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, 2015.June 30, 2015

o 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  (State or other jurisdiction of
incorporation or organization)
 
(IRS(IRS Employer
Identification No.)

80 Office Park Way
Pittsford, New York 14534
(Address of principal executive offices)

(585) 385-0610
 80 Office Park Way
 Pittsford, New York 14534
 (Address of principal executive offices)
 (Registrant's telephone number)

 (585) 385-0610
  (Registrant's telephone number)
(Former
 (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 x      No o

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 x      No o

        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 o
Non-accelerated filer o
 
Accelerated filer o
Smaller reporting company þx

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
There were 26,561,883 shares of the issuer’s common stock, par value $.001 per share, outstanding as of MayAugust 14, 2015.
 

 
 
 
 
 

Infinite Group, Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 31,June 30, 2015

Table of Contents

 PAGE
PART I -– FINANCIAL INFORMATION 
  
Item 1.Financial Statements3
  
Balance Sheets – March 31,June 30, 2015 (Unaudited)  and December 31, 2014
3
  
Statements of Operations (Unaudited) for the three and six months ended March 31,June 30, 2015 and 20144
  
Statements of Cash Flows (Unaudited) for the threesix months ended March 31,June 30, 2015 and 20145
  
Notes to Financial Statements – (Unaudited)6
  
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations10
  
Item 3.Quantitative and Qualitative Disclosures About Market Risk14
  
Item 4.Controls and Procedures14
  
PART II -– OTHER INFORMATION 
  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds15
  
Item 5.Other Information15
  
Item 6.Exhibits15
  
SIGNATURES16

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
 
 
PART I -
FINANCIAL INFORMATION
Item 1.  Financial Statements.Statements

INFINITE GROUP, INC.            
      
Balance Sheets            
 March 31,  December 31, 
 
2015
(Unaudited)
  2014  
June 30,
2015
(Unaudited)
  
December 31,
2014
 
ASSETS            
Current assets:            
Cash $34,632  $7,768  $36,233  $7,768 
Accounts receivable, net of allowances of $70,000  379,462   359,599 
Accounts receivable, net of allowance of $70,000  472,025   359,599 
Prepaid expenses and deferred charges, net  32,785   43,654   33,556   43,654 
Total current assets  446,879   411,021   541,814   411,021 
                
Property and equipment, net  54,435   60,039   48,726   60,039 
Software  180,000   0 
Software, net  171,000   0 
Investment  101,000   109,000   96,000   109,000 
Deposits and deferred charges, net  32,626   36,956   28,297   36,956 
                
Total Assets $814,940  $617,016  $885,837  $617,016 
                
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                
Current liabilities:                
Accounts payable $430,058  $341,977  $483,893  $341,977 
Accrued payroll  285,240   148,918   437,304   148,918 
Accrued interest payable  524,411   503,014   546,194   503,014 
Accrued retirement  210,534   208,449   212,639   208,449 
Accrued expenses - other  53,137   58,888   17,350   58,888 
Current maturities of long-term obligations  13,532   14,388   12,624   14,388 
Current maturities of long-term obligations - related parties  13,408   8,172   13,340   8,172 
Notes payable  435,000   30,000   427,000   30,000 
Notes payable - related parties
  548,300    129,000   548,300   129,000 
Total current liabilities
  2,513,620   1,442,806   2,698,644   1,442,806 
                
Long-term obligations:                
Notes payable:                
Banks and other  1,180,999   1,509,018   1,177,999   1,509,018 
Related parties  330,267   664,828   328,713   664,828 
Total liabilities  4,024,886   3,616,652   4,205,356   3,616,652 
                
Commitments                
                
Stockholders’ deficiency:                
Common stock, $.001 par value, 60,000,000 shares authorized;                
26,561,883 shares issued and outstanding  26,561   26,561   26,561   26,561 
Additional paid-in capital  30,436,649   30,422,242   30,452,894   30,422,242 
Accumulated deficit  (33,673,156)  (33,448,439)  (33,798,974)  (33,448,439)
Total stockholders’ deficiency  (3,209,946)  (2,999,636)  (3,319,519)  (2,999,636)
Total Liabilities and Stockholders’ Deficiency $814,940   617,016  $885,837  $617,016 
        
See notes to unaudited financial statements.See notes to unaudited financial statements.

See notes to unaudited financial statements.



 
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INFINITE GROUP, INC.
      
Statements of Operations (Unaudited)      
  Three Months Ended 
  March 31, 
  2015  2014 
       
Sales $2,169,638  $2,014,417 
Cost of sales  1,693,226   1,506,164 
Gross profit  476,412   508,253 
         
Costs and expenses:        
   General and administrative  397,591   325,224 
   Selling  232,419   244,018 
        Total costs and expenses  630,010   569,242 
Operating loss  (153,598)  (60,989)
         
Loss on investment  (8,000)  (15,000)
Interest expense:        
    Related parties  (19,175)  (11,517)
    Other  (43,944)  (71,769)
Total interest expense  (63,119)  (83,286)
         
Net loss $(224,717) $(159,275)
         
Net loss per share - basic and diluted $(.01) $(.01)
Weighted average shares outstanding - basic  and diluted  26,561,883   25,961,883 



INFINITE GROUP, INC.      
       
Statements of Operations (Unaudited)      
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2015  2014  2015  2014 
             
Sales $2,071,068  $2,127,571  $4,240,705  $4,141,988 
Cost of sales  1,586,320   1,627,489   3,279,546   3,133,656 
Gross profit  484,748   500,082   961,159   1,008,332 
                 
Costs and expenses:                
   General and administrative  342,419   312,681   740,008   637,902 
   Selling  201,643   235,852    434,061    479,869 
        Total costs and expenses  544,062   548,533   1,174,069   1,117,771 
                 
Operating loss  (59,314)  (48,451)  (212,910)  (109,439)
                 
Loss on investment  (5,000)  (21,000)  (13,000)  (36,000)
Interest expense:                
    Related parties  (18,731)  (11,645)  (37,906)  (23,163)
    Other  (42,774)  (63,465)   (86,719)   (135,234)
Total interest expense  (61,505)  (75,110)  (124,625)  (158,397)
                 
Net loss $(125,819) $(144,561) $(350,535) $(303,836)
                 
Net loss per share - basic and diluted
 $.00  $(.01) $(.01) $(.01)
                 
Weighted average shares outstanding - basic
     and diluted
  26,561,883   25,961,883   26,561,883   25,961,883 
 
See notes to unaudited financial statements.
 
 
4
 
 
INFINITE GROUP, INC.
Statements of Cash Flows (Unaudited)
  Three Months Ended 
  March 31, 
  2015  2014 
Cash flows from operating activities:      
   Net loss $(224,717) $(159,275)
  Adjustments to reconcile net loss to net cash provided by operating activities:        
      Stock based compensation  14,407   58,805 
      Depreciation and amortization  5,604   6,288 
      Loss on investment  8,000   15,000 
      (Increase) decrease in assets:        
          Accounts receivable  (19,863)  203,086 
          Other assets  15,198   (4,255)
     Increase (decrease) in liabilities:        
          Accounts payable  88,082   35,022 
          Accrued expenses  151,968   (147,022)
          Accrued retirement  2,085   2,003 
Net cash provided by operating activities  40,764   9,652 
         
Cash flows from investing activities:        
    Purchase of software  (100,000)  0 
    Purchases of property and equipment  0   (3,634)
Net cash used by investing activities  (100,000)  (3,634)
         
Cash flows from financing activities:        
   Proceeds from notes payable - related parties  145,000   0 
   Repayments of notes payable - other  (3,875)  (5,222)
   Repayments of notes payable - related parties   (55,025)  0 
Net cash provided (used) by financing activities  86,100   (5,222)
         
Net increase in cash  26,864   796 
Cash - beginning of period  7,768   16,947 
Cash - end of period $34,632  $17,743 
         
Supplemental Disclosures of Cash Flow Information:        
    Cash payments for:        
       Interest $42,844  $62,504 
       Income taxes $0  $0 
 
See notes to unaudited financial statements.
INFINITE GROUP, INC.
Statements of Cash Flows (Unaudited)
  Six Months Ended 
  June 30, 
  2015  2014 
       
Cash flows from operating activities:      
   Net loss $(350,535) $(303,836)
   Adjustments to reconcile net loss to net cash
      provided by operating activities:
        
         Stock based compensation  30,652   74,894 
         Depreciation and amortization  29,572   12,836 
         Loss on investment  13,000   36,000 
         (Increase) decrease in assets:        
               Accounts receivable  (112,426)  120,545 
               Other assets  10,097   (10,925)
         Increase in liabilities:        
               Accounts payable  141,917   140,489 
               Accrued expenses  290,028   207 
               Accrued retirement  4,190    4,026 
Net cash provided by operating activities  56,495   74,236 
         
Cash flows from investing activities:        
    Purchase of software  (100,000)  0 
    Purchases of property and equipment  (600)  (18,789)
Net cash used by investing activities  (100,600)  (18,789)
         
Cash flows from financing activities:        
    Proceeds from notes payable - related parties  145,000   0 
    Repayments of notes payable - banks and other  (7,783)  (10,492)
    Repayments of note payable - related parties  (64,647)  0 
Net cash provided (used) by financing activities  72,570   (10,492)
         
Net increase in cash  28,465   44,955 
Cash - beginning of period  7,768   16,947 
Cash - end of period $36,233  $61,902 
         
Supplemental Disclosures of Cash Flow Information:        
     Cash paid for:        
         Interest $75,753   127,016 
         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, 2014 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, 2014 filed with the U.S. Securities and Exchange Commission (SEC).  Results of operations for the three and six months ended March 31,June 30, 2015 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2015.

Note 2. Management Plans - Capital Resources

The Company reported operating losses of $153,598$212,910 and $60,989$109,439 and net losses of $224,717$350,535 and $159,275$303,836 for the threesix months ended March 31,June 30, 2015 and 2014, respectively.

The Company's primary source of liquidity is cash provided by collections of accounts receivable and its factoring line of credit.  At March 31,June 30, 2015, the Company had approximately $110,000$210,000 of availability under this line.  During the threesix months ended March 31,June 30, 2015, the Company financed its business activities through sales with recourse of accounts receivable and loans from a director and from an officer of the Company.

The Company’s working capital deficit increased from approximately $1,032,000 at December 31, 2014 to $2,067,000approximately $2,157,000 at March 31,June 30, 2015 principally due to the scheduled maturity on January 1, 2016 of notes payable of $419,300 to related parties and $325,000 to others which total $744,300.  We also originated a short-term secured promissory note in the principal amount of $80,000 during the three months ended March 31,in February 2015 in connection with the purchase of UberScan software.  We plan to renegotiate the terms of the notes payable, seek funds to repay the notes or use a combination of both alternatives.

The Company believes the capital resources available under its factoring line of credit, cash from additional related and third party loans and cash generated by improving the results of its operations provide sources to fund its ongoing operations and to support the internal growth the Company expects to achieve for at least the next 12 months.  However, if the Company does not continue to maintain or improve the results of its operations in future periods, the Company expects that additional working capital will be required to fund its business.  Although the Company has no assurances, the Company believes that related parties, who have previously provided working capital, 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.  There is no assurance that in the event the Company needs additional funds that adequate additional working capital will be available or, if available, will be offered on acceptable terms.

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, 2014 presents a summary of significant accounting policies as included in the Company's Annual Report on Form 10-K as filed with the SEC.

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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.
6

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, 2016, subsequently extended to December 31,15, 2017.  The Company has not yet selected a transition method and is currently evaluatingwill evaluate the effect that the updated standard will have on its financial statements and related disclosures.disclosures and select a transition method.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern."  The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances.  The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter.  Early application is permitted.  The Company is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.

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.  In April 2014, the Company completed a revised financing agreement with the Purchaser.  The retained amount was revised to 15% of the total accounts receivable invoice sold to the Purchaser.  Previously the retained amount was 20%.  The fee for the initial purchase is .466% of the invoice.  The fee is charged at prime plus 4% (effective rate of 7.25% at March 31,June 30, 2015) against the average daily outstanding balance of funds advanced.  Previously, the fee for the first 30 days was 1% and additional fees were charged against the average daily balance of net outstanding funds at the prime rate, which was 3.25% per annum as of March 31, 2014.annum.  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 threesix months ended March 31,June 30, 2015, the Company sold approximately $1,895,000$3,615,000 ($2,123,000 - March 31,4,035,000 – June 30, 2014) of its accounts receivable to the Purchaser.  As of March 31,June 30, 2015, approximately $797,000$392,000 ($1,078,000 -1,033,000 – December 31, 2014) of these receivables remained outstanding. Additionally, as of March 31,June 30, 2015, the Company had approximately $110,000$210,000 available under the financing line with the financial institution ($90,000 –220,000 - December 31, 2014).  After deducting estimated fees and advances from the Purchaser, the net receivable from the Purchaser amounted to $119,500$57,005 at March 31,June 30, 2015 ($215,600 - March 31,148,850 – June 30, 2014), 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 approximately $22,323$42,000 for the threesix months ended March 31,June 30, 2015 ($43,117 - March 31,92,200 – June 30, 2014).  These financing line fees are classified on the statements of operations as interest expense.

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Note 5.  Earnings perPer 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 warrantsconvertible notes 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.
7

The following table sets forth the computation of basic and diluted net loss per share for the three months ended:share.

 Three months ended  Six months ended 
 March 31, 2015  March 31, 2014  
June 30, 2015
  
June 30, 2014
  
June 30, 2015
  
June 30, 2014
 
Numerator for basic and diluted net loss per share:                  
Net loss $(224,717) $(159,275) $(125,819) $(144,561) $(350,535) $(303,836)
Denominator for basic and diluted net loss per share:                        
Weighted average common shares outstanding  26,561,883   25,961,883   26,581,883   25,961,883   26,581,883   25,961,883 
Basic and diluted net loss per share $(.01) $(.01) $.00  $(.01) $(.01) $(.01)
                        
Anti-dilutive shares excluded from net loss per share calculation  29,389,749   31,704,552 
Anti-dilutive shares excluded from net loss per share  28,552,398   30,745,393   28,552,398   30,745,893 

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 an aggregate of 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.  goSudo is a customer of the Company.  As a result, at MarchJune 30, 2015 and December 31, 2015,2014, the Company owns approximately 9.4% of the total outstanding shares of goSudo.

The investment is accounted for using the equity method since Company management exercises significant influence over the operating and financial policies of goSudo.  Beginning in 2012 certain officers and directors of the Company made loans to goSudo and converted loans to Series A stock.  In addition, one former Company employee, whose employment extended through June 30, 2014, is one of four members of the board of directors of goSudo and, was active in managing goSudo's business.  The Company’s chief executive officer is a member of the board of directors and is President of goSudo.  As a result of the foregoing, the Company is deemed to have significant influence upon goSudo's policy and operating decisions.  During the threesix months ended March 31,June 30, 2015, the investment was written down by $8,000 ($15,000 - 2014).$13,000 because of the net losses recorded by goSudo.  The investment has a carrying value of $101,000$96,000 at March 31,June 30, 2015 ($109,000 at December 31, 2014).

Unaudited financial information for goSudo as of and for the threesix months ended March 31,June 30, 2015 reflects total assets of $8,785,$6,932, total liabilities of $770,153,$820,338, and a net loss of $86,089.$138,128.  goSudo is a development stage enterprise.  During the threesix months ended March 31,June 30, 2015, goSudo earned consulting fees of $4,406$37,176 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 in the principal amount of $80,000.  After April 7, 2015, the note accrues interest at 10% per annum.  The note was amended to extend the maturity date to October 7, 2015.  As security for its obligations under the promissory note, the Company granted the Seller a security interest in the Software.  The cost of $180,000 is being amortized over the estimated useful life of five years beginning on the date the asset is placed in service.  AmortizationAnnual amortization expense in future periods is estimated to be $27,000 in 2015, $36,000 in 2016 to 2019 and $9,000 in 2020.

8
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 payable for the six months ended June 30, 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 amount is payable when the total licensing fees paid to the Company less the licensing fee payments made to the Seller equals the difference between $500,000 and the total software development cost.  The Company has determined the potential obligation is not probable and accordingly no liability was recorded at March 31,June 30, 2015.

To finance the portion of the base purchase price paid in cash at the closing under the purchase agreement, the Company borrowed $100,000 under an unsecured line of credit financing agreement (the “LOC Agreement”) with a member of its board of directors.   In connection with the closing, the Company entered into an employment agreement with one of the Seller’s principals to employ him as Director of CyberSecurity for three years.
8

Note 8. Notes Payable - Related Parties

Note payable, line of credit, 6.1%, unsecured - During the three months ended March 31, 2015, the Company borrowed an additional $120,000 under the terms of its LOC Agreement with a member of its board of directors.  The balance of the note, after monthly principal payments, was $318,675$317,053 at March 31,June 30, 2015 ($200,000 at December 31, 2014).  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.

Term Note Payable, 7% - On February 12, 2015, the Company received a loan of $25,000 with interest at 7% from its senior vice-president, chief administrative officer.  The note is unsecured and matures on March 31, 2018.  The principal is convertible at the option of the holder into shares of common stock at $.10 per share.

Note 9. Stock Option Plans and Agreements

The Company has approved stock options plans and agreements covering up to an aggregate of 10,840,0008,967,500 shares of common stock.  SuchPlan 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 threesix months ended March 31,June 30, 2015 and 2014:2014.

 2015  2014  2015  2014 
Risk-free interest rate  1.78%   .77% - 1.98%   1.49% - 1.78%  .77% -1.98%
Expected dividend yield  0%   0%   0%  0%
Expected stock price volatility  100%   100%   100%  100%
Expected life of options 5.75 years  3.25 to 5.75 years  5.75 years  3.25 - 5.75 years 

The Company recorded expense for options issued to employees and independent service providers of $14,407$16,245 and $58,805$16,089 for the three months ended March 31,June 30, 2015 and 2014, respectively, and $30,652 and $74,894 for the six months ended June 30, 2015 and 2014, respectively.

At March 31,June 30, 2015, there was approximately $64,000$48,000 of total unrecognized compensation cost related to non-vested options.  ThatThis 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 threesix months ended March 31,June 30, 2015 was approximately $46,000.

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$47,000.  The weighted average fair value of options granted during the six months ended June 30, 2015 was approximately $.03 ($.09 during the six months ended June 30, 2014).  No options were exercised during the six months ended June 30, 2015 and 2014.

A summary of all stock option activity for the threesix months ended March 31, 2015 follows:

  
Number of Options
  
Weighted
Average
Exercise
Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
           
Outstanding at December 31, 2014  10,899,500  $.16     
Options granted  120,000  $.05     
Options expired  (1,170,833) $.16     
Options forfeited   (41,667) $.13     
Outstanding at March 31, 2015  9,807,000  $.16 5.3 years $0 
Vested or expected to vest at             
  March 31, 2015  7,457,000  $.17 6.0 years $0 
              
Exercisable at March 31, 2015  6,495,333  $.18 5.6 years $0 

During the three months ended March 31, 2015, the Company issued to certain of its employees common stock options for an aggregate of 120,000 shares exercisable at $.05 per share which vest on June 30, 2015.2015 follows.
  
Number of Options
  
Weighted
Average
Exercise
Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
           
Outstanding at December 31, 2014  10,899,500  $.16     
Options granted  150,000  $.05     
Options expired  (1,568,333) $.16     
Options forfeited  (641,667) $.13     
Outstanding at June 30, 2015  8,839,500  $.16 5.3 years $88,200 
 
Vested or expected to vest at
             
  June 30, 2015   7,089,500  $.17 5.8 years $88,200 
              
Exercisable at June 30, 2015  6,264,500  $.18 5.5 years $64,800 

Note 10. Related Party Accounts Receivable, Accounts Payable and Accrued Interest Payable

Accounts Receivable and Accounts Payable – Since 2012, certain officers andor directors of the Company have made loans to goSudo, a customer of the Company, and can influence the management of this company.  IncludedAt June 30, 2015, included in accounts receivable are amounts due from this related party of $69,228 at March 31, 2015$88,422 ($66,885269 - December 31, 2014). and included in accounts payable are amounts due to this related party of $30,675.

Accrued Interest Payable – Included in accrued interest payable is accrued interest payable to related parties of $390,634$399,949 at March 31,June 30, 2015 ($378,731358,698 - December 31, 2014).
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Note 11. Supplemental Cash Flow Information

On February 6, 2015, the Company originated a secured promissory note in the principal amount of $80,000 in connection with the acquisition of the UberScan software (See Note 7).

Note 12. Subsequent Events

Subsequent to March 31, 2015, the Company issued to an employee common stock options for an aggregate of 30,000 shares exercisable at $.04 per share of which 10,000 vested on the grant date.

Subsequent to March 31, 2015, the Company and the Seller of the Software, amended the secured promissory note for $80,000 to extend the maturity date to October 7, 2015.

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

Item 2.                            Management’s Discussion and Analysis of Financial Condition and Results of Operations

IT Consulting

Headquartered in Pittsford, New York, we provide IT solutions that are intended to deliver measurable results to small and medium sized businesses (SMBs), government agencies, and large commercial enterprises.  We provide:
 
●Cloud computing;
●Managed services that include managing leading edge operations and implementing complex programs in advanced server management;
●Remote desktop and remote server monitoring and remediation;
●Help desk and call center services;
●Third party data storage;
●Cyber security services;
●Third party software licenses for our SMB partners; and
●Project management.
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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.  We planOur objective is to expand our sales with our existing clients by expanding within those organizations.

Results of Operations

Comparison of the Three Months Ended March 31,and Six Month Periods ended June 30, 2015 and 2014

The following table comparestables compare our statements of operations data for the three and six months ended March 31,June 30, 2015 and 2014.  The trends suggested by this table are not indicative of future operating results.
 
  Three Months Ended March 31, 
              2015 vs. 2014 
     As a % of     As a % of  Amount of  % Increase 
  2015  Sales  2014  Sales  Change  (Decrease) 
                   
Sales $2,169,638   100.0% $2,014,417   100.0% $155,221   7.7 
Cost of sales  1,693,226   78.0   1,506,164   74.8   187,062   12.4 
Gross profit  476,412   22.0   508,253   25.2   (31,841)  (6.3)
General and administrative  397,591   18.3   325,224   16.1   72,367   22.3 
Selling  232,419   10.7   244,018   12.1   (11,599)  (4.8)
Total operating expenses  630,010   29.0   569,242   28.3   60,768   10.7 
Operating loss  (153,598)  (7.1)  (60,989)  (3.0)  (92,609)  151.8 
Loss on investment  (8,000)  (0.4)  (15,000)  (0.7)  (7,000)  100.0 
Interest expense  (63,119)  (2.9)  (83,286)  (4.1)  (20,167)  (24.2)
Net loss $(224,717)  (10.4) % $(159,275)  (7.9) % $(65,442)  41.1 
                         
Net loss per share - basic and diluted $(.01)     $(.01)            
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  Three Months Ended June 30, 
              2015 vs. 2014 
     As a % of    As a % of  Amount of  % Increase 
  2015  Sales 2014  Sales Change  (Decrease) 
                   
Sales $2,071,068   100.0% $2,127,571   100.0% $(56,503)  (2.7) %
Cost of sales  1,586,320   76.6   1,627,489   76.5   (41,169)  (2.5)
Gross profit  484,748   23.4   500,082   23.5   (15,334)  (3.1)
General and administrative  342,419   16.5   312,681   14.7   29,738   9.5 
Selling  201,643   9.7   235,852   11.1   (34,209)  (14.5)
Total costs and expenses  544,062   26.3   548,533   25.8   (4,471)  (.8)
Operating loss  (59,314)  (2.9)  (48,451)  (2.3)  (10,863)  22.4 
Loss on investment  (5,000)  (.2)  (21,000)  (1.0)  (16,000)  (76.2)
Interest expense  (61,505)  (3.0)  (75,110)  (3.5)  (13,605)  (18.1)
Net loss $(125,819)  (6.1) % $(144,561)  (6.8) % $18,742   (13.0) %
                         
Net loss per share - basic and diluted $.00      $(.01)     $.01     
                         
                         
  Six Months Ended June 30,
                  2015 vs. 2014 
      As a % of      As a % of  Amount of  % Increase 
   2015  Sales   2014  Sales  Change  (Decrease) 
                         
Sales $4,240,705   100.0% $4,141,988   100.0% $98,717   2.4%
Cost of sales  3,279,546   77.3   3,133,656   75.7   145,890   4.7 
Gross profit  961,159   22.7   1,008,332   24.3   (47,173)  (4.7)
General and administrative  740,008   17.5   637,902   15.4   102,106   16.0 
Selling  434,061   10.2   479,869   11.6   (45,808)  (9.5)
Total costs and expenses  1,174,069   27.7   1,117,771   27.0   56,298   5.0 
Operating loss  (212,910)  (5.0)  (109,439)  (2.6)  (103,471)  94.5 
Loss on investment  (13,000)  (.3)  (36,000)  (.9)  23,000   (63.9)
Interest expense  (124,625)  (2.9)  (158,397)  (3.8)  33,772   (21.3)
Net loss $(350,535)  (8.3) % $(303,836)  (7.3) % $(46,699)  15.4%
                         
Net loss per share - basic and diluted $(.01)     $(.01)     $.00     
 
Sales

Sales for the six months ended June 30, 2015 were $4,240,705 an increase of $98,717 or 2.4% as compared to sales for the six months ended June 30, 2014 of $4,141,988.  Sales for the three months ended March 31,June 30, 2015 were $2,169,638$2,071,068, a decrease of $56,503 or 2.7% as compared to sales for the three months ended March 31,June 30, 2014 of $2,014,417, an increase of $155,221 or 7.7%.  $2,127,571.  Sales of virtualization projects increased during the threesix months ended March 31,June 30, 2015 as compared to 2014.2014 by approximately $153,000.  However, we realized sales decreases of approximately $75,000$150,000 during the threesix months ended March 31,June 30, 2015 due to a lower rate when our principal contract with Hewlett-Packard Company was renewed for its twelfth consecutive year.  We expect this rate reduction to continue through at least the next contract renewal date, October 1, 2015.  During March and April 2015, we began to close new contracts and expect future sales fromfor security assessments and related projects using proprietary software, UberScan, which we purchased in February 2015.  During the three months ended June 30, 2015, we began to deliver cyber security assessments, reports and other cyber security services and we sold third party software licenses to our SMB partners, which accounted for a substantial portion of our 2015 sales increase.

One of our priorities is to increase sales.  Accordingly, we continue to hire additional sales personnel in an effort to increase commercial and U.S. Government agency 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 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.

We have several contract vehicles that enable us to deliver a broad range of our services and solutions to the U.S. Government and commercial clients. We have formed alliances with large systems integrators, who are mandated by federal policy to direct defined percentages of their work to companies like ours which are small business subcontractors.  We have completed proposals with major prime contractors to the U.S. Government.
 
 
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Cost of Sales and Gross Profit

Cost of sales principally represents the cost of employeeemployees delivering services related to our IT Services Group.  customers.  We also incurred cost of sales for third party software licenses for our SMB partners.  Cost of sales for the six months ended June 30, 2015 was $3,279,546 or 77.3% of sales as compared to $3,133,656 or 75.7% of sales for the six months ended June 30, 2014.  Gross profit was $961,159 or 22.7% of sales for the six months ended June 30, 2015 compared to $1,008,332 or 24.3% of sales for the six months ended June 30, 2014.

Cost of sales for the three months ended March 31,June 30, 2015 was 1,693,226$1,586,320 or 78.0%76.6% of sales as compared to $1,506,164$1,627,489 or 74.8% for the three months ended March 31, 2014.  Gross profit was $476,412 or 22.0%76.5% of sales for the three months ended March 31, 2015 compared to $508,253June 30, 2014.  Gross profit was $484,748 or 25.2%23.4% of sales for the three months ended March 31,June 30, 2015 compared to $500,082 or 23.5% of sales for the three months ended June 30, 2014.

Gross profit was affected by sales decreases of approximately $75,000$150,000 or 3.5% during the threesix months ended March 31,June 30, 2015 due to a lower rate when our principal contract with Hewlett-Packard Company was renewed for its twelfth consecutive year.  We experienced an increase in utilization of our IT engineers during the threesix months ended March 31,June 30, 2015 as compared to 2014 which improved our gross profit margin.  This increased utilization helped offset the decrease in gross profit noted above.from our Hewlett-Packard Company contract.

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 six months ended June 30, 2015 increased by $102,106 or 16.0% from $637,902 for the six months ended June 30, 2014 to $740,008 for the six months ended June 30, 2015.  As a percentage of sales, general and administrative expenses were 17.5% for the six months ended June 30, 2015 and 15.4% for the six months ended June 30, 2014.

General and administrative expenses for the three months ended March 31,June 30, 2015 increased by $72,367were $342,419 which was an increase of $29,738 or 22.3% to $397,5919.5% as compared to $325,224$312,681 for the same period inthree months ended June 30, 2014.   As a percentage of sales, general and administrative expense was 16.5% for the three months ended June 30, 2015 and 14.7% for the three months ended June 30, 2014.
The increase in general and administrative expenses in 2015 was principally a result of increases in professional fees of approximately  $40,000 in connection with the purchase of UberScan software and public reporting requirements and the addition of an executive officer in October 2014 who is responsible for working with other key executives to develop and implement our strategic direction and marketing plans and improve performance through collaboration between sales and service delivery functions.  In 2015, we realized expense reductions of approximately $28,500$24,600 for stock options expense and approximately $19,800$43,000 for shareholder investor relations and communications expense.
 
Selling Expenses

For the threesix months ended March 31,June 30, 2015, we incurred selling expenses of $232,419 associated with the development of our IT Services Group business$434,061 compared to $244,018$479,869 for the six months ended June 30, 2014, a decrease of $45,808 or 9.5%.   For the three months ended June 30, 2015, we incurred selling expenses of $201,643 as compared to $235,852 for the three months ended March 31,June 30, 2014, a decrease of $11,599$34,209 or 4.8%14.5%.

This decrease is due to various minor changes in expense items from period to period and a decrease in stock options expense of approximately $15,570$16,900 in 2015.  We continue to hire additionalhired sales personnel in an effort to increase commercial and U.S. Government agency sales, however, we eliminated certain sales positions in 2014, which offset a portion of the expenses associated with these new personnel.  In March and April 2015, we hired employees to focus on increasing our cyber security assessment and virtualization project, services and software sales.

Operating Loss

For the threesix months ended March 31,June 30, 2015 we had anour operating loss of $153,598was $212,910 compared to an operating loss of $60,989$109,439 for the threesix months ended March 31, 2014.June 30, 2014, an increase of $103,471.  The $92,609 decreaseincrease is attributable to a decrease in our gross profit of $31,841$47,173 and an increase in total operatingour general and administrative expenses of $60,768$102,106, offset by a decrease in our selling expenses of $45,808 during the six months ended June 30, 2015.

For the three months ended June 30, 2015 our operating loss was $59,314 compared to $48,451 for the three months ended March 31, 2015 as comparedJune 30, 2014, an increase of $10,863.  The increase is attributable to 2014.a decrease in our gross profit of $15,334 and an increase in our general and administrative expenses of $29,738, offset by a decrease in our selling expenses of $34,209 during the three months ended June 30, 2015.
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Loss on Investment

During 2014 and 2013, we purchased an aggregate of 300,000 shares of Series A Convertible Preferred Stock 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,June 30, 2015, we own approximately 9.4% (8.5% - June 30, 2014) 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$5,000 ($21,000 - 2014)  and $13,000 ($36,000 - 2014)  during the three and six months ended March 31,June 30, 2015, ($15,000 - 2014)respectively  to $101,000$96,000 ($109,000 - December 31, 2014) based on our interest in the net loss of goSudo for the same period.
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Interest Expense

TotalInterest expense includes interest on indebtedness and fees for financing accounts receivable invoices.  Interest expense was $124,625 for the six months ended June 30, 2015, a decrease of $33,772 from interest expense of $158,397 for the six months ended June 30, 2014.  Interest expense was $63,119$61,505 for the three months ended March 31,June 30, 2015, a decrease of $20,167$13,605 from $83,286interest expense of $75,110 for the three months ended March 31,June 30, 2014.  The decrease principally results from changes in the terms of our line of credit financing agreement which became effective in April 2014 reducing our cost of capital and improved collection rates from our two primary customers.  A portion of this decrease was offset by borrowings under our line of credit beginning in December 2014 to fund our operating losses and interest on our note payable in connection with the acquisition of UberScan software in 2015.

Net Loss

For the threesix months ended March 31,June 30, 2015, we recorded a net loss of $224,717$350,535 or $.01 per share compared to $159,275a net loss of $303,836 or $.01 per share for the six months ended June 30, 2014.  For the three months ended June 30, 2015, we recorded a net loss of $125,819 or $.00 per share compared to net loss of $144,561 or $.01 per share for the three months ended March 31, 2014.June 30, 2014.

Liquidity and Capital Resources

At March 31,June 30, 2015, we had cash of $34,632$36,233 available for our primary liquidity needs for working capital needs and planned capital asset expenditures.  During 2015, 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,June 30, 2015, we had approximately $110,000$210,000 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.  We borrowed $120,000 during 2015 for working capital.capital and have a balance under the line of $317,053 at June 30, 2015.  In addition, during the three months ended March 31, 2015, we borrowed $25,000 from an executive officer.  WeAt June 30, 2015, we have available $81,320$82,947 to borrow under the LOC Agreement.

At March 31,June 30, 2015, we had a working capital deficit of approximately $2,067,000$2,156,000 and a current ratio of .18..20.  This increase in the working capital deficit from approximately $1,032,000 at December 31, 2014 is principally due to the scheduled maturity on January 1, 2016 of notes payable of $419,300 to related parties and $325,000 to others which total $744,300.  We also originated a short-term secured promissory note in the principal amount of $80,000 during the three months ended March 31, 2015 in connection with the purchase of UberScan software that matures, as amended, on October 7, 2015.  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.

The following table sets forth our cash flow information for the periods presented:
 
 
Three Months Ended
 March 31,
  
Six Months Ended
 June 30,
 
 2015  2014  2015  2014 
Net cash provided by operating activities $40,764  $9,652  $56,495  $74,236 
Net cash used by investing activities  (100,000)  (3,634)  (100,600)  (18,789)
Net cash provided (used) by financing activities  86,100   (5,222)   72,570    (10,492)
Net increase in cash
 $26,864  $796  $28,465  $44,955 

Cash Flows Provided by Operating Activities

Cash provided by operations was $56,495 during the threesix months ended March 31,June 30, 2015 was $40,764 compared with $9,652$74,236 for the same periodsix months ended June 30, 2014.  For the six months ended June 30, 2015, our net loss of $350,535, non-cash expenses of $73,224, a net decrease in 2014.  cash flows from accounts receivable and other assets of $102,329, and an increase in current liabilities of $436,135 in aggregate resulted in cash flows from our operating activities.  For the six months ended June 30, 2014, our net loss of $303,836 was principally offset by non-cash expenses of $123,730, a net increase in cash flows from accounts receivable and other assets of $109,620 and an increase in current liabilities of $144,722.

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.payments by using cash generated by operations and financing our accounts receivable.  We bill our clients weekly or monthlyperiodically after services are performed, depending on the contract terms.  To generate cash provided by operating activities in 2015, our net loss of $224,717 for 2015 was principally offset by non-cash expenses of $28,011 and increases in current liabilities of $242,135.

To generate cash provided by operating activities in 2014, our net loss of $159,275 for 2014 was principally offset by non-cash expenses of $80,093 and improved payments of our accounts receivable of $203,087 which offset our decreases in current liabilities of $109,997.

We continue to hire additional sales personnel in an effort to increase commercial and U.S. Government agency sales and 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 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.
 
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Cash Flows Used by Investing Activities

Cash used by investing activities was $100,000$100,600 and $3,634$18,789 during the threesix months ended March 31,June 30, 2015 and 2014, respectively.  We invested $100,000 in 2015 to purchase the UberScan software to perform security assessments.  In 2014, we relocated our offices to more efficient space in the same office park and incurred costs for cabling our computer networks and the work stations for our newly hired sales personnel of $8,650.  Cash used in investing activities also included capital expenditures for computer hardware and software.
We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business.   We plan to investBeginning in April 2015, we invested in improvements to the functions and performance of UberScan software.
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software, which costs were expensed as incurred.
 
Cash Flows Provided (Used) by Financing Activities

Cash provided by financing activities was $86,100$72,570 as compared to cash used of $5,222$10,492 for the threesix months ended March 31,June 30, 2015 and 2014, respectively.  In 2015, we borrowed $120,000 for working capital under our LOC agreement and $25,000 from an executive officer.  We made principal payments of $55,025$64,647 to related parties, who are executive officers.  During 2015 and 2014, we made principal payments on other notes payable.payable of $7,783 and $10,492, respectively.  We anticipate that we will use $26,940$25,964 during the next twelve months for contractual amounts due to banks, the PBGC and theour LOC agreement with a director.  We continue to evaluate repayment of other notes payable based on our cash flow.

Credit Resources
 
We maintain an accounts receivable financing line of credit withfrom 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,June 30, 2015, we had financing availability, based on eligible accounts receivable, of approximately $110,000$210,000 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 and assets, 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 or third 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.

 
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PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

On February 12, 2015, we received a loan of $25,000 from our senior vice-president and chief administrative officer, Andrew Hoyen.  The loan pays interest at 7% per annum.  The note is unsecured and matures on March 31, 2018.  The principal is convertible at the option of the holder into shares of common stock at $.10 per share.  The sale of the convertible note to Mr. Hoyen is 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.

Item 5.  Other Information.

On December 31, 2014, we entered into an amendment to our note payable of $265,000 with Carle C. Conway that was scheduled to mature on January 1, 2015 to extend the maturity date to January 1, 2018.

On February 6, 2015, we originated a secured promissory note in the principal amount of $80,000 in connection with the acquisition of the UberScan software.  After April 7, 2015, the note accrues interest at 10% per annum.  The note was amended to extend the maturity date to October 7, 2015.  As security for our obligations under the promissory note, we granted the Seller a security interest in the Software.

On February 12, 2015, we received a loan of $25,000 from our senior vice-president and chief administrative officer, Andrew Hoyen.  The loan pays interest at 7% per annum.  The note is unsecured and matures on March 31, 2018.  The principal is convertible at the option of the holder into shares of common stock at $.10 per share.  The sale of the convertible note to Mr. Hoyen is 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.

On March 13, 2015, we agreed upon an amendment to our note payable with the PBGC that defers a principal payment of $75,000 that was due on March 15, 2015 to September 15, 2018.

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 17 of this report.  The Index to Exhibits is incorporated herein by reference.


 
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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          MayAugust 14, 2015/s/ James Villa
 James Villa
 Chief Executive Officer
 (Principal Executive Officer)
  
Date         MayAugust 14, 2015/s/ James Witzel
 James Witzel
 Chief Financial Officer
 
(Principal Financial Officer)
 
 
  

 
 
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INDEX TO EXHIBITS

Exhibit No.        Description
 
10.1Modification Agreement to Promissory Notes between the Company and Carle C. Conway, dated December 31, 2014 (incorporated by reference to Exhibit 10.37 of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2015 (File No. 0-21816)).

10.2Software Assets Purchase Agreement between the Company and UberScan, LLC and Christopher B. Karr and Duane Peifer, dated February 6, 2015 (incorporated by reference to Exhibit 10.35 of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2015 (File No. 0-21816)).

10.3Promissory Note and Security Agreement between the Company and UberScan, LLC, dated February 6, 2015 (incorporated by reference to Exhibit 10.36 of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2015 (File No. 0-21816)).*

10.4Promissory Note between Andrew Hoyen and the Company, dated February 12, 2015 (incorporated by reference to Exhibit 10.38 of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2015 (File No. 0-21816)).*

10.5Amendment to Promissory Note between the Company and UberScan, LLC, dated April 6, 2015.*(1)

31.1
 10.6Amendment to Promissory Note between the Company and the PBGC, dated March 13, 2015.*

31.1Chief Executive Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*(2)

31.2
 31.2Chief Financial Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*(2)

32.1
 32.1Chief Executive Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.*(2)

32.2
 32.2Chief Financial Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.*(2)

101.INS101.INS     XBRL Instance Document

101.SCH101.SCH     XBRL Taxonomy Extension Schema Document

101.CAL101.CAL     XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB101.LAB     XBRL Taxonomy Extension Label Linkbase Document

101.PRE101.PRE     XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF101.DEF     XBRL Taxonomy Extension Definition Linkbase Document

*Filed as an exhibit hereto.
______________________
 (1) Incorporated by reference to Exhibit 10.5 in the Company's Form 10-Q dated May 14, 2015 Commission File No. 0-21816
 (2)  Filed as an exhibit hereto.

 
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