INFINITE GROUP INC - FORM 10-Q - May 16, 2016

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EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - INFINITE GROUP INCimci_ex321.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002 - INFINITE GROUP INCimci_ex311.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002 - INFINITE GROUP INCimci_ex312.htm
EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - INFINITE GROUP INCimci_ex322.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X]            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended: March 31, 2016
 
[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to __________
 
Commission file number: 0-21816
 
INFINITE GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
52-1490422
(State or other jurisdiction of incorporation
 or organization)
(IRS Employer Identification No.)
 
 
80 Office Park Way
Pittsford, New York 14534
(Address of principal executive offices)
 
(585) 385-0610
(Registrant's telephone number)
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☒
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. There were 29,061,883 shares of the issuer’s common stock, par value $.001 per share, outstanding as of May 16, 2016.
 
 
 
Infinite Group, Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2016
 
Table of Contents
 
PART I - FINANCIAL INFORMATION
PAGE
 
 
Item 1. Financial Statements
 
 
Balance Sheets – March 31, 2016 (Unaudited) and December 31, 2015
3
 
 
 
Statements of Operations (Unaudited) for the three months ended March 31, 2016 and 2015
4
 
 
 
Statements of Cash Flows (Unaudited) for the three months ended March 31, 2016 and 2015
5
 
 
 
 
Notes to Financial Statements – (Unaudited)
6
 
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
15
 
 
 
 
Item 4. Controls and Procedures
15
 
PART II - OTHER INFORMATION
 
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
15
 
 
 
 
Item 6. Exhibits
16
 
 
 
SIGNATURES
16
 

 
 
FORWARD-LOOKING STATEMENTS
 
Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The terms “we”, “our”, “us”, or any derivative thereof, as used herein refer to Infinite Group, Inc., a Delaware corporation.
 
 
2
 
 
Item 1. Financial Statements.
 
INFINITE GROUP, INC.
BALANCE SHEETS
 
 
 
March 31, 2016
(Unaudited)
 
 
December 31, 2015
 
 
ASSETS
 
Current assets:
 
 
 
 
 
 
Cash
  $7,524 
  $13,510 
Accounts receivable, net of allowances of $70,000
    173,661 
    117,010 
Prepaid expenses and deferred charges, net
    13,904 
    17,629 
Total current assets
    195,089 
    148,149 
 
       
       
Property and equipment, net
    34,880 
    39,273 
 
       
       
Software, net
    144,000 
    153,000 
 
       
       
Deposits
    2,318 
    2,318 
 
  $376,287 
  $342,740 
 
       
       
 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
 
 
       
       
Current liabilities:
       
       
Accounts payable
  $568,398 
  $501,588 
Accrued payroll
    351,079 
    192,246 
Accrued interest payable
    607,818 
    583,005 
Accrued retirement
    219,082 
    216,913 
Accrued expenses - other
    56,893 
    101,388 
Current maturities of long-term obligations
    526,000 
    262,000 
Current maturities of long-term obligations - related parties
    154,960 
    0 
Notes payable
    135,000 
    72,000 
Notes payable - related parties
    40,105 
    119,776 
Total current liabilities
    2,659,335 
    2,048,916 
 
       
       
Long-term obligations:
       
       
Notes payable:
       
       
Banks and other
    1,243,999 
    1,246,999 
Related parties
    389,060 
    803,690 
 
       
       
Total liabilities
    4,292,394 
    4,099,605 
 
       
       
Commitments
       
       
 
       
       
Stockholders' deficiency:
       
       
Common stock, $.001 par value, 60,000,000 shares authorized;
       
       
26,561,883 shares issued and outstanding
    26,561 
    26,561 
Additional paid-in capital
    30,482,859 
    30,476,095 
Accumulated deficit
    (34,425,527)
    (34,259,521)
Total stockholders’ deficiency
    (3,916,107)
    (3,756,865)
 
  $376,287 
  $342,740 
See notes to unaudited financial statements.
 
3
 
 
 
 
 
INFINITE GROUP, INC.
STATEMENTS OF OPERATIONS (Unaudited)
 
 
 
 
 
Three Months Ended March 31,
 
 
 
2016
 
 
2015
 
 
 
 
Sales
  $1,863,762 
  $2,169,638 
Cost of sales
    1,384,599 
    1,693,226 
Gross profit
    479,163 
    476,412 
 
       
       
Costs and expenses:
       
       
General and administrative
    359,881 
    397,591 
Selling
    222,481 
    232,419 
Total costs and expenses
    582,362 
    630,010 
 
       
       
Operating loss
    (103,199)
    (153,598)
 
       
       
Loss on investment
    0 
    (8,000)
 
       
       
Interest expense:
       
       
Related parties
    (14,438)
    (19,175)
Other
    (48,369)
    (43,944)
Total interest expense
    (62,807)
    (63,119)
 
       
       
Net loss
  $(166,006)
  $(224,717)
 
       
       
Net loss per share – basic and diluted
  $(.01)
  $(.01)
 
       
       
Weighted average shares outstanding – basic and diluted
    26,561,883 
    26,561,883 
 
       
       
 
See notes to unaudited financial statements
 
 
4
 
 
 
INFINITE GROUP, INC.
 
STATEMENTS OF CASH FLOWS (Unaudited)
 
 
Three Months Ending March 31,
 
 
 
2016
 
 
2015
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
  $(166,006)
  $(224,717)
Adjustments to reconcile net loss to net cash
       
       
 provided by operating activities:
       
       
Stock based compensation
    6,764 
    14,407 
Depreciation and amortization
    19,473 
    5,604 
Loss on investment
    0 
    8,000 
(Increase) decrease in assets:
       
       
Accounts receivable
    (56,651)
    (19,863)
Prepaid expenses and other assets
    3,725 
    15,198 
Increase in liabilities:
       
       
Accounts payable
    66,810 
    88,082 
Accrued expenses
    139,151 
    151,968 
Accrued retirement
    2,169 
    2,085 
Net cash provided by operating activities
    15,435 
    40,764 
 
       
       
Cash flows from investing activities:
       
       
 
       
       
Purchases of property and equipment
    (1,750)
    0 
Purchase of software
    0 
    (100,000)
Net cash used by investing activities
    (1,750)
    (100,000)
 
       
       
Cash flows from financing activities:
       
       
Repayments of notes payable - related parties
    (9,671)
    (55,025)
Repayments of notes payable - other
    (10,000)
    (3,875)
Proceeds from note payable - related parties
    0 
    145,000 
Net cash (used) provided by financing activities
    (19,671)
    86,100 
 
       
       
Net (decrease) increase in cash
    (5,986)
    26,864 
 
       
       
Cash - beginning of period
    13,510 
    7,768 
 
       
       
Cash - end of period
  $7,524 
  $34,632 
 
       
       
Supplemental Disclosures of Cash Flow Information:
       
       
Cash payments for:
       
       
Interest
  $33,559 
  $42,844 
 
       
       
Income taxes
  $0 
  $0 
 
       
       
 
See notes to unaudited financial statements.
 
 
5
 
 
INFINITE GROUP, INC.
 
Notes to Financial Statements - (Unaudited)
 
Note 1. Basis of Presentation
 
The accompanying unaudited financial statements of Infinite Group, Inc. (“Infinite Group, Inc.” or the “Company”) included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S.) ("GAAP") for interim financial information and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. The December 31, 2015 balance sheet has been derived from the audited financial statements at that date, but does not include all disclosures required by GAAP. The accompanying unaudited financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission (SEC). Results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2016.
 
Note 2. Management Plans - Capital Resources
 
The Company reported operating losses of $103,199 and $153,598 and net losses of $166,006 and $224,717 for the three months ended March 31, 2016 and 2015, respectively. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern through May 16, 2017.
 
The Company’s business strategy is summarized as follows.
 
On October 1, 2014, the Company hired an executive officer, Chief Administrative Officer and Senior Vice President of Business Development, who is responsible for working with other key executives to develop and implement the Company’s strategic direction and marketing plans and improve performance through collaboration between sales and service delivery functions.
 
During 2014, the Company performed vulnerability and security configuration scans against internal and external networks using proprietary software. In February 2015, the Company purchased this software known as ÜberScan and hired a Director of CyberSecurity who has expertise in designing, developing, marketing, and selling network security assessment software and project assessments using ÜberScan (see Note 7). The Company provides technical and executive summary reports of ongoing risks, identifies and prioritizes security vulnerabilities and communicates remediation recommendations. During 2015, the Company developed new software that had many of the functions of ÜberScan but with additional features and functionality. The new product, ÜberGuard is a cybersecurity vulnerability management solution for small and medium sized businesses (SMBs). The Company began to market this product in late 2015.
 
The Company plans include continuing to provide cloud related IT managed services and solutions and continuing to expand into the commercial sector including the SMB space. The Company also reviews potential acquisitions of IT assets and businesses. The Company is committed to remaining on the leading edge of technologies and trends in the IT service sector. The Company’s ability to succeed may depend on how successful it is in differentiating itself from competition at a time when competition in these markets is on the rise.
 
The Company's strategy is to build its business by delivering a wide range of IT solutions and services that address challenges common to many U.S. Government agencies, state and local governments and commercial companies including SMBs. The Company believes that its core strengths position the Company to respond to the long-term trends and changing demands of the IT markets.
 
The Company has established four pillars or business groups to focus on:
●
Cybersecurity bringing innovative solutions to market such as ÜberGuard and performing cybersecurity projects;
●
The commercial SMB market by bringing IT solutions to the Company’s channel partners such as Webroot, which provides endpoint and mobile protection and cloud backup solutions, and ÜberStore, a cloud-based backup and recovery solution;
●
Managed services by providing optimization and continuity planning, operational support services, internal automation, platform management as a service, virtualization services, and management of server, network and mobile devices; and
●
Product development including on demand software engineering and development of proprietary products to fit current customer needs.
 
6
 
 
Continue to Improve Operations and Capital Resources
 
The Company's goal is to increase sales and generate cash flow from operations on a consistent basis. The Company used ISO 9001-2008 practices as a tool for improvement that has aided expense reduction and internal performance.
 
The Company believes the capital resources available under its factoring line of credit, cash from additional related party loans and cash generated by improving the results of its operations provide sources to fund its ongoing operations and to support the internal growth the Company. On March 14, 2016, the Company entered into an unsecured financing agreement with a third party lender to provide working capital as discussed in Note 8. The Company intends to build the infrastructure to market its new ÜberGuard cyber security product. Further, the Company’s business plans require improving the results of its operations in future periods.
 
On December 1, 2014, the Company entered into an unsecured line of credit financing agreement (the “LOC Agreement”) with a member of its board of directors. The LOC Agreement provides for working capital of up to $400,000 through December 31, 2017. At March 31, 2016, there is $5,972 available on this line.
 
Although the Company has no assurances, the Company believes that related parties, who have previously provided working capital, and third parties will continue to provide working capital loans on similar terms, as in the past, as may be necessary to fund its on-going operations for at least the next 12 months. If the Company experiences significant growth in its sales, the Company believes that this may require it to increase its financing line, finance additional accounts receivable, or obtain additional working capital from other sources to support its sales growth.
 
 Note 3. Summary of Significant Accounting Policies
 
There are several accounting policies that the Company believes are significant to the presentation of its financial statements. These policies require management to make complex or subjective judgments about matters that are inherently uncertain. Note 3 to the Company’s audited financial statements for the year ended December 31, 2015 presents a summary of significant accounting policies as included in the Company's Annual Report on Form 10-K as filed with the SEC. The Company adopted ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs during the three months ended March 31, 2016. The guidance was applied retrospectively and resulted in a reclassification between assets and liabilities of $30,308 and $34,638 as of March 31, 2016 and December 31, 2015, respectively.
 
Reclassifications - The Company reclassifies amounts in its financial statements to comply with recently adopted accounting pronouncements.
 
Fair Value of Financial Instruments - The carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate short-term maturity of these financial instruments. The carrying value of notes payable and convertible notes payable approximates the fair value based on rates currently available from financial institutions and various lenders.
 
Recent Accounting Pronouncements Not Yet Adopted - In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company will evaluate the effect that the updated standard will have on its financial statements and related disclosures and select a transition method.
 
In November 2015, the FASB issued new accounting guidance on the classification of deferred taxes. The new guidance requires that all deferred tax asset and liabilities be classified as noncurrent in a classified statement of financial position. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early application is permitted. When the guidance is effective all deferred tax assets and liabilities will be presented as noncurrent. We do not believe this guidance will have a material effect on our financial statements when adopted.
 
7
 
 
In February 2016, the FASB issued amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our financial statements.
 
Note 4. Sale of Certain Accounts Receivable
 
The Company has available a financing line with a financial institution (the Purchaser) which enables the Company to sell selected accounts receivable invoices to the Purchaser with full recourse against the Company.
 
Pursuant to the provisions of FASB ASC 860, the Company reflects the transactions as a sale of assets and establishes an accounts receivable from the Purchaser for the retained amount less the costs of the transaction and less any anticipated future loss in the value of the retained asset. The fee for the initial purchase is .466% of the invoice. The fee is charged at prime plus 4% (effective rate of 7.5% at March 31, 2016) 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 three months ended March 31, 2016, the Company sold approximately $1,541,000 ($1,895,000 - March 31, 2015) of its accounts receivable to the Purchaser. As of March 31, 2016, approximately $589,000 ($566,561 - December 31, 2015) of these receivables remained outstanding. Additionally, as of March 31, 2016, the Company had approximately $80,000 available under the financing line with the financial institution ($20,000 – December 31, 2015). After deducting estimated fees, allowance for bad debts and advances from the Purchaser, the net receivable from the Purchaser amounted to $119,500 at March 31, 2016 ($82,341 – December 31, 2015), and is included in accounts receivable in the accompanying balance sheets.
 
There were no gains or losses on the sale of the accounts receivable because all were collected. The cost associated with the financing line totaled $20,603 for the three months ended March 31, 2016 ($22,323 - March 31, 2015). These financing line fees are classified on the statements of operations as interest expense.
 
Note 5. Earnings per Share
 
Basic earnings per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company’s case, comprise shares issuable under convertible notes payable and stock options. The treasury stock method is used to calculate dilutive shares, which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options and warrants assumed to be exercised. In a loss period, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.
 
8
 
 
The following table sets forth the computation of basic and diluted loss per share for the three months ended:
 
 
 
Three Months Ended March 31,
 
 
 
 2016
 
 
2015
 
Numerator for basic and diluted net loss per share:
 
 
 
 
 
 
Net loss
  $(166,006)
  $(224,717)
Denominator for basic and diluted net loss per share:
       
       
Weighted average common shares outstanding
    26,561,883 
    26,561,883 
Basic and diluted net loss per share
  $(.01)
  $(.01)
 
       
       
Anti-dilutive shares excluded from net loss share calculation
    28,339,229 
    29,389,749 
 
Certain common shares issuable under stock options and convertible notes payable have been omitted from the diluted net loss per share calculation because their inclusion is considered anti-dilutive because the exercise prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.
 
Note 6. Investment
 
During 2014 and 2013, the Company purchased 300,000 shares of the authorized but unissued shares of Series A Convertible Preferred Stock (“Series A stock”), $.001 par value, of Sudo.me Corporation (goSudo) for an aggregate purchase price of $300,000 pursuant to the terms and conditions of a preferred stock purchase agreement. As a result, at March 31, 2016, the Company owns approximately 9.4% of the total outstanding shares of goSudo.
 
During 2015, the investment was written down using the equity method because of the net losses recorded by goSudo. In addition, the remaining carrying value of the investment was considered impaired at December 31, 2015 due to continued net losses of goSudo.
 
During the three months ended March 31, 2016 and 2015, goSudo earned consulting fees of $0 and $4,406, respectively, from the Company.
 
Note 7. Software Purchase
 
On February 6, 2015, the Company purchased all rights to cyber security network vulnerability assessment software (the “Software”). Under the purchase agreement, the Company agreed to pay the Seller the base purchase price of $180,000, of which $100,000 was paid in cash at the closing and the remaining $80,000 of which was paid by delivery at the closing of the Company’s secured promissory note. After April 7, 2015, the note accrues interest at 10% per annum. The note was amended to extend the maturity date to June 30, 2016. As security for its obligations under the promissory note, the Company granted the Seller a security interest in the Software. The asset cost of $180,000 is amortized over the estimated useful life of five years beginning on the date the asset is placed in service. Amortization expense in future periods is estimated to be $36,000 in 2016 to 2019 and $9,000 in 2020.
 
Under the purchase agreement, in addition to the base purchase price, the Company also agreed to pay the Seller: (i) a percentage of the licensing fees paid to the Company within three years after the closing date; provided, that the maximum amount payable to the Seller with respect to that three-year period is $800,000; plus (ii) a percentage of the licensing fees paid to the Company during the three years beginning on the date, if any, on which the aggregate amount of the licensing fees paid to Seller with respect to the initial three-year period equals $800,000. The royalties are payable quarterly within 30 days after the end of each calendar quarter. There were no royalties earned or payable for the three months ended March 31, 2016 or 2015.
 
The purchase agreement also provides that the Company will pay the Seller one half of the amount by which the total software development costs incurred by the Company in connection with upgrading the Software to include specific functional specifications is less than $500,000. The Company has determined the potential obligation is not probable and accordingly no liability was recorded at March 31, 2016.
 
9
 
 
Note 8. Notes Payable - Banks and Other
 
On March 14, 2016, the Company entered into an unsecured financing agreement with a third party lender. The agreement provides for $500,000 of working capital with draws of $200,000 which occurred on April 13, 2016, $200,000 to occur on July 1, 2016 and $100,000 to occur on October 1, 2016. Borrowings bear interest at 6% with interest payments due quarterly. Principal is due on December 31, 2021. 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 at the first closing consisting of 2,500,000 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. The lender has piggy back registration rights for these shares. The Company’s Chief Executive Officer and President agreed to guarantee the loan obligations if he is no longer an “affiliate” of the Company as defined by Securities and Exchange Commission rules.
 
Note 9. Notes Payable - Related Parties
 
The balance of the note payable to a member of the Company’s board of directors was $394,028 at March 31, 2016 ($394,028 at December 31, 2015). Principal and interest are paid monthly using an amortization schedule for a fifteen year fully amortizing loan with all outstanding amounts due on December 31, 2017.
 
Note 10. Stock Option Plans and Agreements
 
The Company has approved stock options plans and agreements covering up to an aggregate of 10,118,500 shares of common stock. Such options may be designated at the time of grant as either incentive stock options or nonqualified stock options. Stock based compensation consists of charges for stock option awards to employees, directors and consultants.
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for the three months ended March 31, 2016 and 2015:
 
 
 
2016
 
2015
Risk-free interest rate
 
1.07%
 
 1.78%
Expected dividend yield
 
0%
 
0%
Expected stock price volatility
 
100%
 
100%
Expected life of options
 
2.50 years
 
 5.75 years
 
The Company recorded expense for options issued to employees and independent service providers of $6,764 and $14,407 for the three months ended March 31, 2016 and 2015, respectively.
 
At March 31, 2016, there was approximately $15,000 of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted average period of approximately one year. The total fair value of shares that vested during the three months ended March 31, 2016 was approximately $39,000.
 
A summary of all stock option activity for the three months ended March 31, 2016 follows:
 
 
 
Number of Options Outstanding
 
 
Weighted Average Exercise Price
 
Remaining Contractual Term
 
Aggregate Intrinsic Value
 
Outstanding at December 31, 2015
    8,443,500 
  $.16 
 
 
 
 
Granted
    938,000 
  $.23 
 
 
 
 
Expired
    (943,000)
  $.23 
 
 
 
 
Outstanding at March 31, 2016
    8,438,500 
  $.17 
4.4 years
  $4,400 
 
       
       
 
       
At March 31, 2016:
       
       
 
       
Vested or expected to vest
    5,750,500 
  $.16 
5.4 years
  $4,400 
Exercisable
    5,447,167 
  $.16 
5.3 years
  $2,000 
 
 
10
 
 
Note 11. Related Party Accounts Receivable and Accrued Interest Payable
 
Accounts Receivable - Since 2012, certain officers and directors of the Company have made loans to goSudo, a customer of the Company, and can influence the management of this company. During 2015, the accounts receivable balance of $110,000 due from goSudo was converted to a demand note with interest at 10% and was fully reserved upon conversion, due to continued net losses of goSudo.
 
Accrued Interest Payable - Included in accrued interest payable is accrued interest payable to related parties of $79,590 at March 31, 2016 ($411,303 - December 31, 2015).
 
Note 12. Subsequent Events
 
Subsequent to March 31, 2016, the Company granted a consultant common stock options for 10,000 shares exercisable at $.047 per share all of which vested on the grant date.
 
Subsequent to March 31, 2016 as stated in Note 8, the Company borrowed $200,000 under its financing agreement and issued 2,500,000 shares of its $.001 par value common stock.
 
************
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Business Overview
 
The Company has established four pillars or business groups to focus on:
●
Cybersecurity bringing innovative solutions to market such as ÜberGuard and performing cybersecurity projects;
●
The commercial SMB market by bringing IT solutions to the Company’s channel partners such as Webroot, which provides endpoint and mobile protection and cloud backup solutions, and ÜberStore, a cloud-based backup and recovery solution;
●
Managed services by providing optimization and continuity planning, operational support services, internal automation, platform management as a service, virtualization services, and management of server, network and mobile devices; and
●
Product development including on demand software engineering and development of proprietary products to fit current customer needs.
 
We provide cloud computing solutions that include public and private cloud architectures along with hybrid scalable cloud hosting, server virtualization and desktop virtualization solutions. In addition, we provide IT solutions that address mobility and unified communications. Our cyber security practice provides information security services including internal and external security assessments and recommended solutions. We focus on aligning business processes with technology for delivery of solutions meeting our clients’ needs and providing expert management services to the lifecycle of technology-based projects.
 
We provide support to professional services organizations of software companies that need additional skilled resources when implementing solutions. Our technical support personnel maintain leading edge certifications and qualifications in their respective software applications. We intend to use our service track record and experience to our advantage and market our excellent record to other software companies who need our services. Our objective is to expand our sales with our existing clients by expanding within those organizations.
 
11
 
 
Results of Operations
 
Comparison of the Three Months Ended March 31, 2016 and 2015
 
The following table compares our statements of operations data for the three months ended March 31, 2016 and 2015. The trends suggested by this table are not indicative of future operating results.
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 vs. 2015
 
 
 
 
 
 
As a % of
 
 
 
 
 
As a % of
 
 
Amount of
 
 
% Increase
 
 
 
2016
 
 
Sales
 
 
2015
 
 
Sales
 
 
Change
 
 
(Decrease)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
  $1,863,762 
    100.0%
  $2,169,638 
    100.0%
  $(305,876)
    (14.1)%
Cost of sales
    1,384,599 
    74.3 
    1,693,226 
    78.0 
    (308,627)
    (18.2)
Gross profit
    479,163 
    25.7 
    476,412 
    22.0 
    2,751 
    .6 
General and administrative
    359,881 
    19.3 
    397,591 
    18.3 
    (37,710)
    (9.5)
Selling
    222,481 
    11.9 
    232,419 
    10.7 
    (9,938)
    (4.3)
Total operating expenses
    582,362 
    31.2 
    630,010 
    29.0 
    (47,648)
    (7.6)
Operating loss
    (103,199)
    (5.5)
    (153,598)
    (7.1)
    50,399 
    (32.8)
Loss on investment
    0 
    0.0 
    (8,000)
    (0.4)
    (8,000)
    100.0 
Interest expense
    (62,807)
    (3.4)
    (63,119)
    (2.9)
    (312)
    (0.5)
Net loss
  $(166,006)
    (8.9)%
  $(224,717)
    (10.4)%
  $58,711 
    (26.1)%
 
       
       
       
       
       
       
Net loss per share - basic and diluted
  $(.01)
 
  $(.01)
 
 
 
 
Sales
 
Sales for the three months ended March 31, 2016 were $1,863,762 as compared to sales for the three months ended March 31, 2015 of $2,169,638, a decrease of $305,876 or 14.1%. Sales of virtualization projects decreased by approximately 45% due to the completion of projects in 2015 that were not replaced by new projects in 2016. This decrease was offset in part by sales growth from our cybersecurity and commercial SMB businesses during the three months ended March 31, 2016 as compared to 2015. We continue to close new contracts and expect future sales from security assessments and related projects using our proprietary cybersecurity software. Our commercial SMB business continues to establish new relationships with channel partners who purchase IT solutions from us.
 
One of our priorities is to increase sales. Accordingly, during 2015 we hired additional commercial SMB sales personnel in an effort to increase commercial sales. In March and April 2015, we hired employees to focus on increasing our cyber security assessment and virtualization project sales. Due to the lengthy lead times typically needed to generate new sales in these areas, we do not expect to realize a return from the addition of new sales personnel for one or more quarters. As a result, we may experience net losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows and incremental borrowings, as needed.
 
Cost of Sales and Gross Profit
 
Cost of sales represents the cost of employee services related to our IT Services Group. Cost of sales for the three months ended March 31, 2016 was 1,384,599 or 74.3% of sales as compared to $1,693,226 or 78.0% for the three months ended March 31, 2015. Gross profit was $479,163 or 25.7% of sales for the three months ended March 31, 2016 compared to $476,412 or 22.0% of sales for the three months ended March 31, 2015. Gross profit was relatively unchanged from 2015 to 2016 although sales decreased by 14.1%. This was due to a reduction of personnel and improved utilization of our professional employees.
 
12
 
 
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 for the three months ended March 31, 2016 decreased by $37,710 or 9.5% to $359,881 as compared to $397,591 for the same period in 2015. In 2015, we incurred professional fees of approximately $40,000 in connection with the purchase of ÜberScan software and public reporting requirements as compared to none in 2016.
 
Selling Expenses
 
For the three months ended March 31, 2016, we incurred selling expenses of $222,481 associated with the development of our IT Services Group business compared to $232,419 for the three months ended March 31, 2015, a decrease of $9,938 or 4.3%. This decrease is due to various minor changes in expense items from period to period. We continue to hire additional sales personnel in an effort to increase commercial and U.S. Government agency sales, however, we eliminated certain sales positions, which offset a portion of the expenses associated with these new personnel.
 
Operating Loss
 
For the three months ended March 31, 2016, we had an operating loss of $103,199 compared to an operating loss of $153,598 for the three months ended March 31, 2015. The $50,399 decrease is principally attributable to a decrease in operating expenses of $47,648 for the three months ended March 31, 2016 as compared to 2015.
 
Loss on Investment
 
For the three months ended March 31, 2016, we had no loss on investment compared to a loss on investment of $8,000 for the three months ended March 31, 2015. The loss on investment recorded during 2015 was related to our investment in Sudo.me Corporation (goSudo). During 2014 and 2013, we purchased 300,000 shares of Series A Convertible Preferred Stock of goSudo for $300,000 pursuant to the terms and conditions of a preferred stock purchase agreement. As a result, as of March 31, 2016 we own approximately 9.4% of the total outstanding shares of goSudo. goSudo's web site is http://goSudo.com (the information contained in goSudo’s website shall not be considered a part of this Report). Our management exercises significant influence over the operating and financial policies of goSudo. The investment was written down by $8,000 during the three months ended March 31, 2015 to $101,000 based on our interest in the net loss of goSudo for the same period. The remaining carrying value of the investment was fully reserved and written down to zero during the three months ended September 30, 2015.
 
Interest Expense
 
Total interest expense was $62,807 for the three months ended March 31, 2016, a decrease of $312 from $63,119 for the three months ended March 31, 2015. The decrease is principally attributable to a net decrease in borrowings during the three months ended March 31, 2016 as compared to 2015.
 
Net Loss
 
For the three months ended March 31, 2016, we recorded a net loss of $166,006 or $.01 per share compared to $224,717 or $.01 per share for the three months ended March 31, 2015. The decrease is attributable to the items discussed above for the three months ended March 31, 2016 as compared to 2015.
 
Liquidity and Capital Resources
 
At March 31, 2016, we had cash of $7,524 available for working capital needs and planned capital asset expenditures. During 2016, we financed our business activities principally through cash flows provided by operations and sales with recourse of our accounts receivable. Our primary source of liquidity is cash provided by collections of accounts receivable and our factoring line of credit. At March 31, 2016, we had approximately $80,000 of availability under this line.
 
On December 1, 2014, we entered into an unsecured line of credit financing agreement (the “LOC Agreement”) with a member of our board of directors. The LOC Agreement provides for working capital of up to $400,000 through December 31, 2017. At March 31, 2016, we had $5,972 of availability under the LOC Agreement.
 
At March 31, 2016, we had a working capital deficit of approximately $2,464,000 and a current ratio of .07. This increase in the working capital deficit from $1,900,000 at December 31, 2015 is principally due to the scheduled maturity on January 1, 2017 of notes payable of $419,300 to related parties. We plan to renegotiate the terms of the notes payable, seek funds to repay the notes or use a combination of both alternatives. Our objective is to improve our working capital position through profitable operations.
 
13
 
 
The following table sets forth our cash flow information for the periods presented:
 
 
 
Three Months Ended March 31,
 
 
 
2016
 
 
2015
 
Net cash provided by operating activities
  $15,435 
  $40,764 
Net cash used by investing activities
    (1,750)
    (100,000)
Net cash (used) provided by financing activities
    (19,671)
    86,100 
Net (decrease)  increase in cash
  $(5,986)
  $26,864 
 
Cash Flows Provided by Operating Activities
 
Cash provided by operations during the three months ended March 31, 2016 was $15,435.  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.  To generate cash provided by operating activities in 2016, our net loss of $166,006 for 2016 was principally offset by non-cash expenses of $21,907 and increases in current liabilities of $208,131 which were offset by an increase in current assets, principally accounts receivable.
 
We continue to hire additional sales personnel in an effort to increase commercial sales and cybersecurity assessment and virtualization project sales. Due to the lengthy lead times typically needed to generate new sales in these areas, we do not expect to realize a return from the addition of the new sales personnel for one or more quarters. As a result, we may experience net losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows and incremental borrowings, as needed.
 
Cash Flows Used by Investing Activities
 
Cash used by investing activities was $1,750 during the three months ended March 31, 2016.  In 2016, we incurred capital expenditures for computer software.  We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business. 
 
Cash Flows (Used) Provided by Financing Activities
Cash used by financing activities was $19,671 for the three months ended March 31, 2016.  During 2016, we made principal payments of $9,671 to related parties and $10,000 on other notes payable. 
Our current maturities of long-term obligation-other of $526,000 are comprised of a $100,000 note scheduled to mature on October 3, 2016; $150,000 of notes scheduled to mature on December 31, 2016; $264,000 due to a former director that is scheduled to mature on January 1, 2017; and $12,000 due to the Pension Benefit Guarantee Corporation (PBGC) under the secured promissory note dated October 17, 2011 that we issued to the PBGC pursuant to our settlement agreement with the PBGC dated September 6, 2011. Our current maturities of long-term obligations-related parties of $154,960 is reduced by debt financing costs of $17,319. Without those costs the obligations are $172,279 which consist of notes of $155,300 scheduled to mature on January 1, 2017 and maturities under our LOC agreement. 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.
 
14
 
 
Credit Resources
 
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 March 31, 2016, we had financing availability, based on eligible accounts receivable, of approximately $80,000 under this line. We pay fees based on the length of time that the invoice remains unpaid.
 
We believe the capital resources available under our factoring line of credit, cash from additional related party loans and cash generated by improving the results of our operations will be sufficient to fund our ongoing operations and to support the internal growth we expect to achieve for at least the next 12 months. However, if we do not continue to improve the results of our operations in future periods, we expect that additional working capital will be required to fund our business. There is no assurance that in the event we need additional funds that adequate additional working capital will be available or, if available, will be offered on acceptable terms.
 
We anticipate financing growth from acquisitions of other businesses, if any, and our longer-term internal growth through one or more of the following sources: cash from collections of accounts receivable; additional borrowing from related parties; issuance of equity; use of our existing accounts receivable credit facility; or a refinancing of our accounts receivable credit facility.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
As a smaller reporting company we are not required to provide the information required by this Item.
 
Item 4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 
 These options vest at the Company’s Board of Director’s discretion.  There are none vested as of March 31, 2016.
 
PART II - OTHER INFORMATION
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
On January 11, 2016, in consideration of his agreement to continue a covenant not to compete and to provide for a smooth transition of responsibilities, we granted a former Company officer options for 315,000 common shares at an exercise price of $.10; 315,000 common shares at an exercise price of $.25; and 308,000 common shares at an exercise price of $.34.  These options vest at the Company’s board of director’s discretion.  There are none vested as of March 31, 2016. 
 
On March 14, 2016, we entered into an unsecured financing agreement with a third party lender. The agreement provides for $500,000 of working capital with draws of $200,000 which occurred on April 13, 2016, $200,000 to occur on July 1, 2016 and $100,000 to occur on October 1, 2016. Borrowings bear interest at 6% with interest payments due quarterly. Principal is due on December 31, 2021. 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 consisting of 2,500,000 shares of its common stock at the first closing, which was in April 2016.
 
On April 19, 2016, in consideration of services rendered to the Company, the Company granted to a consultant common stock options for 10,000 shares exercisable at $.047 per share all of which vested on the grant date.
 
The grants of these stock options and issuance of common stock are exempt from registration under the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereunder, as a transaction by an issuer not involving any public offering.
 
15
 
Item 6. Exhibits.
 
Exhibits required to be filed by Item 601 of Regulation S-K.
 
For the exhibits that are filed herewith or incorporated herein by reference, see the Index to Exhibits located on page 16 of this report. The Index to Exhibits is incorporated herein by reference.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Infinite Group, Inc.
(Registrant)
Date: May 16, 2016
/s/ James Villa
 
James Villa
 
Chief Executive Officer
 
(Principal Executive Officer)
 
 
Date: May 16, 2016
/s/ James Witzel
 
James Witzel
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
 
 
 
INDEX TO EXHIBITS
 
 
 
 
 
 
Exhibit No.
 
Description
 10.1
Line of Credit Note and Agreement between the Company and James Leonardo Managing Member of a Limited Liability Corporation to be formed dated March 14, 2016 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015).
 31.1
Chief Executive Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. *
 31.2
Chief Financial Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. *
 32.1
Chief Executive Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. *
 32.2
Chief Financial Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. *
 
101.INS
 
XBRL Instance Document.*
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.*
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.*
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.*
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.*
 
*Filed as an exhibit hereto.
 
 
 
 
 
 
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