programs or requirements; |
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| · | budgetary priorities limiting or delaying government spending generally, or by specific departments or agencies and changes in fiscal policies or available funding, including potential governmental shutdowns; |
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| · | reductions in the government’s use of technology solutions firms; |
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| · | a decrease in the number of contracts reserved for small businesses, or small business set asides, which could result in our inability to compete directly for these prime contracts; and |
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| · | curtailment of the government uses of IT or related professional services. |
We rely on software-as-a-service vendors to operate certain functions of our business and any failure of such vendors to provide services to us could adversely impact our business and operations.
We rely on third-party software-as-a-service vendors to operate certain critical functions of our business, including financial management and human resource management. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated, all of which could harm our business.
Risks Related to our Common Stock
Upon exercise of our outstanding options or warrants and conversion of our convertible notes we will be obligated to issue a substantial number of additional shares of common stock which will dilute our present stockholders.
We are obligated to issue additional shares of our common stock in connection with our outstanding options, warrants, and convertible notes. As of March 31, 2023, there were options, warrants, convertible notes outstanding, convertible into 179,389, 178,104 and 140,833 shares of common stock, respectively, at prices ranging from $1.50 to $18.75 per share. The exercise, conversion or exchange of warrants or convertible securities, including for other securities, will cause us to issue additional shares of our common stock and will dilute the percentage ownership of our stockholders. In addition, we have in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to the securities held by other stockholders not participating in such exchange.
Our stock price is volatile and could be further affected by events not within our control.
The trading price of our common stock has been volatile and will continue to be subject to volatility in the trading markets and other factors.
The closing market price for our common stock varied between a low of $2.00 and a high of $27.75 in 2022. This volatility may affect the price at which a stockholder could sell its shares of common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock. Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including variations in our quarterly operating results and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, or capital commitments.
Our common stock is currently quoted on the Over The Counter (“OTC”) Bulletin Board. Because there is a limited public market for our common stock, a stockholder may not be able to sell shares when he or she wants. We cannot assure you that an active trading market for our common stock will ever develop.
There is limited trading in our common stock, and we cannot assure you that an active public market for our common stock will ever develop. The lack of an active public trading market means that a stockholder may not be able to sell shares of common stock when wanted, thereby increasing market risk. Until our common stock is listed on an exchange, we expect that the shares will continue to be quoted on the OTC Bulletin Board. However, an investor may find it difficult to obtain accurate quotations regarding the common stock’s market value. In addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect the shares’ liquidity. Moreover, our ability to obtain future financing may be adversely affected by the consequences of our common stock trading on the OTC Bulletin Board.
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Our common stock may be considered a “penny stock” and may be difficult to buy or sell.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market or exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is currently below $5.00 per share and therefore may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to accept our share certificates into a customer account and may affect the ability of our stockholders to sell their shares.
Concentration of ownership among our existing executive officers, directors and holders of 5% or more of our outstanding common stock may prevent new investors from influencing significant corporate decisions.
As of March 31, 2023, our executive officers and directors owned, in the aggregate, approximately 18.4% of our outstanding common stock. In addition, there are a number of holders of 5% or more of our outstanding common who are not our officers and directors. As a result, such persons, acting together, have significant ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
Sales of large blocks of our common stock over a short time last fall could have a significant adverse effect on our common stock price. If our existing stockholders and investors seek to sell a substantial number of shares of our common stock, such selling efforts may cause significant declines in the market price of our common stock. The existence of an overhang, which is the potential dilution in the value of our common stock due to outstanding convertible notes, warrants and stock options, whether or not sales have occurred or are occurring, also could make our ability to raise additional financing through the sale of equity or equity-linked securities more difficult in the future at a time and price that we deem reasonable or appropriate. If our existing stockholders and investors seek to sell a substantial number of shares of our common stock, such selling efforts may cause significant declines in the market price of our common stock.
Our common stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our common stock.
Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.
Because we do not intend to pay cash dividends on our shares of common stock, any returns will be limited to the value of our shares.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the increase, if any, of our share price.
If securities analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about our business or if they publish negative evaluations of our stock, the price and trading volume of our stock could decline.
The trading market for our common stock will rely, in part, on the research and reports that industry or financial analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by industry or financial analysts. If no, or few, analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock or publish inaccurate or unfavorable research about our business, or provide more favorable relative recommendations about our competitors, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price and trading volume to decline.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our principal offices are located at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534, where we lease approximately 7,181 square feet of office space under a lease that expires in May 2029. We do not own or operate, and have no plans to establish, any manufacturing facilities.
Item 3. Legal Proceedings
We are not presently involved in any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the OTC Bulletin Board under the symbol IMCI. The following table sets forth, for the periods indicated, the high and low closing bid quotations per share for our common stock for each quarter within the last two fiscal years, as reported by the OTC Bulletin Board. Quotations represent interdealer prices without an adjustment for retail markups, markdowns or commissions and may not represent actual transactions:
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Year Ended December 31, 2022 |
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First Quarter |
| $ | 15.75 |
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| $ | 7.94 |
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Second Quarter |
| $ | 27.76 |
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| $ | 10.13 |
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Third Quarter |
| $ | 11.40 |
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| $ | 5.63 |
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Fourth Quarter |
| $ | 5.85 |
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| $ | 2.00 |
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Year Ended December 31, 2021 |
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First Quarter |
| $ | 20.78 |
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| $ | 6.38 |
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Second Quarter |
| $ | 22.50 |
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| $ | 12.00 |
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Third Quarter |
| $ | 18.75 |
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| $ | 8.18 |
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Fourth Quarter |
| $ | 12.75 |
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| $ | 5.33 |
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At March 31, 2023, we had 208 record stockholders and estimate that we had approximately 1,200 beneficial stockholders.
Dividend Policy
We have never declared or paid a cash dividend on our common stock and we currently anticipate that we will retain future earnings for the development, operations and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. The payment of cash dividends in the future will be dependent upon our earnings and financial requirements and other factors deemed relevant by our Board.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary statement identifying important factors that could cause our actual results to differ from those projected in forward-looking statements.
Readers of this report are advised that this document contains both statements of historical facts and forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward-looking statements. Examples of forward-looking statements include, but are not limited to (i) projections of sales, income or loss, earnings per share, capital expenditures, dividends, capital structure, and other financial items, (ii) statements of our plans and objectives with respect to business transactions and enhancement of stockholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report.
Business
Headquartered in Pittsford, New York, Infinite Group is a developer of cybersecurity software and related cybersecurity consulting, advisory and managed information security services. We principally sell our software and services through indirect channels such as MSPs, MSSPs, agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the cybersecurity market at a time when competition and consolidation in these markets are on the rise. Our strategy to differentiate our cybersecurity software and services from our competitors is to combine customized software and professional services, and grow our business by designing, developing, and marketing cybersecurity SaaS solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI CyberLabs, to fill technology gaps we identify, and then we bring these software and services to market through our existing channel partner and customer relationships. Our software and services are designed to simplify and manage the security needs of our customers and channel partners in a variety of environments. We focus on the small and medium-sized enterprises market. We support our channel partners by providing recurring-revenue business models for both services and through our cybersecurity SaaS solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions.
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Business Strategy
We have a threefold business strategy composed of:
| · | providing differentiated cybersecurity software and services to small to mid-sized enterprises who lack the internal resources to focus on cybersecurity related matters by combining customized software and professional services; |
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| · | designing, developing, and marketing cybersecurity SaaS solutions, including Nodeware; and |
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| · | identifying other cybersecurity companies to acquire as part of a strategic roll-up strategy. |
We believe our ability to succeed depends on how successful we are in differentiating ourselves in the market at a time when competition and consolidation in these markets is on the rise.
Our software and services are designed to simplify the security needs of our customers and channel partners, with a focus on the small to mid-sized enterprises, and be believe our ability to integrate our product and service offerings differentiates them from our competitors. In addition, we support our channel partners by providing recurring -revenue business models for both services and our cybersecurity SaaS solutions.
Cybersecurity is a constantly evolving field, so we devote significant efforts in developing proprietary software and services to meet our customer and channel partners’ evolving needs. These efforts have resulted in the development of our patented and patent-pending Nodeware solution. We expect to continue to make significant investments in developing other intellectual property to serve as the core to other proprietary software and services.
Historically, a significant portion of our revenues has been derived through our managed support services, however, we believe our cybersecurity SaaS solutions, including Nodeware, present an opportunity for significant growth. We believe that Nodeware’s ability to be deployed across a wide variety of networks and the ability to integrate it into existing and new cybersecurity solutions, will allow us to significantly grow this segment of our business. Similarly, we believe Nodeware’s SaaS recurring revenue business model and its flexibility as a standalone or integrated solution makes it an attractive part of our channel partners’ portfolio of products. Accordingly, in 2022 we made significant investments in IGI and CyberLabs sales and marketing to grow our team of cybersecurity sales and technical consultants. As a result, we believe we are seeing the pipeline growth expected from focused efforts, which we anticipate will convert to revenue growth in 2023.
We believe the market for cybersecurity services for small and medium-sized enterprises is fragmented and does not currently meet the needs of this customer base. The market is fragmented and is beginning to consolidate, which is why we are seeking to strategically acquire other cybersecurity technology and services companies.
Recent Developments
In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware Cloud security solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing channel partner relationships.
In accordance with our strategic roll-up strategy, on January 31, 2022, we entered into an agreement to acquire the issued and outstanding equity securities of Pratum, Inc. (“Pratum”), an Iowa corporation and an information securities firm. Pratum provides cybersecurity consulting and advisory services, risk assessments, and managed extended detection and response (“XDR”) services, which we believe is a strategic fit for us. The aggregate purchase price under the Pratum agreement is $8,500,000, subject to customary purchase price adjustments for, among other things, indebtedness of Pratum as of the closing. $8,000,000 will be paid to Pratum’s shareholder at closing and $500,000 will be deposited at closing with an escrow agent to be held in escrow for a period of six months. It was anticipated that the transaction would close in the first half of 2022. On June 15, 2022, the agreement was terminated, and the transaction did not close.
During the year ended December 31, 2022, we had sales of approximately $7.0 million, an operating loss of approximately $2.3 million and a net loss of approximately $3.6 million, due primarily to increased investment in sales and marketing for Nodeware and related services, together with increased costs associated with our preparations to list on NASDAQ and with assessing potential acquisition targets. We had full year sales of approximately $7.0 million in 2022 and $7.2 million in 2021, generating operating loss of approximately $2.3 million and $1.4 million and net loss of approximately $3.6 million and $1.6 million, respectively.
On December 15, 2021, our board of directors (the “Board”) approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock and recommended that the stockholders of the Company authorize the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On January 26, 2022, the company’s stockholder voted to authorize the reverse stock split. The record date of the split is October 17, 2022, with a final ratio of 75-1 for the reverse stock split. The reverse stock split will not impact the number of authorized shares of common stock which will remain at 60,000,000 shares. All option, share and per share information in this prospectus does not give effect to the reverse stock split.
On November 3, 2021, we entered into a financing arrangement (the “Bridge Loan”) with Mast Hill Fund, L.P. (the “Lender”), a Delaware limited partnership. In exchange for a promissory note, Lender agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022.
On February 15, 2022, we entered into a second financing arrangement together with the Bridge Loan, (the “Loans”) with Lender. In exchange for a promissory note, Lender agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. As additional consideration for the second Mast Hill Loan, the Company issued the “Lender” a 5-year warrant to purchase 12,334 shares of Company common stock at a fixed price of $12.00 per share. J.H. Darbie & Co., Inc. ( “Finder”), a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $14,650.00 (4.39% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 1,619 shares of Company common stock at a fixed price of $14.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for more information regarding the Loans.
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On May 27, 2022, we entered into a third financing arrangement together with the Loans, with Lender. In exchange for a promissory note, Lender agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for more information regarding the Loans.
On November 23, 2022, we entered into a fourth financing arrangement together with the Loans, with Lender. In exchange for a promissory note, Lender agreed to lend the Company $566,000, which bears interest at a rate of eight percent (8%) per annum, less $56,600 original issue discount. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $3.55 per share. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for more information regarding the Loans.
On April 12, 2022, we entered into a financing arrangement with Talos Victory Fund, LLC, a Delaware limited partnership. In exchange for a promissory note, Talos agreed to lend the Company $296,000.00, which bears interest at a rate of eight percent (8%) per annum, less $29,600.00 original issue discount. Under the terms of the Loan, amortization payments are due beginning August 12, 2022, and each month thereafter with the final payment due on April 12, 2023. Additionally, in the event of a default under the Loan or if the Company elects to pre-pay the Loan, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to Lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The Loan is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. As additional consideration for the financing, the Company issued Lender a 5-year warrant to purchase 9,867 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances, representing 40% warrant coverage on the principal amount of the Loan. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender. J.H. Darbie & Co., Inc. ( “Finder”), a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $11,320.00 (4.25% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 1,295 shares of Company common stock at a fixed price of $14.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant.
On August 8, 2022, Company entered into a financing arrangement (the “Celtic Bank Loan Agreement”) with Celtic Bank, a Utah corporation. Pursuant to the Celtic Bank Loan Agreement, Celtic Bank agreed to lend the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the agreement, payments became due on August 15, 2022, and consisted of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty-day period, whichever is higher, with the final payment due on February 6, 2024. The loan is subject to customary events of default. No material relationship exists between the Company or its affiliates and Lender, other than in respect to the processing of credit card payments through Stripe, Inc.’s payment processing platform, and the Celtic Bank Loan Agreement.
On September 6, 2022, the Company and Donald W. Reeve (“Lender”), a director of the Company, entered into two note modification agreements (each a “Modification” and collectively, the “Modifications”) with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The 2020 Note, the 2021 Note and the Modifications were each approved by the disinterested members of the Board of Directors. The Modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note to January 1, 2023. The Modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616.44 will be due. Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.
On March 29, 2023, the Company, as seller, received a $1,330,464 as a purchase price (the “Purchase Price”) for the sale of the Company’s rights, title and interest per a Risk Participation of ERC Claim Agreement, dated March 27, 2023 (“Agreement”) by and between the Company and 1861 Acquisition LLC (the “Buyer,” together with the Company the “Parties”). The Agreement transferred all of the Company’s rights to receive any and all payments, proceeds or distributions of any kind (without set-off, deduction or withholding of any kind), including interest, from the United States Internal Revenue Service (the “IRS”) in respect of the employee retention credits duly and timely claimed by Seller on account of qualified wages paid by Seller and identified as a “Claim for Refund” under Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the third (3rd) and fourth (4th) quarters of 2020, and the first (1st), second (2nd) and third (3rd) quarters of 2021 (the “Tax Refund Claim”) in the aggregate amount of $1,662,698 (“Transferred Interests”). Notwithstanding anything to the contrary contained in the Agreement, (i) the relationship between Company and Buyer under the Agreement with respect to the Transferred Interests is that of seller and purchaser, with the Company having irrevocably transferred to Buyer the right to receive from the Company 100% of the monies or property received by the Company with respect to the Tax Refund Claim in exchange for the Purchase Price, and (ii) the Agreement shall not constitute an assignment or transfer or agreement to assign or transfer all or any part of the Company’s legal title in and to the Tax Refund Claim.
On March 17, 2023, the Company, as borrower, entered into an Amended and Restated Line of Credit Note and Agreement (the “New Note”) effective as of October 1, 2022, which amended and restated that certain Line of Credit Note and Agreement dated March 14, 2016 (the “Original Note”) by and between the Company and James V. Leonardo (the “Holder,” together with the Company the “Parties”). The New Note has a principal amount of $250,000 (the ‘Principal Amount”) and accrues interest on the unpaid Principal Amount at a rate of ten percent (10%) per annum. Also on March 17, 2023, James Villa, the Company’s Chief Executive Officer, entered into a personal guarantee with the Holder to personally guarantee the obligations of the Company under the New Note. Under the terms of the New Note, the Company has agreed to make a one-time payment of $16,667 for interest accrued on the Original Note for the four-month period covering June 2022 through September 2022. The Company has also agreed to make quarterly interest payments of $6,250, commencing on December 31, 2022, and continuing through and including September 30, 2023. For consideration received by the Parties for entry into the New Note, the Parties, along with James Villa and RES Exhibit Services, LLC (“RES”), an entity owned by the Holder, entered into a Letter Agreement (the “Agreement”) on March 17, 2023. Under the terms of the Agreement, all prior amounts owed to the Company by RES were set off against amounts owed by the Company to the Holder under the Original Note.
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On February 3, 2023, the Company, as borrower, entered into a financing arrangement with Mast Hill Fund, L.P. In exchange for a promissory note, Mast Hill agreed to lend the Company $118,000.00, which bears interest at a rate of eight percent (8%) per annum, less $11,800.00 original issue discount. Under the terms of the Loan, amortization payments are due beginning June 3, 2023, and each month thereafter with the final payment due on February 3, 2024. Additionally, in the event of a default under the Loan or if the Company elects to pre-pay the Loan, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $2.00 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to Lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The Loan is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. As additional consideration for the financing, the Company issued Lender a 5-year warrant to purchase 59,000 shares of Company common stock at a fixed price of $2.00 per share, subject to price adjustments for certain actions, including dilutive issuances, representing 100% warrant coverage on the principal amount of the Loan. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan and similar loans between the Company and Lender entered into on November 3, 2021, February 11, 2022, May 31, 2022, and November 23, 2022, respectively. J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $3,100 (2.92% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 3,098 shares of Company common stock at a fixed price of $2.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. The Company and the Lender are parties to promissory notes dated November 3, 2021, February 11, 2022, May 27, 2022, and November 23, 2022. On February 3, 2023, the Company and the Lender entered into an amendment with respect to the February 11, 2022 Note (the “Note”) waiving any Event of Default (as defined in the Note) under Section 4.17 of the Note that occurred prior to February 3, 2023. In addition, the amendment extended the maturity date of the Note to May 30, 2023. The Company shall pay $200,000 of the existing balance of the Note on or before March 31, 2023, to reduce the balance of the note by $200,000. If the company fails to make the payment, then the (i) the principal of the Note shall be increased by $30,000 (the “Increased Principal Portion”) as of April 1, 2023, and (ii) the Company shall repay the Increased Principal Portion on or before April 16,2023. Except as set forth above, the terms of the Notes remain the same.
Results of Operations - Comparison of the years ended December 31, 2022 and 2021
The following discussion analyzes our results of operations for the years ended December 31, 2022 and 2021. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.
The following table compares our statements of operations data for the years ended December 31, 2022 and 2021. Certain trends suggested by this table are not indicative of future operating results.
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| Years Ended December 31, |
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| 2022 vs 2021 |
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| As a % of |
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| Amount of |
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| 2022 |
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| Sales |
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| 2021 |
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| Sales |
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| Change |
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| (Decrease) |
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Sales |
| $ | 7,003,404 |
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| 100.0 | % |
| $ | 7,224,242 |
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| 100.0 | % |
| $ | (220,838 | ) |
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| (3.1 | )% |
Cost of sales |
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| 4,262,355 |
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| 60.9 |
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| 4,489,306 |
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| 62.1 |
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| (226,951 | ) |
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| (5.1 | ) |
Gross profit |
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| 2,741,049 |
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| 39.1 |
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| 2,734,936 |
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| 37.9 | % |
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| 6,113 |
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| 0.2 |
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General and administrative |
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| 2,488,937 |
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| 35.5 |
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| 2,159,378 |
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| 29.9 |
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| 329,559 |
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| 15.3 |
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Selling |
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| 2,591,623 |
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| 37.0 |
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| 1,983,127 |
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| 27.5 |
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| 608,496 |
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| 30.7 |
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Total cost and expenses |
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| 5,080,560 |
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| 72.5 |
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| 4,142,505 |
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| 57.3 |
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| 938,055 |
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| 22.6 |
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Operating loss |
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| (2,339,511 | ) |
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| (33.4 | ) |
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| (1,407,569 | ) |
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| (19.5 | ) |
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| (931,942 | ) |
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| (66.2 | ) |
Other Income |
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| (60,973 | ) |
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| (0.9 | ) |
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| 120,505 |
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| 1.7 |
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| (181,478 | ) |
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| (150.6 | ) |
Interest expense (net) |
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| (1,161,173 | ) |
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| (16.6 | ) |
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| (281,749 | ) |
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| (3.9 | ) |
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| (879,424 | ) |
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| (312.1 | ) |
Net loss |
| $ | (3,561,657 | ) |
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| (50.9 | )% |
| $ | (1,568,813 | ) |
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| (21.7 | )% |
| $ | (1,992,844 | ) |
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| (127.0 | )% |
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Net loss per share - basic and diluted |
| $ | (7.95 | ) |
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| $ | (3.91 | ) |
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| $ | (4.04 | ) |
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Our managed support service sales increased by 3% from $4,325,067 during the twelve months ended December 31, 2021 to $4,442,236 during the corresponding period of 2022. Managed support service sales accounted for approximately 63% of our sales in 2022 and approximately 60% for the same period in 2021. The increase in our managed support service sales during 2022 was due to an increase in services provided to our largest customer. We expect our Managed Information Security Services sales to remain steady in 2023.
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Nodeware sales increased from $172,402 in 2021 to $431,839 in 2022, an increase of over 250%. This increase was due to the hiring of additional sales people in late 2021 and throughout 2022, as well as increased marketing expenditures. We expect to see continued growth of Nodeware sales throughout 2023.
Sales of Webroot decreased from $838,470 in 2021 to $720,222 in 2022. This is a legacy third party offering which we are no longer aggressively marketing.
Our cybersecurity software and services sales, primarily to SMEs, decreased by 20% to $1,409,112 during the twelve months ended December 31, 2022 from $1,769,303 during the corresponding period of 2021. The decrease in cybersecurity software and services sales during 2022 was attributable to delayed timing on completion of several projects late in the year, as well as a reduction of sales orders. We expect our cybersecurity software and services business to grow in 2023 due to our expanding salesforce, and channel and marketing programs.
Cost of Sales and Gross Profit
Cost of sales principally represents the compensation expense for our employees (primarily the cost of our IT services group). To a lesser degree, but still significant, we also incurred cost of sales for third party software licenses for our commercial SME partners. Cost of sales decreased by 5% to $4,262,355 during the twelve months ended December 31, 2022 from $4,489,306 during the corresponding period of 2021. The decrease in cost of sales during the twelve months ended December 31, 2022 from 2021 was due to several cost reductions, but also partially offset by several increases. The cost of supplying Webroot software decreased from $462,565 in 2021 to $403,496 in 2022, due to a reduction in sales. Our consulting business was eliminated in 2022, thus reducing our cost for consulting from $83,582 in 2021 to $0 in 2022. Stock option expense recognized as part of cost of sales in 2022 decreased to $0 from $46,060 in 2021. These decreases were partially offset by increases in software expense. Software expenses related to cost of sales increased from $186,658 in 2021 to $339,117 in 2022, primarily driven by the increase in the amount of transactional data being processed by an outside third party vendor, due to the increase in Nodeware sales.
Gross profit remained stable year over year, increasing less than 1% to $2,741,049 for 2022.
General and Administrative Expenses
General and administrative expenses include corporate overhead such as compensation and benefits for executive, administrative and finance personnel, rent, insurance, professional fees, travel, and office expenses. General and administrative expenses increased by approximately $330,000 in 2022. The primary components of that change were an increase in legal, accounting, and public company fees of approximately $525,000, a decrease in consulting fees of approximately $110,000, and a decrease in corporate salaries of approximately $120,000, with multiple other smaller changes netting the difference.
Selling Expenses
The increase of $608,000 in selling expenses to approximately $2,592,000 in 2022 is principally due to an increase in marketing expenses of $210,000 , an increase in salaries due to new hires of $200,000, recognition of stock option expense of $100,000, with multiple other smaller changes netting the difference.
Operating Income (Loss)
Operating income decreased approximately $932,000 from 2021 to 2022. While gross profit remained stable from the prior year, improving by just over $6,000, the increase in our general and administrative expenses of $330,000, and the increase in selling expenses of $608,000, both described in detail above, were the primary reasons for the decrease in operating income.
Other Income
In 2021, we settled the long-term debt agreement with the Pension Benefit Guaranty Corporation (“PBGC”) for $200,000 on the outstanding principal of $246,000 and accrued interest of approximately $74,500. We recorded a gain of approximately $120,500 at that time of forgiveness. This event is non-recurring.
In 2022, we restructured a loan with James V. Leonardo and RES Exhibit Services, LLC (“RES”), an entity owned by Mr. Leonardo. The nature of the agreement offsets principal and interest balances of approximately $572,500 against accounts receivable balances from RES of approximately $383,500, and creates a new obligation for the Company in the amount of $250,000, with ongoing interest payments. The net result of the offsets was a loss to the Company of approximately $61,000.
Interest Expense, net
Interest expense increased by approximately $879,000 and includes interest on indebtedness, amortization of loan fees, cost of stock options as part of debt agreements and fees for financing accounts receivable invoices. The increase in interest expense is principally attributable to bridge loan financing considerations of approximately $1,004,000 during 2022.
Net Income (loss)
The decrease in net income (loss) is attributable primarily to the selling, general and administrative items discussed above for 2022 as compared to 2021 due to our focus on growing and developing the Cybersecurity Services and CyberLabs segments, as well as the interest expense associated with new loans in 2022.
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Liquidity and Capital Resources
At December 31, 2022, we had cash of $23,187 available for working capital needs and planned capital asset expenditures and a working capital deficit of approximately $6,038,000 with a current ratio of 0.09.
During 2022, our primary sources of liquidity are cash provided by collections of accounts receivable and our factoring line of credit, and short term debt arrangements. We maintain an accounts receivable financing line of credit with an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain of our on-going costs and expenses. At December 31, 2022, based on eligible accounts receivable, we had $144,000 available under this arrangement. We expect sales during 2023 to generate additional accounts receivable eligible for factoring, that will support our operations. We pay fees based on the length of time that the invoice remains unpaid.
At December 31, 2022, we had current notes payable of $229,000 to related parties. $100,000 of this debt is due on January 1, 2023. The remaining $129,000 are in the form of demand notes with an interest rate of 6%.
At December 31, 2022, we have current notes payable of approximately $1,573,000 to third parties, which includes convertible notes payable of approximately $150,000. Also included is $12,500 in principal amount of a note payable due on June 30, 2016 but not paid by then. This note was issued in payment of software we purchased in February 2016 and secured by a security interest in the software. To date, the holder has not taken any action to collect the amount past due on this note or to enforce the security interest in the software.
Also included in the current notes payable to third parties at December 31, 2022, are four bridge loans with Mast Hill Fund, L.P. All four loans bear interest at 8%. We plan to use the proceeds from the bridge loans to substantially enhance our marketing of CyberLabs’ Nodeware solution, in order to significantly increase its growth. In 2021, a total of approximately $272,000 was recorded as deferred note costs. An additional $737,000 was recorded as deferred note costs associated with these loans in 2022. At December 31, 2022, the unamortized balance of the deferred note costs for all four loans was approximately, $424,000. See Note 5 of the 2022 Audited Financial Statements for more information.
Notes payable to third parties at December 31, 2022, also incudes a loan with Talos Victory Fund, LLC. This loan bears interest at 8%. We plan to use the proceeds to fund operations. Approximately $129,000 was recorded as deferred note cost related to this transaction. At December 31, 2022, the unamortized balance of deferred note cost for this transaction were approximately $37,000.
Notes payable to third parties at December 31, 2022, includes a loan with Celtic Bank. In lieu of interest, this has a one-time up-front fixed fee of $11,152. This entire fee was recorded as deferred note costs. The remaining unamortized balance at December 31, 2022 was approximately $6,000.
At December 31, 2022, we also have an accrued liability for the voluntary match portion of a former simple IRA plan, including interest, of approximately $287,000. We do not anticipate distributing this liability in the next year or two. Interest will continue to accrue.
We have $515,000 of current maturities of long-term obligations to third parties. This is composed of two notes including long-term notes to third parties of $265,000 due on January 1, 2018, which has not been renewed or amended, and $250,000 due on September 30, 2023. The accrued interest on these notes and current maturities is approximately $270,000 at December 31, 2022.
We have $385,000 of current maturities of long-term obligations to related parties. This is composed of the scheduled payment of $25,000 on June 30, 2023 and $90,000 on July 31, 2023, to an officer of the Company. The accrued interest of these two notes is approximately $26,600 at December 31, 2022.
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 schedules maturities.
Our ability to raise the additional capital is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of development and business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price that is favorable to us. In addition, our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the recent or future disruptions to and volatility in the financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic or otherwise. With regards to our existing debt, if the equity raise is not successful, we plan to restructure the debt, convert debt to equity or pay down appropriate debt. We may also increase ownership via exercising of stock options and the potential sale of restricted stock. If adequate funds are not available when needed, we may need to significantly reduce our operations while we seek strategic alternatives, which could have an adverse impact on our ability to achieve our intended business objectives including new software initiatives.
We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.
There is substantial doubt of the company to continue as a going concern and our audit report included this matter.
Cash Flows
The following table summarizes our cash flow information for the years presented, described below, and should be read in conjunction with our financial statements appearing at Page 40, et seq., of this report.
|
| Years Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net cash used in operating activities |
| $ | (1,050,137 | ) |
| $ | (544,817 | ) |
Net cash used in investing activities |
|
| (216,023 | ) |
|
| (243,034 | ) |
Net cash provided by financing activities |
|
| 1,189,915 |
|
|
| 854,970 |
|
Net (decrease) increase in cash |
| $ | (76,245 | ) |
| $ | 67,119 |
|
| 25 |
| Table of Contents |
Cash Flows Used in Operating Activities
Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. We bill our clients weekly or monthly after services are performed, depending on the contract terms. Our net loss of $3,561,657 for 2022 was increased by non-cash expenses for depreciation, amortization, bad debt expense, amortization of debt discount and stock-based compensation of $1,048,983. In addition, an increase in accounts payable, deferred revenue, and accrued expenses of $1,419,348 along with a decrease in accounts receivable and other assets of $17,784, and the other income loss of $60,973, resulted in net cash used in operating activities of $1,050,137.
We are increasing our marketing of Nodeware to our IT channel partners who resell to their customers. We are making investments in our cyber security team for penetration testing, CISOTaaS and other services. Due to the lengthy lead times typically needed to generate these new sales, we do not expect to realize a return from our sales and marketing personnel for one or more quarters. As a result, we may continue to experience small operating income or operating losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows and incremental borrowings, as needed.
Cash Flows Used in Investing Activities
In 2021 and 2022, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The slight decrease from 2021 was primarily due to less development activities in 2022 that were capitalized. We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business. We do not anticipate our continued investment to be significant.
Cash Flows Provided by Financing Activities
During 2022, we received $1,105,775 from three bridge loans from the Mast Hill Fund L.P, with debt issuance costs of $185,225. We also received $250,080 from a loan with Talos Victory Fund, LLC, with debt issuance costs of $45,920. We received $139,400 from Celtic Bank, with debt issuance costs of $11,152. These increases were partially offset by short term loan payments of $322,340.
We plan to evaluate alternatives which may include renegotiating the terms of the notes, seeking conversion of the notes to shares of common stock and seeking funds to repay the notes. We continue to evaluate repayment of our notes payable based on our cash flow.
Credit Resources
We maintain an accounts receivable financing line of credit from an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain costs and expenses. At December 31, 2022, we had financing availability, based on eligible accounts receivable, of approximately $144,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately $16,000 of available credit under various lines of credit as of December 31, 2022.
During May 2019, we originated a line of credit note payable for a $500,000 with a related party and borrowed $499,000 and have $1,000 available to borrow for working capital. This agreement matures in August 2026.
During 2017, we originated two lines of credit with related parties totaling $175,000. At December 31, 2022, we had $15,000 available under these financing agreements which mature in January 2023 and July 2023, respectively.
We believe the capital resources available under our factoring line of credit, cash from additional related party loans and cash generated by improving the results of our operations will be sufficient to fund our ongoing operations for at least the next 12 months. We anticipate financing growth from acquisitions of other businesses, if any, and our longer-term internal growth through one or more of the following sources: issuance of equity: cash from collections of accounts receivable; additional borrowing from related and third parties; use of our existing accounts receivable credit facility; a refinancing of our accounts receivable credit facility; and/or approval of the Employment Retention Credit application.
Critical Accounting Policies and Estimates
See Note 3 to the Financial Statements for a discussion of the Company’s accounting policies and estimates including Capitalization of Software for Resale and management’s assessment of going concern.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report beginning on page 40.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15-d-15(e) under the Exchange Act) as of the end of the period covered by this report (the Evaluation Date). Based upon that evaluation, our chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
| 26 |
| Table of Contents |
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Infinite Group have been detected.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Our management has concluded that, as of December 31, 2022, our internal control over financial reporting was effective based on these criteria.
This Annual Report does not include an attestation report of our Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Information required by this item is disclosed elsewhere herein.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
| 27 |
| Table of Contents |
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Set forth below are the names, ages and positions of our executive officers and directors.
|
|
|
|
| Affiliated | ||||
Name |
| Age |
|
| Position |
| Since | ||
James Villa |
|
| 65 |
|
| Chief Executive Officer |
| 2003 | |
Donald W. Reeve (1) |
|
| 76 |
|
| Chairman of the Board |
| 2013 | |
Andrew Hoyen |
|
| 52 |
|
| President and Chief Operating Officer |
| 2014 | |
Richard Glickman |
|
| 61 |
|
| VP Finance and Chief Accounting Officer |
| 2019 | |
________________________
(1) Member of the audit and compensation committees.
Each director is elected for a period of one year and serves until his successor is duly elected and qualified. Officers are elected by and serve at the will of our Board.
Background
The principal occupation of each of our directors and executive officers for at least the past five years is as follows:
James A. Villa is our Chief Executive Officer and a director. He became a director on July 1, 2008, our President on February 25, 2010, and our Chief Executive Officer on January 21, 2014. Previously, Mr. Villa served as our Acting Chief Executive Officer from December 31, 2010 to January 21, 2014. Mr. Villa brings to the Board his experience with us since 2003 as well as professional experience gained from his services to a variety of public and privately held middle market businesses. Mr. Villa holds a bachelor’s degree in electrical engineering from Clarkson University, where he studied computer science and power transmission and distribution. Mr. Villa also has software and technology experience having acted as an IT and business consultant.
Donald W. Reeve became a director on December 31, 2013. He became Chairman of the Board on August 20, 2019. Since January 2013, he has been the principal partner at ReTech Services, LLC, a management consulting practice. Since August 2013, Mr. Reeve has been providing consulting services to us on a part time basis without cash compensation. Previously, Mr. Reeve was Senior Vice President and Chief Information Officer for Wegmans Food Markets, Inc. (Wegmans) from May 1986 until his retirement in August 2012. In that position, he managed an information technology staff of approximately 300 professionals with responsibilities for development, application and support services of computer technology. Prior to May 1986 and since 1970, he held various positions of increasing responsibility for Wegmans. Mr. Reeve recently completed his final term on the Board of Directors of ESL Federal Credit Union, a full-service financial institution and continues to serve on this Supervisory Committee. He also serves on the Board of Directors of Veterans Outreach Center of Rochester, a non-profit organization dedicated to advocating for and serving veterans. He attended Monroe Community College and SUNY Empire State College, earned an associate’s degree at Rochester Business Institute and is a veteran of the U.S. Army. Mr. Reeve brings to the Board the experience of managing the IT requirements for a growing company in a competitive environment. Mr. Reeve provides strategic guidance to the Board and our management as we continue to enter various commercial IT markets.
| 28 |
| Table of Contents |
Andrew T. Hoyen is our President and Chief Operating Officer. He was initially appointed Chief Administrative Officer and Senior Vice President of Business Development on October 1, 2014. In January 2016, he was appointed Chief Operating Officer. On July 18, 2017, he was elected to the Board, In September 2020 , he was named President in addition to his role as Chief Operating Officer. Mr. Hoyen is responsible for developing and implementing our strategic direction through improved operations, M&A, sales and marketing, product development, and overall collaboration across the enterprise. Previously, he has served in a variety of executive roles at Toyota Material Handling North America, Eastman Kodak Company and their spin-off, Carestream Health that have enabled him to fit the roles he has played at IGI. He holds a Bachelor of Science degree in Biotechnology from Worcester Polytechnic Institute, a Master of Public Health degree from State University of New York at Albany and a Master of Business Administration degree from Rochester Institute of Technology.
Richard W. Glickman is our Vice President of Finance and Chief Accounting Officer. He became Vice President of Finance and Chief Accounting Officer in February 2019. Mr. Glickman is responsible for accounting, financial reporting, financial analyses, and various special projects. Previously, since 2015, he was Chief Financial Officer for American Rock Salt Company. Prior to that, from 2013 to 2015, he was Chief Financial Officer for HCR Home Care. Prior to that, from 2001 to 2013, he served in various roles in accounting, financial operations, and strategic projects for Time Warner Cable. He holds a Bachelor of Science in accounting from State University of New York at Buffalo and a Master of Business Administration degree from University of Rochester.
Committees of the Board of Directors
Our Board has an audit committee and a compensation committee. The audit committee reviews the scope and results of the audit and other services provided by our independent registered public accounting firm and our internal controls. The compensation committee is responsible for the approval of compensation arrangements for our officers and the review of our compensation plans and policies. Each committee is comprised of Mr. Villa and Mr. Reeve.
Audit Committee Financial Expert
Our audit committee is comprised of Mr. Villa, as chairman, and Mr. Reeve. The Board has determined that Mr. Villa qualifies as our audit committee financial expert, as that term is defined in Item 407(d)(5) of Regulation S-K. Neither Mr. Villa nor Mr. Reeve is independent for audit committee purposes under the definition contained in Section 10A(m)(3) of the Exchange Act.
Code of Ethics
We have adopted a code of business conduct and ethics that applies to our principal executive officer, principal financial officer and other persons performing similar functions, as well as all employees and directors. This code of business conduct and ethics is posted on our website at www.igicybersecurity.com under Business Conduct Guidelines.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten-percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to us, or written representations that no Forms 5 were required, we believe that all required Section 16(a) filings were timely made for the year ended December 31, 2022. With respect to any of our former directors, officers, and greater than ten-percent stockholders, we have no knowledge of any known failure to comply with the filing requirements of Section 16(a).
Item 11. Executive Compensation
2022 Summary Compensation Table
The Summary Compensation Table below includes, for each of the years ended December 31, 2022 and 2021, individual compensation for services to Infinite Group, Inc. paid to: (i) our Chief Executive Officer, our Chief Financial Officer and (ii) the next most highly paid executive officers whose total compensation exceeded $100,000 for the year ended December 31, 2022 (together, the “Named Executive Officers”).
| 29 |
| Table of Contents |
| Name and Principal Position |
| Year |
|
| Salary ($) |
|
|
| Option |
|
|
| All Other Compensation($) |
|
|
| Total ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| James Villa |
| 2022 |
|
| 222,996 |
|
|
|
|
|
|
|
|
|
| 222,996 |
| |
| Chief Executive Officer |
| 2021 |
|
| 240,475 |
|
|
|
|
|
|
|
|
|
| 240,475 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Andrew Hoyen |
| 2022 |
|
| 263,231 | (1) |
|
|
|
| 10,498 | (2) |
|
| 273,729 |
| ||
| President and Chief Operating Officer |
| 2021 |
|
| 227,163 |
|
|
|
|
|
|
|
|
|
|
| 227,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Richard Glickman |
| 2022 |
|
| 112,994 |
|
|
|
|
|
|
|
|
|
|
| 112,994 |
|
| VP Finance and Chief Accounting Officer |
| 2021 |
|
| 110,652 |
|
|
| 1,240 | (3) |
|
|
|
|
| 110,652 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. | Includes $44,000 for stock options Mr. Hoyen exercised before expiration. |
|
|
2. | Includes $7,591 for employer portion of healthcare insurance, and $2,907 for employer portion of HSA contribution. This aggregate amount was less than $10,000 for the other listed officers. |
|
|
3. | The amounts in this column do not reflect option awards actually received by our Named Executive Officers, but instead reflect the aggregate grant date grant fair value for stock option awards computed in accordance with FASB ASC 718. The fair value of the stock option awards was determined using the Black-Scholes option pricing model. See Note 3 and Note 5 to the financial statements in this report regarding assumptions underlying valuation of equity awards. |
Outstanding Equity Awards at December 31, 2022
The following table provides information with respect to the value of all unexercised options previously awarded to our Named Executive Officers as of December 31, 2022.
Option Awards | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Number of |
|
| Number of |
|
|
|
|
|
| ||||
|
| Securities |
|
| Securities |
|
|
|
|
|
| ||||
|
| Underlying |
|
| Underlying |
|
|
|
|
|
| ||||
|
| Unexercised |
|
| Unexercised |
|
| Option |
|
| Option | ||||
|
| Options |
|
| Options - |
|
| Exercise |
|
| Expiration | ||||
Name |
| - Exercisable |
|
| Unexercisable |
|
| Price |
|
| Date | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
James Villa |
|
| 6,667 |
|
|
| 0 |
|
| $ | 8.63 |
|
| 01/20/2024 | |
|
|
| 3,334 |
|
|
| 0 |
|
| $ | 3.75 |
|
| 12/22/2024 | |
|
|
| 3,334 |
|
|
| 0 |
|
| $ | 9.00 |
|
| 11/16/2025 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Andrew Hoyen |
|
| 2,667 |
|
|
| 0 |
|
| $ | 3.00 |
|
| 12/09/2024 | |
|
|
| 3,334 |
|
|
| 0 |
|
| $ | 3.75 |
|
| 12/22/2024 | |
|
|
| 3,334 |
|
|
| 0 |
|
| $ | 1.50 |
|
| 06/01/2026 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Richard Glickman |
|
| 2,667 |
|
|
| 0 |
|
| $ | 1.50 |
|
| 07/23/2024 | |
|
|
| 667 |
|
|
| 0 |
|
| $ | 3.00 |
|
| 12/09/2024 | |
|
|
| 334 |
|
|
| 0 |
|
| $ | 9.00 |
|
| 07/12/2025 | |
|
|
| 334 |
|
|
| 0 |
|
| $ | 6.75 |
|
| 01/03/2026 | |
Employment Agreements
We do not have any employment agreements with any of the Named Executive Officers.
Compensation of Directors
Effective August 13, 2019, we established that in connection with rendering services as a Board of Directors, each non-management Director may receive compensation, as applicable to each Director, if approved by the Board. Directors are reimbursed for the costs relating to attending Board and committee meetings.
| 30 |
| Table of Contents |
Effective August 20, 2019, the Board resolved to compensate Donald W. Reeve $12,000 annually as Chairman of the Board.
|
| Director Compensation Fiscal Year Ending December 31, 2022 |
|
|
|
|
|
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Value |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| and |
|
|
|
|
|
|
| |||||||
|
| Fees |
|
|
|
|
|
|
|
|
|
|
| Nonqualified |
|
|
|
|
|
|
| |||||||
|
| earned or |
|
|
|
|
|
|
|
| Non-Equity |
|
| Deferred |
|
|
|
|
|
|
| |||||||
|
| paid in |
|
| Stock |
|
| Option |
|
| Incentive Plan |
|
| Compensation |
|
| All Other |
|
|
|
| |||||||
Name |
| cash |
|
| Award |
|
| Award |
|
| Compensation |
|
| Earnings |
|
| Compensation |
|
| Total |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Donald W. Reeve |
| $ | 12,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| $ | 12,000 |
|
At March 31, 2023, Donald W. Reeve held exercisable options for:
| · | 8,000 shares of our common stock at an exercise price of $3.75 per share which expires on November 30, 2024; |
|
|
|
| · | 6,667 shares of common stock at an exercise price of $11.25 per share which expires on September 4, 2023; and |
|
|
|
| · | 3,334 shares of common stock at an exercise price of $3.75 per share which expires on December 22, 2024. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of our common stock, our only class of voting securities, as of March 31, 2023 by:
| · | each person known to us to be the beneficial owner of more than 5% of our outstanding shares; |
|
|
|
| · | each director; |
|
|
|
| · | each Named Executive named in the Summary Compensation Table above; and |
|
|
|
| · | all directors and executive officers as a group. |
Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of common stock owned by them. All information with respect to beneficial ownership has been furnished to us by the respective stockholder. The address of record of each individual listed in this table, except if set forth below, is c/o Infinite Group, Inc., 175 Sully’s Trail, Suite 202, Pittsford, New York 14534. The percentages shown in the table are based on 476,608 shares of common stock issued and outstanding as of March 31, 2023.
|
| Shares of |
|
|
|
| ||
|
| Common |
|
|
|
| ||
|
| Stock |
|
|
|
| ||
|
| Beneficially |
|
| Percentage of |
| ||
Name of Beneficial Owner |
| Owned (5) |
|
| Ownership |
| ||
Richard Glickman |
|
| 7,036 | (1) |
|
| 1.5 | % |
Andrew Hoyen |
|
| 50,527 | (2) |
|
| 10.2 | % |
Donald W. Reeve |
|
| 39,758 | (3) |
|
| 8.0 | % |
James Villa |
|
| 117,374 | (4) |
|
| 21.0 | % |
All Directors and Officers (4 persons) as a group |
|
| 214,695 | (5) |
|
| 35.6 | % |
5% Stockholders: |
|
|
|
|
|
|
|
|
Paul J. Delmore |
|
|
|
|
|
|
|
|
One America Place |
|
|
|
|
|
|
|
|
600 West Broadway, 28th Floor |
|
|
|
|
|
|
|
|
San Diego, CA 92101 |
|
| 33,936 | (6) |
|
| 7.1 | % |
|
|
|
|
|
|
|
|
|
Harry A. Hoyen |
|
| 38,667 | (7) |
|
| 7.5 | % |
Marblehead, OH 43440 |
|
|
|
|
|
|
|
|
Richard Popper |
|
| 23,833 | (8) |
|
| 5.0 | % |
(1) | Includes 6,502 shares subject to currently exercisable options. |
|
|
(2) | Includes 3,334 shares, which are issuable upon the conversion of a note in the principal amount of $25,000 through March 31, 2023; and 16,035 shares subject to currently exercisable options. |
|
|
(3) | Includes 18,001 shares subject to currently exercisable options. |
|
|
(4) | Includes 69,878 shares, which are issuable upon the conversion of notes to Northwest Hampton Holdings, LLC, whose sole member is James Villa, including principal in the amount of $146,300 and accrued interest in the amount of $115,741 through March 31, 2023; and 13,335 shares subject to currently exercisable options. |
|
|
(5) | Assumes that all currently exercisable options, which total 53,873 shares, and convertible securities, which total 73,212 shares, owned by members of the group have been exercised. |
|
|
(6) | Includes 33,936 shares owned of record by Upstate Holding Group, LLC, an entity wholly-owned by Mr. Delmore. |
|
|
(7) | Consists of 38,667 shares subject to currently exercisable options. |
|
|
(8) | Includes 1,000 shares subject to currently exercisable options. |
| 31 |
| Table of Contents |
Securities Authorized for Issuance Under Equity Compensation Plans
The Company’s Board and stockholders approved a stock option plan adopted in 2005. Since this plan has expired, no additional options may be granted under this plan. At December 31, 2022, there are options for 13,203 common shares under this plan.
The 2009 Stock Option Plan (“2009 Plan”) was established in February 2009 to align the interests of our employees, consultants, agents and affiliates with those of our stockholders to incent them to increase their efforts on our behalf and to promote the success of our business. The 2009 Plan expired on February 3, 2019, and as of December 31, 2022, there were outstanding options to acquire 6,601 shares of common stock under the 2009 Plan. Generally, the 2009 Plan is administered by the compensation committee of the Board and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. Since this plan has expired, no additional options may be granted under this plan.
The 2019 Stock Option Plan (“2019 Plan”) Plan was established in August 2019 to align the interests of our employees, consultants, agents and affiliates with those of our stockholders to incent them to increase their efforts on our behalf and to promote the success of our business. Under the 2019 Plan up to 20,000 shares of common stock were authorized for option grants. Generally, the 2019 Plan is administered by the compensation committee of the Board and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. As of December 31, 2022, there were outstanding options to acquire 17,352 shares under the 2019 Plan and zero shares were available under our 2019 Plan. The 2019 Plan was replaced by our 2021 Plan (defined below) upon approval by our stockholders at our Annual Meeting on January 26, 2022 as described below.
The 2020 stock option plan (“2020 Plan”) was established in April 2020 to align the interests of our employees, consultants, agents and affiliates with those of our stockholders to incent them to increase their efforts on our behalf and to promote the success of our business. Under the 2020 Plan up to 20,000 shares of common stock were authorized for option grants. Generally, the 2020 Plan is administered by the compensation committee of the Board and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. As of December 31, 2022, there were outstanding options to acquire 17,673 shares under the 2020 Plan and zero shares were available under our 2020 Plan. The 2020 Plan was replaced by our 2021 Plan upon approval by our stockholders at our Annual Meeting on January 26, 2022 as described below.
The Infinite Group, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) was approved and adopted by our Board on December 15, 2021, subject to stockholder approval. The 2021 Plan was submitted to our stockholders for their approval at our 2021 Annual Meeting on January 26, 2022, and our stockholder approved the plan at the Annual Meeting. The 2021 Plan replaces the 2019 Plan and the 2020 Plan (the “Prior Plans”), and no further awards may be granted under the Prior Plans. The purpose of the 2021 Plan is to promote stockholder value and our future success by providing appropriate retention and performance incentives to employees and non-employee directors of the Company or its affiliates, and any other individuals who perform services for the Company or its affiliates. Generally, the 2021 Plan is administered by the compensation committee of the Board and provides that the maximum number of shares of Common Stock available for grant and issuance under the 2021 Plan is (a) 60,000, plus (b) any shares of Common Stock that are subject to options granted under the Prior Plans that expire, are forfeited or canceled or terminate for any other reason without the issuance of shares under the Prior Plans on or after January 26, 2022, plus (c) any shares of Common Stock that are subject to options granted under the Prior Plans that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any option under the Prior Plans on or after January 26, 2022. As of December 31, 2022, there were outstanding options to acquire 602 shares under the 2021 Plan and 62,767 shares were available under our 2021 Plan.
| 32 |
| Table of Contents |
The following table summarizes, as of December 31, 2022, the (i) options granted under our option plans and (ii) all other securities subject to contracts, options, warrants, and rights or authorized for future issuance outside of our plans. The shares covered by outstanding options or authorized for future issuance are subject to adjustment for changes in capitalization stock splits, stock dividends and similar events.
|
| Equity Compensation Plan Table |
| |||||||||
|
|
|
|
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|
|
| Number of |
| |||
|
|
|
|
|
|
|
| securities |
| |||
|
|
|
|
|
|
|
| remaining |
| |||
|
|
|
|
|
|
|
| available for |
| |||
|
|
|
|
|
|
|
| future |
| |||
|
| Number of |
|
|
|
|
| issuance |
| |||
|
| securities to |
|
| Weighted- |
|
| under equity |
| |||
|
| be issued |
|
| average |
|
| compensation |
| |||
|
| upon exercise |
|
| exercise price |
|
| plans |
| |||
|
| of outstanding |
|
| of outstanding |
|
| (excluding |
| |||
|
| options, |
|
| options, |
|
| securities |
| |||
|
| warrants and |
|
| warrants and |
|
| reflected in |
| |||
|
| Rights |
|
| rights |
|
| column (a)) |
| |||
|
| (a) |
|
| (b) |
|
| (c) |
| |||
Expired equity compensation plans previously approved by security holders (1) |
|
| 13,200 |
|
| $ | 7.17 |
|
|
| 0 |
|
Active equity compensation plans previously approved by security holders (2) |
|
| 600 |
|
| $ | 12.85 |
|
|
| 62,767 |
|
Equity compensation plans not previously approved by security holders (3) |
|
| 41,881 |
|
| $ | 9.40 |
|
|
| 0 |
|
Individual option grants that have not been approved by security holders (4) |
|
| 76,357 |
|
| $ | 5.93 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 132,038 |
|
| $ | 7.19 |
|
|
| 62,767 |
|
(1) | Consists of grants under our 2005 Stock Option Plans of which all are exercisable at December 31, 2022. |
|
|
(2) | Consists of grants under our 2021 Plan, of which 467 are exercisable at December 31, 2022. |
|
|
(3) | Consists of grants under our 2009 Plan, 2019 Plan and 2020 Plan of which 41,881 are exercisable at December 31, 2022. |
|
|
(4) | Consists of individual option grants approved by the Board of which 76,357 were exercisable at December 31, 2022. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Officers, Directors, and Equity Investment
The following is a summary of transactions since January 1, 2022 to which we have been a party in which any of our executive officers, directors, director nominees or beneficial holders of more than five percent of our capital stock had or will have a direct or indirect material interest.
On July 29, 2022, Andrew Hoyen exercised his stock option agreement dated July 31, 2017 for 5,334 shares at 3.00per share.
On September 6, 2022, the Company and Donald W. Reeve entered into two note modification agreements. The Modification of the Promissory Note originally dated December 30, 2020 extended the due date of the first balloon payment to January 1, 2023. The Modification of the Promissory Note originally dated May 25, 2021 extended the maturity date of the 2021 Note to January 1, 2023. Except as set forth above, the terms of each note remained the same.
On April 11, 2023, the Company paid off the $30,000 demand note dated September 16, 2021 with Donald W. Reeve. Interest paid at that time was $2,891.
Director Independence
Our current Board consists of Donald W. Reeve, James Villa, and Andrew Hoyen. Mr. Villa and Mr. Hoyen are not considered independent based on the listing standards of NASDAQ. We are not currently listed on a national securities exchange or in an inter-dealer quotation system that requires a majority of the Board be independent.
| 33 |
| Table of Contents |
Item 14. Principal Accountant Fees and Services
During the period covering the fiscal years ended December 31, 2022 and 2021, Freed Maxick, CPAs, P.C., our independent registered public accounting firm, performed the following professional services.
Description |
| 2022 |
|
| 2021 |
| ||
Audit fees |
|
|
|
|
|
| ||
Audit of the financial statements |
| $ | 90,000 |
|
| $ | 85,000 |
|
Quarterly reviews |
|
| 34,500 |
|
|
| 31,800 |
|
Total audit fees |
| $ | 124,500 |
|
| $ | 116,800 |
|
Audit-related fees |
|
|
|
|
|
|
|
|
Pratum audit and S-1 review |
| $ | 207,500 |
|
| $ | 16,500 |
|
Total audit-related fees |
| $ | 207,500 |
|
| $ | 16,500 |
|
Tax fees |
|
|
|
|
|
|
|
|
None |
| $ | 0 |
|
| $ | 0 |
|
Total tax fees |
| $ | 0 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
Freed Maxick CPAs, P.C. and associated entities fee total |
| $ | 332,000 |
|
| $ | 133,300 |
|
All accounting services and fees reflected in the table above were reviewed and approved by the audit committee. As a matter of policy, each permitted non-audit service is pre-approved by the audit committee or the audit committee’s chairman pursuant to delegated authority by the audit committee, other than de minimus non-audit services for which the pre-approval requirements are waived in accordance with the rules and regulations of the SEC.
| 34 |
| Table of Contents |
Audit Committee Pre-Approval Policies and Procedures
The audit committee charter provides that the audit committee will pre-approve audit services and non-audit services to be provided by our independent auditors before the accountant is engaged to render these services. The audit committee may consult with management in the decision-making process, but may not delegate this authority to management. The audit committee may delegate its authority to pre-approve services to one or more committee members, provided that the designees present the pre-approvals to the full committee at the next committee meeting.
Item 15. Exhibits and Financial Statement Schedules
(a) | The following documents are filed as part of this report: |
|
|
(1) | Financial Statements – See the financial statements beginning on page 40. |
(b) Exhibits:
Exhibit |
| No. Description |
|
|
|
3.1 |
| Certificate of Incorporation of the Company dated April 29, 1993 (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856) |
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
| By-Laws of the Company (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856). |
|
|
|
4.1 |
| Specimen Stock Certificate (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856). |
|
|
|
| ||
|
|
|
10.2 |
| Form of Stock Option Agreement (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33- 61856). |
|
|
|
|
|
|
10.4 |
| Modification Agreement No. 3 to Promissory Notes between Allan Robbins and the Company dated October 1, 2005 (incorporated herein by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005). |
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| 35 |
| Table of Contents |
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| 36 |
| Table of Contents |
* Filed as an exhibit hereto.
**Management contract or compensatory plan or arrangement.
# Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Omitted portions have been filed separately with the SEC.
| 37 |
| Table of Contents |
Information required by schedules called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.
Item 16. Form 10-K Summary
None.
| 38 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Infinite Group, Inc. |
| |
|
|
|
|
Date: May 9, 2023 | By: | /s/ James Villa |
|
|
| James Villa |
|
|
| Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ James Villa |
| Chief Executive Officer |
| May 9, 2023 |
James Villa |
|
| ||
|
| (Principal Executive Officer) |
|
|
/s/ Richard Glickman |
| VP Finance and Chief Accounting Officer |
| May 9, 2023 |
Richard Glickman |
|
| ||
|
| (Principal Financial and Accounting Officer) |
|
|
/s/ Andrew Hoyen |
|
| ||
Andrew Hoyen |
| President and Chief Operating Officer |
| May 9, 2023 |
|
|
|
|
|
/s/ Donald W. Reeve |
|
| ||
Donald W. Reeve |
| Chairman of the Board |
| May 9, 2023 |
| 39 |
| Table of Contents |
FINANCIAL STATEMENTS
INFINITE GROUP, INC.
DECEMBER 31, 2022
with
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Freed Maxick CPAs, P.C. - Firm ID 0317)
| 40 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Infinite Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Infinite Group, Inc. (the Company) as of December 31, 2022 and 2021, the related statements of operations, changes in stockholders' deficiency and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has negative working capital, and has total liabilities in excess of its total assets. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters arise from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. We did not identify any critical audit matters during the current period audit.
We have not been able to determine the specific year that we began serving as the Company’s auditor; however, we are aware that we have served as the Company’s auditor since at least 1995.
Rochester, New York
May 9, 2023
| 41 |
| Table of Contents |
See notes to audited financial statements.
| 42 |
| Table of Contents |
INFINITE GROUP, INC. | ||||||||
STATEMENTS OF OPERATIONS | ||||||||
|
|
|
|
| ||||
|
| Years Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
| ||
Revenue |
| $ | 7,003,404 |
|
| $ | 7,224,242 |
|
Cost of revenue |
|
| 4,262,355 |
|
|
| 4,489,306 |
|
Gross profit |
|
| 2,741,049 |
|
|
| 2,734,936 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
General and administrative |
|
| 2,488,937 |
|
|
| 2,159,378 |
|
Selling |
|
| 2,591,623 |
|
|
| 1,983,127 |
|
Total costs and expenses |
|
| 5,080,560 |
|
|
| 4,142,505 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
| (2,339,511 | ) |
|
| (1,407,569 | ) |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Other income (loss) |
|
| (60,973 | ) |
|
| 120,505 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 109 |
|
|
| 37 |
|
Interest expense: |
|
|
|
|
|
|
|
|
Related parties |
|
| (91,944 | ) |
|
| (72,455 | ) |
Other |
|
| (1,069,338 | ) |
|
| (209,331 | ) |
Total interest expense |
|
| (1,161,282 | ) |
|
| (281,786 | ) |
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
| (1,222,146 | ) |
|
| (161,244 | ) |
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (3,561,657 | ) |
| $ | (1,568,813 | ) |
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted |
| $ | (7.95 | ) |
| $ | (3.91 | ) |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic |
|
| 447,870 |
|
|
| 401,637 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – diluted |
|
| 447,870 |
|
|
| 401,637 |
|
See notes to audited financial statements.
| 43 |
| Table of Contents |
INFINITE GROUP, INC. |
| |||||||||||||||||||
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY |
| |||||||||||||||||||
Years Ended December 31, 2021 and 2022 |
| |||||||||||||||||||
|
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|
|
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| |||||
|
|
|
|
|
|
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| Additional |
|
|
|
|
|
|
| |||||
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance - December 31, 2020 |
|
| 387,492 |
|
| $ | 387 |
|
| $ | 30,792,391 |
|
| $ | (33,898,548 | ) |
| $ | (3,105,770 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
| 16,668 |
|
|
| 17 |
|
|
| 158,108 |
|
|
| 0 |
|
|
| 158,125 |
|
Exercise of stock options |
|
| 31,852 |
|
|
| 32 |
|
|
| 98,898 |
|
|
| 0 |
|
|
| 98,930 |
|
Stock based compensation |
|
| 0 |
|
|
| 0 |
|
|
| 117,587 |
|
|
| 0 |
|
|
| 117,587 |
|
Warrants issued |
|
| 0 |
|
|
| 0 |
|
|
| 202,052 |
|
|
| 0 |
|
|
| 202,052 |
|
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,568,813 | ) |
|
| (1,568,813 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2021 |
|
| 436,012 |
|
|
| 436 |
|
|
| 31,369,036 |
|
|
| (35,467,361 | ) |
|
| (4,097,889 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
| 5,668 |
|
|
| 6 |
|
|
| 16,994 |
|
|
| 0 |
|
|
| 17,000 |
|
Stock based compensation |
|
| 0 |
|
|
| 0 |
|
|
| 143,181 |
|
|
| 0 |
|
|
| 143,181 |
|
Warrants issued |
|
| 0 |
|
|
| 0 |
|
|
| 635,151 |
|
|
| 0 |
|
|
| 635,151 |
|
Cashless exercise of warrants |
|
| 26,894 |
|
|
| 27 |
|
|
| (27 | ) |
|
| 0 |
|
|
| 0 |
|
Split Adjustments |
|
| 1,519 |
|
|
| 1 |
|
|
| (1 | ) |
|
| 0 |
|
|
| 0 |
|
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (3,561,657 | ) |
|
| (3,561,657 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2022 |
|
| 470,093 |
|
| $ | 470 |
|
| $ | 32,164,334 |
|
| $ | (39,029,018 | ) |
| $ | (6,864,214 | ) |
See notes to audited financial statements.
| 44 |
| Table of Contents |
INFINITE GROUP, INC. | ||||||||||
STATEMENTS OF CASH FLOWS | ||||||||||
|
|
|
|
|
|
| ||||
|
| Years Ended December 31, |
| |||||||
|
| 2022 |
|
| 2021 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
| ||||
Net loss |
| $ | (3,561,657 | ) |
| $ | (1,568,813 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||
Stock based compensation |
|
| 143,181 |
|
|
| 117,587 |
| ||
Depreciation and amortization |
|
| 240,923 |
|
|
| 186,379 |
| ||
Amortization of debt discount |
|
| 637,879 |
|
|
| 51,891 |
| ||
Bad debt expense |
|
| 27,000 |
|
|
| 9,000 |
| ||
Forgiveness of note payable and interest |
|
| 0 |
|
|
| (120,505 | ) | ||
Restructure of short term debt and interest |
|
| 60,973 |
|
|
| 0 |
| ||
(Increase) decrease in assets: |
|
|
|
|
|
|
|
| ||
Accounts receivable |
|
| (89,180 | ) |
|
| 217,529 |
| ||
Prepaid expenses and other assets |
|
| 71,396 |
|
|
| (64,213 | ) | ||
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
| ||
Accounts payable |
|
| 1,150,716 |
|
|
| 193,790 |
| ||
Deferred revenue |
|
| 52,789 |
|
|
| 177,692 |
| ||
Accrued expenses |
|
| 204,660 |
|
|
| 244,099 |
| ||
Accrued retirement |
|
| 11,183 |
|
|
| 10,747 |
| ||
Net cash used by operating activities |
|
| (1,050,137 | ) |
|
| (544,817 | ) | ||
|
|
|
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
|
|
|
| ||
Purchase of property and equipment |
|
| (969 | ) |
|
| (13,506 | ) | ||
Capitalization of software development costs |
|
| (215,054 | ) |
|
| (229,528 | ) | ||
|
|
|
|
|
|
|
|
| ||
Net cash used by investing activities |
|
| (216,023 | ) |
|
| (243,034 | ) | ||
|
|
|
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
|
|
|
| ||
Proceeds from notes payable |
|
| 1,737,552 |
|
|
| 403,200 |
| ||
Debt issuance costs |
|
| (242,297 | ) |
|
| (25,160 | ) | ||
Proceeds from notes payable - related parties |
|
| 0 |
|
|
| 578,000 |
| ||
Repayment of notes payable - short-term |
|
| (322,340 | ) |
|
| 0 |
| ||
Proceeds from the exercise of common stock options |
|
| 17,000 |
|
|
| 98,930 |
| ||
Repayment of long-term obligations |
|
| 0 |
|
|
| (200,000 | ) | ||
|
|
|
|
|
|
|
|
| ||
Net cash provided by financing activities |
|
| 1,189,915 |
|
|
| 854,970 |
| ||
|
|
|
|
|
|
|
|
| ||
Net (decrease) increase in cash |
|
| (76,245 | ) |
|
| 67,119 |
| ||
|
|
|
|
|
|
|
|
| ||
Cash - beginning of period |
|
| 99,432 |
|
|
| 32,313 |
| ||
|
|
|
|
|
|
|
|
| ||
Cash - end of period |
| $ | 23,187 |
|
| $ | 99,432 |
| ||
|
|
|
|
|
|
|
|
| ||
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
| ||
Cash payments for interest |
| $ | 269,777 |
|
| $ | 84,203 |
| ||
|
|
|
|
|
|
|
|
| ||
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
| ||
Warrant issued in conjunction with debts |
| $ | 635,151 |
|
| $ | 202,052 |
| ||
Settlement of accounts receivable, notes payable, and accrued interest |
| $ | 322,500 |
|
| $ | 0 |
| ||
Common stock issued for prepaid consulting agreement |
| $ | 0 |
|
| $ | 58,125 |
| ||
Right of use asset operating lease and lease liability |
| $ | 691,010 |
|
| $ | 0 |
| ||
See notes to audited financial statements.
| 45 |
| Table of Contents |
INFINITE GROUP, INC.
NOTES TO THE AUDITED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION & BUSINESS
The accompanying financial statements consist of the financial statements of Infinite Group, Inc. (the Company).
The Company operates in one segment, the field of information technology (IT) consulting services, with all operations based in the United States. The primary consulting services are in the cybersecurity industry. There were no significant sales from customers in foreign countries during 2022 and 2021. All assets are located in the United States.
NOTE 2. - MANAGEMENT PLANS
The Company reported operating loss of $2,339,511 in 2022 and operating loss of $1,407,569 in 2021, net loss of $3,561,657 in 2022 and net loss of $1,568,813 in 2021, and stockholders’ deficiencies of $6,864,214 and $4,097,889 at December 31, 2022 and 2021, respectively. The Company has a working capital deficit of approximately $6.0 million at December 31, 2022. These factors raise initial doubt about the entities ability to continue as a going concern.
The Company’s mission is to drive shareholder value by developing and bringing to market automated, cost effective, and innovative cybersecurity technologies. The Company’s strategy is to build its business by designing, developing, and marketing IT security-based products and solutions that fill technology gaps in cybersecurity.
The Company’s goal is to increase sales and generate cash flow from operations on a consistent basis. The Company’s business plans require improving the results of its operations in future periods. The Company has renegotiated the terms of some certain obligations, using operational cash flow to pay down balances and extending terms, and provided financing with the issuance of new loans.
The Company has applied for and expects approval of its ERTC application, plans to issue stock, restructure certain debt and anticipates significant growth of business.
During the first quarter of 2022, the Company filed an S-1 for a public offering of $15 million of common stock and warrants, which was expected to be used for the Pratum acquisition and working capital needs. The public offering did not occur. On June 15, 2022, the acquisition agreement was terminated, and the transaction did not close.
The Company believes the capital resources generated by the improving results of its operations as well as cash available under its factoring line of credit and from additional related parties and third-party loans, if needed, provide sources to fund its ongoing operations and to support the internal growth of the Company. The Company may need to extend existing debt agreements in order to provide resources for other purposes. If the Company experiences significant growth in its sales, the Company believes that this may require it to increase its financing line, finance additional accounts receivable, or obtain additional working capital from other sources to support its sales growth.
The Company plans to continue to evaluate alternatives which may include continuing to renegotiate the terms of other notes, seeking conversion of the notes to shares of common stock and seeking funds to repay the notes. The Company continues to evaluate repayment of our remaining notes payable based on its cash flow.
As a result, there is substantial doubt about the Company’s ability to continue as a going concern within one year of issuance of the financial statements.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable
Credit is granted to substantially all customers throughout the United States. The Company carries its accounts receivable at invoice amount, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. The Company’s policy is to not accrue interest on past due receivables. Management determined that an allowance of $36,710 for doubtful accounts was reasonably stated at December 31, 2022 ($9,710 – 2021).
Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in financial institutions. The cash accounts occasionally exceed the federally insured deposit amount; however, management does not anticipate nonperformance by financial institutions. Management reviews the financial viability of these institutions on a periodic basis.
Loan Origination Fees - The Company capitalizes the costs of loan origination fees and amortizes the fees as interest expense over the contractual life of each agreement and they are shown as a reduction of the debt.
| 46 |
| Table of Contents |
Sale of Certain Accounts Receivable - The Company has available a financing line with a financial institution (the Purchaser). In connection with this line of credit, the Company adopted FASB ASC 860 “Transfers and Servicing”. FASB ASC 860 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company has a factoring line with the Purchaser which enables the Company to sell selected accounts receivable invoices to the Purchaser with full recourse against the Company.
These transactions qualify for a sale of assets since (1) the Company has transferred all of its right, title and interest in the selected accounts receivable invoices to the financial institution, (2) the Purchaser may pledge, sell or transfer the selected accounts receivable invoices, and (3) the Company has no effective control over the selected accounts receivable invoices since it is not entitled to or obligated to repurchase or redeem the invoices before their maturity and it does not have the ability to unilaterally cause the Purchaser to return the invoices. Under FASB ASC 860, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.
Pursuant to the provisions of FASB ASC 860, the Company reflects the transactions as a sale of assets and establishes an accounts receivable from the Purchaser for the retained amount less the costs of the transaction and less any anticipated future loss in the value of the retained asset. The retained amount is equal to 10% of the total accounts receivable invoice sold to the Purchaser. The fee is charged at prime plus 3.6% (effective rate of 11.1% at December 31, 2022) against the average daily outstanding balance of funds advanced.
The estimated future loss reserve for each receivable included in the estimated value of the retained asset is based on the payment history of the accounts receivable customer and is included in the allowance for doubtful accounts, if any. As collateral, the Company granted the Purchaser a first priority interest in accounts receivable and a blanket lien, which may be junior to other creditors, on all other assets.
The financing line provides the Company the ability to finance up to $2,000,000 of selected accounts receivable invoices, which includes a sublimit for one of the Company’s customers of $1,500,000. During the year ended December 31, 2022, the Company sold approximately $3,972,700 ($3,630,000 - 2021) of its accounts receivable to the Purchaser. As of December 31, 2022, approximately $228,000 ($148,000 - 2021) of these receivables remained outstanding. Additionally, as of December 31, 2022, the Company had $144,000 available under the financing line with the financial institution ($66,000 - 2021). After deducting estimated fees and advances from the Purchaser, the net receivable from the Purchaser amounted to $22,760 at December 31, 2022 ($14,816 - 2021) and is included in accounts receivable in the accompanying balance sheets as of that date.
There were no gains or losses on the sale of the accounts receivable because all were collected. The cost associated with the financing line was approximately $52,200 for the year ended December 31, 2022 ($34,200 - 2021). These financing line fees are classified on the statements of operations as interest expense.
Property and Equipment - Property and equipment are recorded at cost and are depreciated over their estimated useful lives for financial statement purposes. The cost of improvements to leased properties is amortized over the shorter of the lease term or the life of the improvement. Maintenance and repairs are charged to expense as incurred while improvements are capitalized.
Capitalization of Software for Resale - The Company capitalizes the software development costs for software to be sold, leased, or otherwise marketed. Capitalization begins upon the establishment of technological feasibility of a new product or enhancements to an existing product, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. Costs incurred after the enhancement has reached technological feasibility and before it is released in the market are capitalized and are primarily labor costs related to coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. Costs associated with major upgrade releases begin amortization in the month after release. The amortization period is three years. As of December 31, 2022, there is $894,027 of costs capitalized and $472,702 of accumulated amortization ($678,973 and $261,323, respectively, in 2021). During the year ended December 31, 2022 there was $215,379 of amortization expense recorded ($166,783 in 2021). $49,616 is not subject to amortization at December 31, 2022. Future amortization is expected to be $367,708 at a rate of $196,468, $114,687, and $56,553 for the years, 2023, 2024 and 2025 respectively. Costs incurred prior to reaching technological feasibility are expensed as incurred. Labor amounts expensed related to these development costs amounted to approximately $46,489 and $153,600 during the years ended December 31, 2022 and 2021, respectively.
Accounting for the Impairment or Disposal of Long-Lived Assets - The Company follows provisions of FASB ASC 360 “Property, Plant and Equipment” in accounting for the impairment of disposal of long-lived assets. This standard specifies, among other things, that long-lived assets are to be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The Company determined that there was no impairment of long-lived assets during 2022 and 2021.
Revenue Recognition - The Company’s revenues are generated under both time and material and fixed price agreements. Managed support services revenue is recognized when the associated costs are incurred, which coincides with the consulting services being provided. Time and materials service agreements are based on hours worked and are billed at agreed upon hourly rates for the respective position plus other billable direct costs. Fixed price service agreements are based on a fixed amount of periodic billings for recurring services of a similar nature performed according to the contractual arrangements with clients. These agreements are arrangements for monthly or weekly support services. Under both types of agreements, the delivery of services occurs when an employee works on a specific project or assignment as stated in the contract or purchase order. Based on historical experience, the Company believes that collection is reasonably assured.
| 47 |
| Table of Contents |
The Company sells licenses of Nodeware and third-party software, principally Webroot. The majority of customers are invoiced monthly at fixed rates for license fees and revenue is recognized over time.
The Company’s total revenue recognized from contracts from customers was comprised of two major services in 2022, down from three major sources in 2021. Managed support services and Cybersecurity projects including software, continue to constitute our major revenue sources for 2022, while Other IT consulting services are no longer a major source of revenue. The categories depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. There were no material unsatisfied performance obligations at December 31, 2022 or 2021 for contracts with an expected original duration of more than one year. The following table summarizes the revenue recognized by the major services:
|
| Years Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Managed support services |
| $ | 4,442,236 |
|
| $ | 4,325,067 |
|
Cybersecurity projects and software |
|
| 2,561,168 |
|
|
| 2,780,175 |
|
Other IT consulting services |
|
| 0 |
|
|
| 119,000 |
|
Total sales |
| $ | 7,003,404 |
|
| $ | 7,224,242 |
|
Managed support services
Managed support services consist of revenue primarily from our subcontracts for services to its end clients, principally a major establishment of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments.
| · | We generate revenue primarily from these subcontracts through fixed price service and support agreements. Revenues are earned and billed weekly and are generally paid within 45 days. The revenues are recognized at time of service. |
Cyber security projects and software
Cyber security projects and software revenue includes the selling of licenses of Nodeware® and third-party software, principally Webroot™ as well as performing cybersecurity assessments, testing and consulting as a CISO (Chief Information Security Officer).
| · | Nodeware and Webroot software offerings consist of fees generated from the use of the respective software by our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Substantially all customers are billed in the month of the service and is cancellable upon notice per the respective agreements. Substantially all payments are electronically billed, and the billed amounts are paid to the Company instantaneously via an online payment platform. If payments are made in advance, revenues related to the term associated with our software licenses is recognized ratably over the contractual period. |
|
|
|
| · | Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our standalone selling price. |
|
|
|
| · | Cybersecurity assessments, testing and CISO services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For substantially all these contracts, revenue is recognized when the specific performance obligation is satisfied. If the contract has multiple performance obligations, the revenue is recognized when the performance obligations are satisfied. Depending on the nature of the service, the amounts recognized are either based on an allocation of the transaction price to each performance obligation based on a relative standalone selling price of the products sold. |
|
|
|
| · | In substantially all Cybersecurity agreements, a 50% to 75% down payment is required before work is initiated. Down payments received are deferred until revenue is recognized. For the year ended December 31, 2022, we recognized revenue of approximately $498,000 that was included in the deferred revenue liability balance at the beginning of the period presented. Deferred revenue that will be realized during the succeeding 12-month period is approximately $540,000. |
Other IT consulting services
Other IT consulting services consists of services such as project management and general IT consulting services. We terminated this service in 2021.
| · | We generated 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. |
During 2022, sales to one client, including sales under subcontracts for services to several entities, accounted for 63.4% of total sales (59.6% - 2021) and 26.5% of accounts receivable at December 31, 2022 (15.6% - 2021).
| 48 |
| Table of Contents |
Stock Options - The Company recognizes compensation expense related to stock-based payments at the grant date fair value of the awards. The Company uses the Black-Scholes option pricing model to determine the estimated fair value of the awards.
Income Taxes - The Company accounts for income tax expense in accordance with FASB ASC 740 “Income Taxes.” Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company periodically reviews tax positions taken to determine if it is more likely than not that the position would be sustained upon examination. The Company did not have any material unrecognized tax benefit at December 31, 2022 or 2021. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2022 and 2021, the Company recognized no interest and penalties.
The Company files U.S. federal tax returns and tax returns in various states. The tax years 2018 through 2022 remain open to examination by the taxing jurisdictions to which the Company is subject.
Fair Value of Financial Instruments - The Company has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels.
Level 1 uses observable inputs such as quoted prices in active markets;
Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 is defined as unobservable inputs in which little or no market data exist and requires the Company to develop its own assumptions.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The carrying amounts of cash, accounts receivable and accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity. The carrying amount of the Company’s term debt and notes payable approximates fair value because the effective yields on these obligations, which include contractual interest rates, taken together with other features such as concurrent issuance of warrants, are comparable to rates of returns for instruments of similar credit risk.
Earnings Per Share - Basic earnings per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company’s case, comprise shares issuable under convertible notes payable, warrants and stock options. The treasury stock method is used to calculate dilutive shares, which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of options and notes assumed to be exercised. In a loss year, the calculation for basic and diluted earnings per share is the same, as the impact of potential common shares is anti-dilutive.
The following table sets forth the computation of basic and diluted loss per share as of December 31, 2022 and 2021:
|
| Years Ended December 31, |
| |||||
Numerator for basic and diluted net income per share: |
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
| ||
Net income (loss) |
| $ | (3,561,657 | ) |
| $ | (1,568,813 | ) |
Basic and diluted net income (loss) per share |
| $ | (7.95 | ) |
| $ | (3.91 | ) |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
Basic shares |
|
| 447,870 |
|
|
| 401,637 |
|
Diluted shares |
|
| 447,870 |
|
|
| 401,637 |
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from net income (loss) per share |
|
| 415,534 |
|
|
| 301,651 |
|
Certain common shares issuable under stock options and convertible notes payable have been omitted from the diluted net income (loss) per share calculation because their inclusion is considered anti-dilutive because the exercise or conversion prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.
Reclassifications -The Company reclassifies amounts in its prior year financial statements to conform to the current year’s presentation.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 49 |
| Table of Contents |
Leases
The Company recognizes a liability for their lease obligations and a corresponding right-of-use asset, initially measured at the present value of the lease payments. Subsequent accounting depends on whether the agreement is deemed to be a financing or operating lease. For operating leases, a lessee recognizes its total lease expense as an operating expense over the lease term. Assets and liabilities are presented and disclosed separately, and the liabilities must be classified appropriately as current and noncurrent.
Recently Adopted Accounting Guidance
Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. Adoption of the new standard did not materially impact the Company’s consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements.
NOTE 4. - PROPERTY AND EQUIPMENT
Property and equipment consists of:
|
| Depreciable |
| December 31, |
| |||||
|
| Lives |
| 2022 |
|
| 2021 |
| ||
Software |
| 3 years |
| $ | 72,834 |
|
| $ | 72,834 |
|
Equipment |
| 3 to 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
| 156,603 |
|
|
| 155,635 |
|
Furniture and fixtures |
| 5 to 7 years |
|
| 17,735 |
|
|
| 17,735 |
|
|
|
|
|
| 247,172 |
|
|
| 246,204 |
|
Accumulated depreciation |
|
|
|
| (227,176 | ) |
|
| (205,066 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 19,996 |
|
| $ | 41,138 |
|
Depreciation expense was $22,110 and $20,567 for the years ended December 31, 2022 and 2021, respectively.
NOTE 5. - NOTES PAYABLE - CURRENT
Notes payable consist of:
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Demand note payable, 10%, secured by software (A) |
| $ | 12,500 |
|
| $ | 12,500 |
|
Convertible promissory note, 8%, (B) |
|
| 240,902 |
|
|
| 448,000 |
|
Convertible promissory note, 8%, (C) |
|
| 370,000 |
|
|
| 0 |
|
Convertible promissory note, 8%, (D) |
|
| 262,453 |
|
|
| 0 |
|
Convertible promissory note, 8%, (E) |
|
| 355,000 |
|
|
| 0 |
|
Convertible promissory note, 8%, (F) |
|
| 566,000 |
|
|
| 0 |
|
Financing arrangement on certain accounts receivable (G) |
|
| 75,838 |
|
|
| 0 |
|
Convertible notes payable, 6% (H) |
|
| 150,000 |
|
|
| 150,000 |
|
|
| $ | 2,032,693 |
|
| $ | 610,500 |
|
Less: Deferred financing costs (C,D,E,F) |
|
| 112,000 |
|
|
| 58,300 |
|
Debt discounts - warrants (C,D,E,F) |
|
| 347,836 |
|
|
| 168,377 |
|
|
| $ | 1,572,857 |
|
| $ | 383,823 |
|
(A) | Demand Note payable, 10%, secured by Software - During 2015, the Company issued a note in connection with the purchase of Software. |
| 50 |
| Table of Contents |
(B) | Convertible promissory note, 8%, due November 3, 2022 – During 2021, the Company entered into a convertible promissory note. In exchange for the convertible promissory note, the lender agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum. The convertible promissory note is recorded net of a $44,800 original issue discount. Under the terms of the convertible promissory note, monthly payments of principal and interest of $53,760 were due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022. Additionally, in the event of a default as defined in the promissory note agreement, or if the Company elects to pre-pay the convertible promissory note, the lender and the agent has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to the lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The note is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. The promissory note contains customary anti-dilution provisions. The Company evaluated the terms of the conversion feature under ASC 480 and ASC 815 and determined that separate bifurcation of the conversion feature was not required. In addition to the issuance of the convertible promissory note, the Company also granted the lender warrants (Note 9). In exchange for the Promissory Note, the Company accepted an original discount on the Promissory note of $44,800 as noted above, paid a finder’s fee of $20,160, and the lender’s legal fees of $5,000. These deferred financing fees were amortized ratably through October 2022. The Company did not meet the monthly payment obligations; however, on November 23, 2022, the lender waived the default provisions as of November 23, 2022 and extended the maturity date to March 31, 2023 as part of an amendment which increased the balance of the note by $140,000 and the Company repaid the $140,000 five days later. As of the filing date, the Company did not pay off the note. The lender could trigger the default provisions. |
|
|
(C) | Convertible promissory note, 8%, due February 15, 2023 – During 2022, the Company entered into a convertible promissory note. In exchange for the convertible promissory note, the lender agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum. The convertible promissory note is recorded net of a $37,000 original issue discount. Under the terms of the convertible promissory note, monthly payments of principal and interest of $44,400 were due beginning June 16, 2022, and each month thereafter with the final payment due on February 15, 2023. In February 2023, the due date was extended to May 30, 2023. Additionally, in the event of a default as defined in the promissory note agreement, or if the Company elects to pre-pay the convertible promissory note, the lender and the agent has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to the lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The note is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. The promissory note contains customary anti-dilution provisions. The Company evaluated the terms of the conversion feature under ASC 480 and ASC 815 and determined that separate bifurcation of the conversion feature was not required. In addition to the issuance of the convertible promissory note, the Company also granted the lender warrants (Note 9). In exchange for the Promissory Note, the Company accepted an original discount on the Promissory note of $37,000 as noted above, paid a finder’s fee of $14,650, and the lender’s legal fees of $3,000. These deferred financing fees are being amortized ratably through February 2023. The Company did not meet the monthly payment obligations; however, the lender waived the default provisions on February 2, 2023 through February 2, 2023. On February 5, 2023, the lender extended the maturity date to May 30, 2023 as part of an amendment and the Company owed $200,000 by March 31, 2023 or an additional $30,000 would be added to the balance. The Company paid $200,000 of the existing balance on April 3, 2023 and the lender waived the $30,000. |
|
|
(D) | Convertible promissory note, 8%, due April 12, 2023 – During 2022, the Company entered into a convertible promissory note. In exchange for the convertible promissory note, the lender agreed to lend the Company $296,000, which bears interest at a rate of eight percent (8%) per annum. The convertible promissory note is recorded net of a $29,600 original issue discount. Under the terms of the convertible promissory note, monthly payments of principal and interest of $35,520 were due beginning August 12, 2022, and each month thereafter with the final payment due on April 12, 2023. Additionally, in the event of a default as defined in the promissory note agreement, or if the Company elects to pre-pay the convertible promissory note, the lender and the agent has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to the lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The note is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. The promissory note contains customary anti-dilution provisions. The Company evaluated the terms of the conversion feature under ASC 480 and ASC 815 and determined that separate bifurcation of the conversion feature was not required. In addition to the issuance of the convertible promissory note, the Company also granted the lender warrants (Note 9). In exchange for the Promissory Note, the Company accepted an original discount on the Promissory note of $29,600 as noted above, paid a finder’s fee of $11,320, and the lender’s legal fees of $5,000. These deferred financing fees are being amortized ratably through April 2023. The Company did not meet the monthly payment obligations; however, the lender accepted a settlement for principal and accrued interest in April 2023 for $200,000. The debt was forgiven at that time and approximately $98,000 will be recorded as forgiveness of debt in 2023. |
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(E) | Convertible promissory note, 8%, due May 26, 2023 – During 2022, the Company entered into a convertible promissory note. In exchange for the convertible promissory note, the lender agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum. The convertible promissory note is recorded net of a $35,500 original issue discount. Under the terms of the convertible promissory note, monthly payments of principal and interest of $42,600 were due beginning September 27, 2022, and each month thereafter with the final payment due on May 26, 2023. Additionally, in the event of a default as defined in the promissory note agreement, or if the Company elects to pre-pay the convertible promissory note, the lender and the agent has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to the lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The note is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. The promissory note contains customary anti-dilution provisions. The Company evaluated the terms of the conversion feature under ASC 480 and ASC 815 and determined that separate bifurcation of the conversion feature was not required. In addition to the issuance of the convertible promissory note, the Company also granted the lender warrants (Note 9). In exchange for the Promissory Note, the Company accepted an original discount on the Promissory note of $35,500 as noted above, paid a finder’s fee of $15,975, and the lender’s legal fees of $3,500. These deferred financing fees are being amortized ratably through May 2023. The Company did not meet the monthly payment obligations; however, the lender waived the default provisions through November 2022. However, the Company was in default as of December 31, 2022 and as of the filing date and the lender could trigger the default provisions. |
|
|
(F) | Convertible promissory note, 8%, due November 22, 2023 – During 2022, the Company entered into a convertible promissory note. In exchange for the convertible promissory note, the lender agreed to lend the Company $566,000, which bears interest at a rate of eight percent (8%) per annum. The convertible promissory note is recorded net of a $56,600 original issue discount. Under the terms of the convertible promissory note, monthly payments of principal and interest of $67,920 were due beginning March 23, 2023, and each month thereafter with the final payment due on November 22, 2023. Additionally, in the event of a default as defined in the promissory note agreement, or if the Company elects to pre-pay the convertible promissory note, the lender and the agent has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $3.55 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to the lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The note is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. The promissory note contains customary anti-dilution provisions. The Company evaluated the terms of the conversion feature under ASC 480 and ASC 815 and determined that separate bifurcation of the conversion feature was not required. In addition to the issuance of the convertible promissory note, the Company also granted the lender warrants (Note 9). In exchange for the Promissory Note, the Company accepted an original discount on the Promissory note of $56,600 as noted above, paid a finder’s fee of $14,000, and the lender’s legal fees of $5,000. These deferred financing fees are being amortized ratably through November 2023. The Company did not make the first monthly payment. As of the filing date, the lender could trigger the default provisions. |
|
|
(G) | Financing arrangement on certain accounts receivable - During 2022, the Company entered into a financing arrangement. Pursuant to the financing arrangement, the lender agreed to lend the Company $139,400 with a one--time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the financing arrangement, payments became due on August 15, 2022, and consisted of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher. As of December 31, 2022, the outstanding balance was $75,838. Subsequent payments shall also consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher, with the final payment due on February 6, 2024. The loan is subject to customary events of default. No material relationship exists between the Company or its affiliates and Lender, other than in respect to the processing of credit card payments through Stripe, Inc.’s payment processing platform, and the lender’s Loan Agreement. |
|
|
(H) | Convertible notes payable, 6%, maturity date of December 31, 2016 - At December 31, 2022, the Company was obligated to unrelated third parties for $150,000 ($150,000 - 2021) (“The Notes”). The principal is unsecured and convertible at the option of the holders into shares of common stock at $3.75 per share. The Notes bear interest at 6.0% and is past due. The Notes are convertible into shares of common stock subject to the following limitations. The Notes are not convertible to the extent that shares of common stock issuable upon the proposed conversion would result in a change in control of the Company which would limit the use of its net operating loss carryforwards; provided, however if the Company closes a transaction with another third party or parties that results in a change of control which will limit the use of its net operating loss carryforwards, then the foregoing limitation shall lapse. Prior to any conversion by a requesting note holder, each note holder holding a note which is then convertible into 5% or more of the Company’s common stock shall be entitled to participate on a pari passu basis with the requesting note holder and upon any such participation the requesting note holder shall proportionately adjust his conversion request such that, in the aggregate, a change of control, which will limit the use of the Company’s net operating loss carryforwards, does not occur. |
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Notes payable - related parties consist of: |
|
|
|
|
|
| ||
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Demand notes payable to director, 6%, unsecured |
| $ | 130,000 |
|
| $ | 130,000 |
|
Demand note payable to employee, 6% unsecured |
|
| 50,000 |
|
|
| 50,000 |
|
Demand notes payable to officer and director, 6%, unsecured |
|
| 37,000 |
|
|
| 37,000 |
|
Demand note payable to officer and director, 6%, unsecured |
|
| 12,000 |
|
|
| 12,000 |
|
|
| $ | 229,000 |
|
| $ | 229,000 |
|
NOTE 6. - LONG-TERM OBLIGATIONS
Notes Payable - Other - Term notes payable - other consist of:
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
2016 note payable, 6%, unsecured, due December 31, 2021 (A) |
| $ | 0 |
|
| $ | 500,000 |
|
2022 note payable, 10%, unsecured, due September 30, 2023 (B) |
|
| 250,000 |
|
|
| 0 |
|
Note payable, 10%, secured, due January 1, 2018 (C) |
|
| 265,000 |
|
|
| 265,000 |
|
Convertible term note payable,12%, secured, due January 1, 2024 (D) |
|
| 175,000 |
|
|
| 175,000 |
|
2020 note payable, 6%, unsecured, due August 24, 2024 (E) |
|
| 166,473 |
|
|
| 166,473 |
|
Convertible term note payable,7%, secured, due January 1, 2024 (F) |
|
| 100,000 |
|
|
| 100,000 |
|
Convertible notes payable, 6%, due January 1, 2024 (G) |
|
| 9,000 |
|
|
| 9,000 |
|
Accrued interest due after 2021(H) |
|
| 8,376 |
|
|
| 7,836 |
|
|
|
|
|
|
|
|
|
|
|
|
| 973,849 |
|
|
| 1,223,309 |
|
Less: current maturities |
|
| 515,000 |
|
|
| 765,000 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 458,849 |
|
| $ | 458,309 |
|
(A) 2016 note payable, 6%, unsecured, due December 31, 2021 - On March 14, 2016, the Company entered into an unsecured financing agreement with a third-party lender. At December 31, 2016, the Company was obligated for $500,000. Borrowings bear interest at 6% with interest payments due quarterly. Principal was due on December 31, 2021 and is now past due. Principal and interest may become immediately due and payable upon the occurrence of customary events of default. In consideration for providing the financing, the Company paid the lender a fee of 33,334 shares of its common stock valued at $37,500 on the date of the agreement based upon the closing bid quotation of its common stock on the OTC Bulletin Board on that date. These deferred financing costs are recorded as a reduction of the principal owed and are amortized over the life of the debt. The balance of the note payable was $467,225 at December 31, 2016 consisting of principal due of 500,000 offset by deferred financing costs of $32,775. As of December 31, 2021, the balance was $500,000. This debt was amended by a new note effective as of October 1, 2022 (see Note (B) below). The effect of the transaction was the reduction of accounts receivable by $383,473; the reduction of debt of $250,000, the reduction of accrued interest payable by $72,500 and a non-operating loss of $60,973.
(B) 2022 note payable, 10%, unsecured, due September 30, 2023 - On March 17, 2023, the Company, entered into an Amended and Restated Line of Credit Note and Agreement effective as of October 1, 2022, which amended and restated the “2016 Note” (see Note (A) above). The note has a principal amount of $250,000 and accrues interest on the unpaid principal amount at a rate of ten percent (10%) per annum. Under the terms of the note, the Company agreed to make a one-time payment of $16,667 for interest accrued on the 2016 Note for the four-month period covering June 2022 through September 2022. The Company has also agreed to make quarterly interest payments of $6,250, commencing on December 31, 2022, and continuing through and including September 30, 2023. If an event of default occurs, the Company has 30 days to cure from the date on which the lender has provided the Company with written notice specifying the event of default.
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(D) Convertible term note payable, 12%, secured, due January 1, 2024 - The Company entered into a secured loan agreement during 2008 for working capital. The loan bears interest at 12%, which is payable monthly and was due, as modified on August 31, 2018 for an aggregate of $175,000. During 2009, the note was modified for its conversion into common shares at $18.75 per share, which was the closing price of the Company’s common stock on the date of the modification. The note is secured by a subordinate lien on all assets of the Company.
(E) 2020 note payable, 6%, unsecured, due August 24, 2024 - The Company entered into a promissory note agreement dated August 24, 2020 with a third-party lender. The note represents the negotiated amount owed due to the lender after a payment in the amount of $550,000 was made to settle previous notes and interest held by the Lender. The principal amount of the new note is $166,473. This note becomes due on August 24, 2024.
(F) Convertible term note payable, 7%, secured, due January 1, 2024 - The note bears interest at the rate of 7% per annum, payable monthly, and is secured by a subordinate lien on all the Company’s assets. The note’s principal is convertible at the option of the holder into shares of the Company’s common stock at $7.50 per share, which was the price of the Company’s common stock on the closing date of the agreement.
(G) Convertible notes payable, 6%, due January 1, 2024 - The Company has a note payable to a former related party in the amount of $9,000. The note’s maturity was extended to January 1, 2024 from January 1, 2021. In consideration for this extension, the Company agreed to issue the borrower 25,000 options with a 3-year term to purchase common stock of Infinite Group Inc. exercisable at $7.50 per share. Principal and accrued interest are convertible at the option of the holder into shares of common stock at $3.75 per share. The note bears interest at 6% at December 31, 2022 and December 31, 2021. The rate is adjusted annually, on January 1st of each year, to the prime rate in effect on December 31st of the immediately preceding year, plus one and one quarter percent, and in no event, shall the interest rate be less than 6% per annum. The rate effective as of January 1, 2023 was 8.75% (January 1, 2022 – 6%).
(H) Accrued interest due after 2021 – The accrued interest for items (F) and (G) above is not due until the due date of the respective loan.
Notes Payable - Related Parties
Notes payable - related parties consist of:
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Note payable, up to $500,000, 7.5%, due August 31, 2026 (A) |
| $ | 499,000 |
|
| $ | 499,000 |
|
2020 Note payable, 6%, due January 1, 2024 (B) |
|
| 328,000 |
|
|
| 328,000 |
|
Convertible notes payable, 6% (C) |
|
| 146,300 |
|
|
| 146,300 |
|
Convertible note payable, 7%, due June 30, 2023 (D) |
|
| 25,000 |
|
|
| 25,000 |
|
Note payable, $100,000 line of credit, 6%, unsecured (E) |
|
| 90,000 |
|
|
| 90,000 |
|
Note payable, $75,000 line of credit, 6%, unsecured (F) |
|
| 70,000 |
|
|
| 70,000 |
|
Accrued interest due after 2022 (G) |
|
| 113,576 |
|
|
| 116,465 |
|
|
| $ | 1,271,876 |
|
| $ | 1,274,765 |
|
Less current maturities |
|
| 385,000 |
|
|
| 190,000 |
|
|
| $ | 886,876 |
|
| $ | 1,084,765 |
|
(A) Note payable of up to $500,000, 7.5%, due August 31, 2026 - On May 7, 2019, the Company entered into a note payable agreement for up to $500,000 with a related party. The note has an interest rate of 7.5% and is due on August 31, 2026. The Company borrowed $200,000 during the year ended December 31, 2019, $50,000 during the year ended December 31, 2020, and $249,000 during the year ended December 31, 2021 which remains outstanding at December 31, 2022.
(B) 2020 Note payable, 6%, due January 1, 2024 - On December 30, 2020, the Company entered into a promissory note agreement with a member of its Board. The interest payments are due quarterly. First payment to be made on April 1, 2021 and every three (3) months thereafter until the note is retired. No interest payments were made in 2022. A principal payment of two hundred thousand dollars ($200,000.00) are to be made on January 1, 2023 and a balloon payment of $128,000 on January 1, 2024. The due dates are currently being negotiated.
(C) Convertible notes payable, 6% - The Company has a note payable to a related party of $146,300 maturing on January 1, 2024. This note’s maturity date was extended from January 1, 2020. Principal and accrued interest are convertible at the option of the holder into shares of common stock at $3.75 per share, subject to certain limitations. The notes bear interest at 6% at December 31, 2022 The rate is adjusted annually, on January 1st of each year, to the prime rate in effect on December 31st of the immediately preceding year, plus one and one quarter percent, and in no event, shall the interest rate be less than 6% per annum. The rate effective as of January 1, 2023 was 8.75% (6% in 2022).
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The Company executed collateral security agreements with the note holders providing for a subordinate security interest in all the Company’s assets. Generally, upon notice, prior to the note maturity date, the Company can prepay all or a portion of the outstanding notes.
(D) Convertible note payable, 7%, due June 30, 2023 - On February 12, 2015, the Company borrowed $25,000 from a Company officer. The note is unsecured and matured on March 31, 2018 with principal convertible at the option of the holder into shares of common stock at $7.50 per share. In 2019, the Company officer extended the due date to June 30, 2023.
(E) Note payable, $100,000 line of credit, 6%, unsecured - On July 18, 2017, the Company entered into an unsecured line of credit financing agreement with an officer and member of its Board. The LOC Agreement provides for working capital of up to $100,000 with interest at 6% due quarterly through July 31, 2023. In consideration for providing the financing, the lender was granted an option to purchase 5,334 shares of common stock at $3.00 per share. The option was exercised in 2022.
(F) Note payable, $75,000 line of credit, 6%, unsecured - On September 21, 2017, the Company entered into an unsecured line of credit financing agreement with a related party. The LOC Agreement provides for working capital of up to $75,000 with interest at 6% due quarterly through January 2, 2023. In consideration for providing the financing, the lender was granted an option to purchase 5,334 shares of common stock at $3.00 per share. The option expired on January 2, 2023.
(G) Accrued interest due after 2023 – The accrued interest for item (C) above is not due until the due date of the loan.
Long-Term Obligations
As of December 31, 2022, minimum future annual payments of long-term obligations and amortization of deferred financing costs are as follows:
|
| Annual |
|
| Annual |
|
|
|
| |||
|
| Payments |
|
| Amortization |
|
| Net |
| |||
Due Prior to 2023 |
| $ | 1,111,083 |
|
| $ | 0 |
|
| $ | 1,111,083 |
|
2023 |
|
| 2,033,930 |
|
|
| 459,884 |
|
|
| 1,574,046 |
|
2024 |
|
| 863,453 |
|
|
| 0 |
|
|
| 863,453 |
|
2025 |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
2026 |
|
| 499,000 |
|
|
| 0 |
|
|
| 499,000 |
|
Total long-term obligations |
| $ | 4,507,466 |
|
| $ | 459,884 |
|
| $ | 4,047,582 |
|
NOTE 7. - STOCK AND STOCK OPTION PLANS
Preferred Stock - The Company’s certificate of incorporation authorizes its Board to issue up to 1,000,000 shares of preferred stock. The stock is issuable in series that may vary as to certain rights and preferences, as determined upon issuance, and has a par value of $0.01 per share. As of December 31, 2022, and 2021, there were no preferred shares issued or outstanding.
2005 Plan - The Company’s Board and stockholders approved a stock option plan adopted in 2005, which has authority to grant options to purchase up to an aggregate of 53,334 common shares at December 31, 2022 and 2021. There are 0 shares available for grant at December 31, 2022.
2009 Plan - During 2009, the Company’s Board approved the 2009 stock option plan, which grants options to purchase up to an aggregate of 48,894 common shares at December 31, 2022 and 2021. Options issued to date are nonqualified since the Company has decided not to seek stockholder approval of the 2009 Plan. As this plan has expired, there are 0 shares available for grant at December 31, 2022.
2019 Plan - During 2019, the Company’s Board approved the 2019 stock option plan, which grants options to purchase up to an aggregate of 20,000 common shares. As the plan was replaced by the 2021 stock option plan, there are 0 common shares are available for grant at December 31, 2022. Options issued to date are nonqualified since the Company has decided not to seek stockholder approval of the 2019 Plan.
2020 Plan - During 2020, the Company’s Board approved the 2020 stock option plan, which grants options to purchase up to an aggregate of 20,000 common shares. As the plan was replaced by the 2021 stock option plan, there are 0 common shares are available for grant at December 31, 2022. Options issued to date are nonqualified since the Company has decided not to seek stockholder approval of the 2020 Plan.
2021 Plan – During 2021, the Company’s Board approved the 2021 Equity Incentive Plan, which was subsequently approved by the shareholders on January 26, 2022. The 2021 plan replaces the 2019 and 2020 plans, and grants options to purchase up to an aggregate of (a) 60,000, plus (b) any shares of common stock that are subject to options granted under the prior plans that expire, are forfeited or canceled or terminate for any other reason without the issuance of shares under the prior plans on or after January 26, 2022, plus (c) any shares of common stock that are subject to options granted under the prior plans that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any option under the prior plans on or after January 26, 2022. There are 62,767 shares available for granting under this plan as of December 31, 2022.
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NOTE 8. - STOCK OPTION AGREEMENTS AND TRANSACTIONS
The Company grants stock options to its key employees and independent service providers as it deems appropriate. Most options expire from five to ten years after the grant date.
Option Agreements - The Company’s Board approved stock option agreements with consultants, an employee for a performance-based award, and a member of the Board of which options for an aggregate of 27,354 common shares are outstanding at December 31, 2022 with an average exercise price of $12.04 per share. At December 31, 2022, options for 9,354 shares are vested as the performance based award has been reached.
On April 6, 2021, the Company granted a stock option to purchase a total of 2,667 common shares at an exercise price of $14.438 per share to a former executive of the Company who consults with the Company. The individual forfeited an option grant of 6,307 common shares from the 2009 Plan.
On April 19, 2021, the Company issued 10,000 performance-based stock options at $18.375 per share to an executive of the Company. Certain revenue targets must be made to grant the options in three tranches of 3,333, 3,333, and 3,334 shares each. The unrecognized compensation expense for these options is approximately $135,800 at December 31, 2021, and has been fully recognized as of December 31, 2022.
The remaining stock options issued during the year ended December 31, 2021 included in the table below relate to options issued to employees as compensation expense.
All stock options issued in 2022 were issued to employees as compensation expense.
On July 29, 2022, an executive officer exercised 5,334 options at a price of $3.00 per share.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions. Volatility is based on the Company’s historical volatility. The expected life of the options was determined using the simplified method for plain vanilla options as stated in FASB ASC 718 to improve the accuracy of this assumption while simplifying record keeping requirements until more detailed information about the Company’s exercise behavior is available. The risk-free rate for the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The following assumptions were used for the years ended December 31, 2022 and 2021 |
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| ||
|
| 2022 |
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| 2021 |
| ||
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|
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|
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Risk free interest rate |
| 1.26% to 3.35% |
|
| 0.16% to 0.64% |
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| ||
Expected dividend yield |
|
| 0 | % |
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| 0 | % |
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|
|
Expected stock price volatility |
| 110% to 130% |
|
| 100% to 140% |
| ||
|
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|
|
|
|
|
Expected life of options |
| 2.75 years |
|
| 1.25 to 5.25 years |
| ||
| 56 |
| Table of Contents |
The following is a summary of stock option activity, including qualified and non-qualified options for the years ended December 31, 2021 and 2022
|
| Number of |
|
| Weighted |
|
| Remaining |
| Aggregate |
| |||
|
| Options |
|
| Average |
|
| Contractual |
| Intrinsic |
| |||
|
| Outstanding |
|
| Exercise Price |
|
| Term |
| Value |
| |||
|
|
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|
|
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|
|
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| |||
Outstanding at December 31, 2020 |
|
| 165,768 |
|
| $ | 3.98 |
|
|
|
|
|
| |
Granted |
|
| 23,429 |
|
| $ | 15.98 |
|
|
|
|
|
| |
Exercised |
|
| (31,858 | ) |
| $ | 2.78 |
|
|
|
|
|
| |
Expired |
|
| (600 | ) |
| $ | 7.13 |
|
|
|
|
|
| |
Forfeited |
|
| (13,312 | ) |
| $ | 7.20 |
|
|
|
|
|
| |
Outstanding at December 31, 2021 |
|
| 143,427 |
|
| $ | 5.85 |
|
| 2.8 years |
|
| 289,700 |
|
Granted |
|
| 1,403 |
|
| $ | 9.48 |
|
|
|
|
|
|
|
Exercised |
|
| (5,668 | ) |
| $ | 3.00 |
|
|
|
|
|
|
|
Expired |
|
| (7,373 | ) |
| $ | 4.87 |
|
|
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|
|
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Outstanding at December 31, 2022 |
|
| 131,789 |
|
| $ | 6.05 |
|
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|
|
|
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|
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|
|
|
|
|
|
Vested or expected to vest at December 31, 2022 |
|
| 131,789 |
|
| $ | 6.05 |
|
| 2.8 years |
|
| 289,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2022 |
|
| 131,655 |
|
| $ | 6.04 |
|
| 2.8 years |
|
| 289,700 |
|
At December 31, 2022, there was approximately $1,428 of total unrecognized compensation cost related to outstanding non-vested options. The balance was $135,800 at December 31, 2021.
The weighted average fair value of options granted was $9.48 and $15.98 per share for the years ended December 31, 2022 and 2021, respectively. The exercise price for all options granted equaled or exceeded the market value of the Company’s common stock on the date of grant.
NOTE 9. – WARRANTS
On November 3, 2021, as additional consideration for the convertible promissory note financing (Note 5), the Company issued the Mast Hill Fund, L.P. (the “Lender”) a 5-year warrant to purchase 18,667 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $181,900 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5). During 2022, the Lender initiated a cashless exercise of this warrants for 11,470 shares.
On November 3, 2021, J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the same convertible promissory note and was paid a cash fee of $20,160 and issued a 5-year warrant to purchase 2,135 shares of Company common stock at a fixed price of $14.40 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $20,200 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5).
On February 15, 2022, as additional consideration for the convertible promissory note financing (Note 5), the Company issued the Mast Hill Fund, L.P. (the “Lender”) a 5-year warrant to purchase 12,334 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $131,600 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5). During 2022, the Lender initiated a cashless exercise of this warrants for 9,362 shares.
| 57 |
| Table of Contents |
On February 15, 2022, J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the same convertible promissory note and was paid a cash fee of $14,650 and issued a 5-year warrant to purchase 1,619 shares of Company common stock at a fixed price of $14.40 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $16,700 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5).
On April 12, 2022, as additional consideration for the convertible promissory note financing (Note 5), the Company issued Talos Victory Fund, LLC (the “Lender”) a 5-year warrant to purchase 9,867 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $74,000 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5). During 2022, the Lender initiated a cashless exercise of this warrants for 6,062 shares.
On April 12, 2022, J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the same convertible promissory note and was paid a cash fee of $11,320 and issued a 5-year warrant to purchase 1,295 shares of Company common stock at a fixed price of $14.40 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $9,200 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5).
On May 27, 2022, as additional consideration for the convertible promissory note financing (Note 5), the Company issued the Mast Hill Fund, L.P. (the “Lender”) a 5-year warrant to purchase 11,834 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $113,400 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5).
On May 27, 2022, J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the same convertible promissory note and was paid a cash fee of $15,975 and issued a 5-year warrant to purchase 1,554 shares of Company common stock at a fixed price of $14.40 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $14,200 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5).
On November 23, 2022, as additional consideration for the convertible promissory note financing (Note 5), the Company issued the Mast Hill Fund, L.P. (the “Lender”) a 5-year warrant to purchase 110,000 shares of Company common stock at a fixed price of $3.55 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $257,400 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5).
On November 23, 2022, J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the same convertible promissory note and was paid a cash fee of $14,000 and issued a 5-year warrant to purchase 8,371 shares of Company common stock at a fixed price of $4.26 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $18,600 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 5).
| 58 |
| Table of Contents |
NOTE 10. – INCOME TAXES
The components of income tax expense (benefit) consists of the following:
At December 31, 2022, the Company had federal net operating loss carryforwards of approximately $9,300,000 ($8,500,000 - 2021) and various state net operating loss carryforwards of approximately $6,700,000 ($4,900,000 - 2021). Approximately $4,800,000 of these carryforwards can be carried forward indefinitely, while the remaining carryforwards expire from 2023 through 2042. These carryforwards exclude federal net operating loss carryforwards from inactive subsidiaries and net operating loss carryforwards from states that the Company does not presently operate in. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of the net operating loss carryforwards before utilization.
At December 31, 2022, a net deferred tax asset, representing the future benefit attributed primarily to the available net operating loss carryforwards in the amount of approximately $2,538,000 ($2,238,000 - 2021), had been fully offset by a valuation allowance because management believes that the statutory limitations on utilization of the operating losses and concerns over achieving profitable operations diminish the Company’s ability to demonstrate that it is more likely than not that these future benefits will be realized before they expire.
The following is a summary of the Company’s temporary differences and carryforwards which give rise to deferred tax assets and liabilities.
|
| December 31, |
| |||||
Deferred tax assets (liabilities): |
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
| ||
Net operating loss carryforwards |
| $ | 2,187,000 |
|
| $ | 1,956,000 |
|
Operating Lease ROU |
|
| (158,000 | ) |
|
| (10,000 | ) |
Operating Lease Liability |
|
| 159,000 |
|
|
| 10,000 |
|
Property and Equipment |
|
| 47,000 |
|
|
| (14,000 | ) |
Reserves and accrued expenses payable |
|
| 303,000 |
|
|
| 296,000 |
|
Gross deferred tax asset |
|
| 2,538,000 |
|
|
| 2,238,000 |
|
Deferred tax asset valuation allowance |
|
| (2,538,000 | ) |
|
| (2,238,000 | ) |
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
| $ | 0 |
|
| $ | 0 |
|
| 59 |
| Table of Contents |
The differences between the U.S. statutory federal income tax rate and the effective income tax rate in the accompanying statements of operations are as follows:
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
| ||
Statutory U.S. federal tax rate |
|
| 21.00 | % |
|
| 21.00 |
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
| (8.40 | ) |
|
| (20.70 | ) |
Net operating loss carryforward expiration |
|
| (11.10 | ) |
|
| (5.90 | ) |
State taxes |
|
| 2.00 |
|
|
| 3.00 |
|
Original Issue Discount |
|
| (3.30 | ) |
|
| 0.00 |
|
Stock-based compensation |
|
| (0.10 | ) |
|
| 1.10 |
|
Forgiveness of PPP Loan |
|
| 0.00 |
|
|
| 1.60 |
|
Other permanent non-deductible items |
|
| (0.10 | ) |
|
| (0.10 | ) |
|
|
|
|
|
|
|
|
|
Effective income tax rate |
| 0.00 | % |
|
| 0.00 | % | |
NOTE 11. - EMPLOYEE RETIREMENT PLANS
Simple IRA Plan - Through December 31, 2012, the Company offered a simple IRA plan as a retirement plan for eligible employees who earned at least $5,000 of annual compensation. Eligible employees could elect to contribute a percentage of their compensation up to a maximum of $11,500. The accrued liability for the simple IRA plan, including interest, was $286,605 and $275,422, as of December 31, 2022 and 2021, respectively.
401(k) Plan - Effective January 1, 2013, the Company began offering a defined contribution 401(k) plan in place of the simple IRA plan. For 2022, 401(k) employee contribution limits are $20,500 plus a catch-up contribution for those over age 50 of $6,500. The Company can elect to make a discretionary contribution to the Plan. No discretionary contribution was approved for 2022 or 2021.
NOTE 12. - LEASE
Beginning on June 1, 2022, the Company leases its headquarters facility under an operating lease agreement that expires on May 31, 2029. Rent due is $118,487 annually during the first year of the lease term, and increases by 2.0% annually thereafter.
Upon entering the lease agreement, the Company recognized a right-of-use asset of $691,009 and a lease liability of $691,009.
Supplemental balance sheet information related to the operating lease was as follows:
December | ||||
| 31,2022 | ||||
Right of use asset – lease, net | $ | 645,095 | ||
Operating lease liability - short-term | $ | 76,826 | ||
Operating lease liability - long-term | 572,560 | |||
Total operating lease liability | $ | 649,386 | ||
Discount rate - operating lease | 7.0 | % | ||
NOTE 13. - RELATED PARTY ACCRUED INTEREST PAYABLE
Accrued Interest Payable - Included in accrued interest payable is accrued interest payable to related parties of approximately $185,000 at December 31, 2022 ($107,000 - 2021). An additional $114,000 (approximately) of accrued interest to related parties is due to paid after 2022.
| 60 |
| Table of Contents |
NOTE 14. - SUBSEQUENT EVENTS
Mast Hill Loan #5 - On February 3, 2023, Infinite Group, Inc. (the “Company”), as borrower, entered into a financing arrangement (the “Loan”) with Mast Hill Fund, L.P. (the “Lender”), a Delaware limited partnership. In exchange for a promissory note, Lender agreed to lend the Company $118,000.00, which bears interest at a rate of eight percent (8%) per annum, less $11,800.00 original issue discount. Under the terms of the Loan, amortization payments are due beginning June 3, 2023, and each month thereafter with the final payment due on February 3, 2024. Additionally, in the event of a default under the Loan or if the Company elects to pre-pay the Loan, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $2.00 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to Lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The Loan is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. As additional consideration for the financing, the Company issued Lender a 5-year warrant to purchase 59,000 shares of Company common stock at a fixed price of $2.00 per share, subject to price adjustments for certain actions, including dilutive issuances, representing 100% warrant coverage on the principal amount of the Loan. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan and similar loans between the Company and Lender entered into on November 3, 2021, February 11, 2022, May 31, 2022, and November 23, 2022, respectively.
J.H. Darbie & Co., Inc. ( “Finder”), a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $3,100.00 (2.92% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 3,098 shares of Company common stock at a fixed price of $2.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant.
ERC Claim and Loan – In January 2023, the Company filed for the Employee Retention Credit (“ERC”) for $1,662,698. The ERC is a refundable tax credit for businesses that continued to pay employees while sustaining a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 pandemic and orders from an appropriate governmental authority or had significant declines in gross receipts from March 13, 2020 to September 30, 2021. The Company sustained a partial suspension of operations during this time due to governmental orders. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates. The Company did not record the calculated quarterly credits as income at December 31, 2022 because as of December 31, 2022 it was not reasonably certain the amounts would be collected.
On March 29, 2023, Company, as seller, received $1,330,464 as a purchase price (the “Purchase Price”) for the sale of the Company’s rights, title and interest per a Risk Participation of ERC Claim Agreement, dated March 27, 2023 (“Agreement”) by and between the Company and 1861 Acquisition LLC (the “Buyer”). On April 21, 2023, the Company received an additional $82,830 from the Buyer which was held in escrow.
The Agreement transferred all of the Company’s rights to receive any and all payments, proceeds or distributions of any kind (without set-off, deduction or withholding of any kind), including interest, from the United States Internal Revenue Service (the “IRS”) in respect of the employee retention credits duly and timely claimed by Seller on account of qualified wages paid by Seller and identified as a “Claim for Refund” under Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the third (3rd) and fourth (4th) quarters of 2020, and the first (1st), second (2nd) and third (3rd) quarters of 2021 (the “Tax Refund Claim”) in the aggregate amount of $1,662,698 (“Transferred Interests”). Notwithstanding anything to the contrary contained in the Agreement, (i) the relationship between Company and Buyer under the Agreement with respect to the Transferred Interests is that of seller and purchaser, with the Company having irrevocably transferred to Buyer the right to receive from the Company 100% of the monies or property received by the Company with respect to the Tax Refund Claim in exchange for the Purchase Price, and (ii) the Agreement shall not constitute an assignment or transfer or agreement to assign or transfer all or any part of the Company’s legal title in and to the Tax Refund Claim.
Amended and Restated Line of Credit Note - On March 17, 2023, the Company, as borrower, entered into an Amended and Restated Line of Credit Note and Agreement (the “New Note”) effective as of October 1, 2022, which amended and restated that certain Line of Credit Note and Agreement dated March 14, 2016 (the “Original Note”) by and between the Company and James V. Leonardo (the “Holder”). The New Note has a principal amount of $250,000 (the ‘Principal Amount”) and accrues interest on the unpaid Principal Amount at a rate of ten percent (10%) per annum. Also on March 17, 2023, James Villa, the Company’s Chief Executive Officer, entered into a personal guarantee with the Holder to personally guarantee the obligations of the Company under the New Note.
Under the terms of the New Note, the Company has agreed to make a one-time payment of $16,667 for interest accrued on the Original Note for the four-month period covering June 2022 through September 2022. The Company has also agreed to make quarterly interest payments of $6,250, commencing on December 31, 2022, and continuing through and including September 30, 2023.
Revised Financing Arrangement - During March 2023, the Company entered into a revised financing arrangement with Celtic Bank that originally loaned the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552 in 2022. Under the terms of the revised financing arrangement, the lender loaned the Company $155,800 with a one-time fixed loan fee of $12,464 for a total obligation of $168,264. The balance of the original loan of $27,559 was paid to the lender as part of the revised financing agreement. The lender payments became due on March 24, 2023, and consisted of 30% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $18,696 over a sixty-day period, whichever is higher, with the final payment due on September 14, 2024.
Payoff of Related Party Note - On April 11, 2023 the Company paid off the $30,000 demand note dated September 16, 2021 with Donald W. Reeve. Interest paid at that time was $2,891.
Extinguishment of Convertible Promissory Note - On April 12, 2023, the Company entered into an agreement with Talos Victory Fund to accept final payment in the amount of $200,000 on the convertible promissory note dated April 12, 2022. The debt was forgiven at that time and approximately $98,000 will be recorded as forgiveness of debt.
| 61 |
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