Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant (based upon the closing price on the Over the Counter Bulletin Board of $.02 on June 30, 2019 the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $580,000.
As of March 24, 2020, 29,061,883 shares of the registrant's common stock, $.001 par value, were outstanding.
INFINITE GROUP, INC. |
| Form 10-K |
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| TABLE OF CONTENTS |
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| PART I | | Page |
| | Item 1. | Business | 3 |
| | Item 1A. | Risk Factors | 7 |
| | Item 1B. | Unresolved Staff Comments | 16 |
| | Item 2. | Properties | 16 |
| | Item 3. | Legal Proceedings | 16 |
| | Item 4. | Mine Safety Disclosures | 16 |
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| PART II | | |
| | Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 16 |
| | Item 6. | Selected Financial Data | 17 |
| | Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 |
| | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 20 |
| | Item 8. | Financial Statements and Supplementary Data | 20 |
| | Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 20 |
| | Item 9A. | Controls and Procedures | 21 |
| | Item 9B. | Other Information | 21 |
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PART III. | | |
| | Item 10. | Directors, Executive Officers and Corporate Governance | 21 |
| | Item 11. | Executive Compensation | 22 |
| | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 23 |
| | Item 13. | Certain Relationships and Related Transactions, and Director Independence | 25 |
| | Item 14. | Principal Accountant Fees and Services | 26 |
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PART IV. | | |
| | Item 15. | Exhibits and Financial Statement Schedules | 27 |
| | Signatures | 29 |
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth herein under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The terms “we”, “our”, “us”, or any derivative thereof, as used herein refer to Infinite Group, Inc., a Delaware corporation.
PART I
Item 1. Business
Headquartered in Pittsford, New York, Infinite Group, Inc. (IGI) is --- a developer of cybersecurity software and a provider of cybersecurity consulting services to commercial businesses and government organizations that was built from our foundation of managed IT and virtualization services. As part of these offerings we:
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focus on key cybersecurity services (virtual CISO, compliance review and assessment, incident response, penetration testing, managed detection and response and vulnerability assessments) to solve and simplify security for small and medium sized enterprises (SMEs), government agencies, and certain large commercial enterprises. We act as the cybersecurity layer to both internal IT and third-party IT (MSPs, VARs, MSSPs) organizations. We work with both our channel partners and direct customers to provide these services;
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developed and brought to market our patent pending, automated vulnerability management solution through our OEM business, Nodeware®, which we sell through distribution and channel partners. We are also master distributor for other security solutions such as Webroot, a cloud-based endpoint security platform solution, where we market to and provide support for over 300 reseller partners across North America;
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provide level 2 technical and security support across the application layer and physical and virtual infrastructure including software-based managed services supporting enterprise and federal government customers through our partnership with Perspecta; and
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are an Enterprise Level sales and professional services partner with VMware selling virtualization licenses and solutions and providing virtualization services support to commercial and government customers including the New York State and Local Government and Education (SLED) entities and the New York State Office of General Services (NYS OGS).
Business Overview
As of December 31, 2019, we had 59 full-time employees. We possess certifications with our business and technology partners and our personnel maintain numerous security and technical certifications and qualifications. Our professionals are located at our headquarters in Pittsford, New York and in Colorado, Florida, Idaho, New Jersey, Maryland, North Carolina, South Carolina, Georgia, Texas, and Virginia.
We had sales of approximately $7.1 million in 2019 and approximately $6.4 million in 2018. We generated operating income of approximately $329,000 in 2019 as compared to approximately $210,000 in 2018. We had net income of approximately $48,000 in 2019 and $37,000 in 2018. We recorded other income of $83,250 in 2018 from the write-off of a note payable. We derived approximately 80% of our sales in 2019 and 77% in 2018 from contracts as either a prime contractor or a subcontractor with the remainder coming from our software business.
During 2019, we derived approximately 60% of our sales from one prime contractor, Perspecta (spun off from DXC Technology Company in 2018), including sales under subcontracts for services to its end clients, principally a major establishment of the U.S. Government (the U.S. Government Entity) for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments. During 2018, the percentage was approximately 70%. We have been providing this service to the U.S. Government Entity under a long-standing subcontract, which has been renewed annually since 2004. Our team of application and virtual infrastructure security experts supports approximately 5,000 physical and virtual servers and 250,000 client workstations from facilities in Maryland and Colorado. Operating 24 hours per day and seven days per week, we consistently meet or exceed the requirements of our service level agreements. We refer to this as our Advanced Server Management (ASM) team.
During 2019, we continued to grow our team of cybersecurity sales and technical consultants with the continued objective of accelerating sales growth. We continue to drive development of our cybersecurity business through growing and developing channel marketing, programs, and relationships for Nodeware and cybersecurity consulting. We believe our channel presence through entities including large distribution and master agents have created significant opportunities in both of these areas. This has further reinforced our commitment to this business strategy and our decision to leverage third party channels to bring new business and customers and drive growth of our existing relationships to IGI resulting in improved operating income.
We have become less reliant on sales of U.S. Federal Government virtualization projects as an Original Equipment Manufacturer (OEM) subcontractor as our cybersecurity consulting business has grown. Through our legacy VMware business, we have an umbrella NYS OGS Contract through our partnership with VMware. We provide cloud computing solutions that include public and private cloud architectures along with hybrid scalable cloud hosting, server virtualization and desktop virtualization solutions for the government and SME markets. During 2019 and 2018, under this agreement we sold and delivered virtualization software licenses and project credits to New York State of approximately $265,000 and $510,000, respectively. Since these are agent sales and are reported net of cost of sales, we recorded sales of $27,589 for 2019 and $22,065 for 2018.
We provide subcontracted professional services to a select set of OEMs and commercial entities that need additional skilled resources and executive oversight when architecting and implementing solutions. Sales to our principal client, VMware, Inc., consisted of sales under subcontracts for services to their end clients. During 2019, we provided professional services to these clients and earned 7.7% of our sales.
Business Strategy
Our strategy is to build our business by designing, developing, and marketing cybersecurity-based services, products and solutions that address the evolving landscape in cybersecurity for our channel and customers. We have patent pending technology in the market and we continue to develop other additional products and solutions that can be added to our channel of domestic and international partners and distributors. Our products and solutions are designed to simplify the security needs in customer and partner environments, with a focus on the mid-tier Enterprise market and below. We enable our partners by providing recurring revenue-based business models for both recurring services and through our automated and continuous security solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions. Our ability to differentiate ourselves in the market at a time when competition and consolidation in these markets is on the rise has proven successful due to our increased cybersecurity engagements.
Our cybersecurity business is comprised of three components: managed security services, product development and deployment, and integration of third-party security solutions into our security offerings to our channel and customers. We provide cybersecurity services and technical consulting resources to support both our channel partners and end customers. For example, we sell our proprietary product, Nodeware, through both our direct partners and through other 3rd party partner distribution and agents so they can either sell it as a standalone solution or part of other technical services they provide to their customers. This enables the channel partner to develop a base of recurring revenue. We also provide our cybersecurity services through our channel partners as a cybersecurity overlay to the technical services they already provide.
We are working to expand our managed services business with our prime partner, Perspecta, and the current federal enterprise customer and its customers.
The following sections define specific components of our business strategy.
Nodeware
We launched Nodeware version 1 commercially in November 2016. Nodeware is an agentless automated vulnerability management and monitoring solution that is designed to enhance security by proactively identifying, monitoring, and addressing potential vulnerabilities on networks, creating a safeguard against malicious intent to exploit known problems in a customer’s network with simplicity and affordability. Customers have the option to purchase Nodeware licenses to accommodate the varying network needs of their organizations. Nodeware provides a value-based solution designed for SMEs with single or multiple subnets.
Nodeware assesses vulnerabilities in a computer network using scanning technology to capture a comprehensive view of the security exposure of a network infrastructure. Users receive alerts and view network information through a proprietary, web enabled dashboard. Continuous and automated internal scanning and external on demand scanning are components of this offering.
Nodeware 2.0 was released to the market during 2017 providing the same solution with a set of new features, such as credentialed and uncredentialed vulnerability scanning. Nodeware scans the customer’s system through domain credentials without requiring an agent, providing a more comprehensive view of customer vulnerabilities. This level of access often results in the discovery of more missing patches or vulnerabilities that can then be addressed by following instructions available within the Nodeware interface.
Our most current version of Nodeware was released in early 2019. The upgrades made to this release include a next generation of the platform. The new platform’s features include integration of a new, cutting-edge scanning engine, a new reporting engine to easily access reports within the Dashboard, allowing users to securely archive every report and retrieve them instantly and greater technology enhancements around device identification and fingerprinting. Another new feature added to Nodeware was on-demand report generation, which enables IGI’s channel partners to easily pull reports for customers and run reports simultaneously for better cybersecurity management.
Nodeware creates an opportunity for resellers, including managed service providers, managed security service providers, distributors, and value-added resellers. We sell Nodeware in the commercial sector through channel partners and agents. In 2019, we continued to expand our channel of resellers.
We believe that our intellectual property is an asset that may contribute to the growth and profitability of our business. We rely on a combination of patent- and confidentiality procedures and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. In May 2016, we filed a provisional patent application for our proprietary product, Nodeware. The U.S. patent system permits the filing of provisional and non-provisional patent applications. A non-provisional patent application is examined by the United States Patent and Trademark Office (USPTO) and can mature into a patent once the USPTO determines that the claimed invention meets the standards for patentability. In May 2017, we filed a utility patent application for Nodeware which is currently under review. Additional intellectual property will be evaluated on a regular basis to determine its viability for patent application.
Technology and Product Development
Our goal is to position our products and solutions to enable vertical integration with other solutions. We have a technology and product development strategy aligned with our business strategy. We continue to seek to identify other technical partners in the cybersecurity market to integrate Nodeware in to; through either API or full stack integration.
Cybersecurity Services
We provide cybersecurity consulting services that include incident response, security awareness training, risk management, IT governance and compliance, security assessment services, penetration testing, managed detection and response (MDR) and virtual Chief Information Security Officer (vCISO) offerings to channel partners and direct customers across different vertical markets (banking, healthcare, manufacturing, etc.) in North America. Our cybersecurity projects use and leverage different technology platforms and processes such as Nodeware to create a living document that a customer can use to go forward on a path of continuous improvement for its overall IT security. We support both internal and external IT organizations with our cybersecurity overlay that allows us to stay agnostic in the process, especially for compliance while enabling the IT organization to address the issues discovered. We validate overall network security with the goal of maintaining the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from attempted threats and incidents. We continue to enhance our Cybersecurity services when opportunities materialize and as the market evolves.
Government Contract Vehicles and Agreements
A government contract vehicle is a mechanism for conducting business with government entities which helps to significantly reduce such entities’ lead time for procuring products or services and lowers agency acquisition costs associated with managing complex bid procedures. We believe that possessing contract vehicles will facilitate sales growth if we are successful at bidding and winning business within task orders generated under these vehicles. However, the amount of sales that we may generate is not determinable until a specific project award is made.
Federal Supply Schedule Contract. In 2003, we were awarded a Federal Supply Schedule Contract by the U.S. General Services Administration (GSA) for IT consulting services (Schedule 70). Our Schedule 70 contract was extended through December 2023. Having a Schedule 70 allows us to compete for and secure prime contracts with all executive agencies of the U.S. Government, as well as other national and international organizations. Our Schedule 70 contract encompasses 95 different labor categories and in 2018 Nodeware was also added. We have used our Schedule 70 as a basis for pricing our current and proposed work.
New York State and Local Government and Education (SLED). In 2016, we began working with VMware when it established a contract with NYS. VMware designated us as one of a select group of partners that is authorized to sell VMware licenses to SLED customers throughout New York State under their 2016 New York State Information Technology Service (ITS) Manufacturer Umbrella Contract. Beginning in 2017, we also have a similar contract with HPE under the NYS OGS contract that further enables us to bring solutions to SLED customers. These contracts continued in 2019.
The Quilt. The Quilt is the non-profit national coalition of 36 of our country’s most advanced regional research and education organizations. Participants in The Quilt provide advanced network services and applications to over 250 universities and thousands of other educational institutions. Based on The Quilt participants’ combined experiences in operations and development of leading-edge technologies, The Quilt aims to influence the national agenda on information technology infrastructure, with emphasis on networking for research and education. Through this coalition, The Quilt promotes delivery of networking services at lower cost, higher performance and greater reliability and security. Carahsoft is a master government aggregator and distributor for the industry’s leading and emerging IT manufacturers. We have an agreement with Carahsoft to place orders against Carahsoft’s Quilt contract for VMware products and support services for a period of one year, renewable annually.
Partner Agreements
SYNNEX distribution agreement. In 2019, we signed a distribution agreement with SYNNEX Corporation (NYSE: SNX), a leading business process services company, to bring Nodeware and IGI’s full suite of cybersecurity services to the SYNNEX reseller channel in the U.S. and Canada. SYNNEX resellers offer IGI services and Nodeware to their customer base, helping them to improve their security posture and reduce their cyber risk.
Staples to sell Nodeware. In 2019, we also signed a distribution agreement with Staples Inc. to sell its Nodeware™ vulnerability management solution through the Staples Business to Business(“B2B”) solutions division. The entire Staples customer base will now have access to this solution.
Staples to sell Cybersecurity services. In 2020, we added our portfolio of cybersecurity services to the distribution agreement with Staples Inc. through the Staples B2B solutions division.
VMware Enterprise Solution Provider and Consulting Subcontractor. Since 2007, we have been an approved VMware Authorized Consultant (VAC) by VMware, Inc. VMware is recognized as the industry leader in virtualization technology. As a VAC, we are trained and certified to deliver consulting services and solutions leveraging VMware technology. We implement offsite data storage, server virtualization, virtual desktop infrastructure, and public, private or hybrid cloud solutions. Since 2015, we have been a VMware Enterprise Level Solution Provider (ESP) where we still have the benefits of an architect, integration, and service partner along with the ability to sell VMware licenses. We have several solution specializations and are registered with the U.S. Federal and Education Specializations and SLED within VMware. We have completed over 700 projects around the globe and in market sectors including U.S. Government, state governments, education, and commercial corporations.
Certifications
Our technical support personnel maintain leading edge certifications and qualifications in the respective software applications. These certifications are examples of our concerted effort to grow and expand our virtualization practice. We believe that our virtualization experience and expertise with VMware will offer opportunities to increase sales, particularly in the cloud computing market.
CISSP® - Certified Information Systems Security Professionals. The CISSP certification is a credential for those with technical and managerial competence, skills, experience, and credibility to design, engineer, implement, and manage overall information security programs to protect organizations from increasingly sophisticated attacks. It is a globally recognized standard of achievement. Certain of our employees in our cyber security group have this certification.
GCIH - GIAC Certified Incident Handler. The GCIH certification is a credential for incident handlers who manage security incidents by understanding common attack techniques, vectors and tools as well as defending against and/or responding to such attacks when they occur. The GCIH certification focuses on detecting, responding, and resolving computer security incidents including:
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the incident reporting process;
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malicious applications and network activity;
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common attack techniques that compromise hosts;
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system and network vulnerabilities; and
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continuous process improvement and the root causes of incidents.
Certain of our employees in our cyber security group have this certification.
CEH – Certified Ethical Hacker. The Certified Ethical Hacker (CEH) program is a comprehensive ethical hacking certification to help information security professionals grasp the fundamentals of ethical hacking. The certification serves to assist our consultants to systematically attempt to inspect network infrastructures with the consent of its owner to find security vulnerabilities which a malicious hacker could potentially exploit. The course helps assess the security posture of an organization by identifying vulnerabilities in the network and system infrastructure to determine if unauthorized access is possible. Certain of our employees in our cyber security group have this certification.
Microsoft Gold Certified Partner. We are part of Microsoft's Accredited Online Cloud Services program. We have been certified in sales, pricing and technical delivery of Office 365 which combines the familiar Office desktop suite with cloud-based versions of the next-generation communications and collaboration services: Exchange Online, SharePoint Online and Lync Online. These services are providing real world benefits to our clients while allowing us to offer clear guidelines for transitioning new users to hybrid-cloud-based solutions. We received certification for Windows Intune which provides complete remote desktop support capabilities enhancing our overall goal of providing complete solutions for virtualization and cloud-based Software as a Service (SaaS). What once required expensive hardware and time-consuming deployments can now be delivered seamlessly, including web conferencing, collaboration, document management, messaging, customer relationship management and productive office web applications all with lower total cost of ownership and quicker return on investment. We believe our Microsoft competencies assist our business development personnel when presenting solutions that, if accepted, will increase our sales.
Perspecta Inc. Global Procurement Master Terms Agreement. We are a member of a select group of suppliers that enables Perspecta Inc. (spun off from DXC Technology Company in 2018) to purchase products and services from us under a global procurement master agreement and as specified in a statement of work for each project. This relationship continues to evolve and is something that is responsible for our long-term relationship with the Federal customer mentioned previously. Perspecta has many tools and resources to help us generate new sales streams, and improve our mutual profitability, while at the same time adding unique value for our joint clients. The program comprises practical tools and services that we anticipate will help us in the key areas of marketing and selling our solutions, optimizing the technology, and collaborating with other organizations within our industry to generate more revenue. Our global procurement master agreement with Perspecta runs to January 2021.
Competition
As we increase our focus in cybersecurity services and product development, we face competition from several different vendors in this evolving market. We compete with other IT professional services firms, Managed Security Services Providers (MSSPs), and cybersecurity product and software developers operating in the Federal Government, state and local government and commercial marketplace. We obtain a portion of our business based on proposals submitted in response to requests from potential and current clients, who typically also receive proposals from other firms. We face competition in the commercial markets from other IT service providers, MSSPs, and software development companies, large and small. Many of our larger competitors, in general, have substantially greater capital resources, research and development staffs, sales, and marketing resources, facilities, and experience.
Company Information Available on the Internet
We maintain a website at https://IGIus.com. Through a link to the Investor Relations section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are available, free of charge, as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission (SEC). We also maintain a web site for our cybersecurity product, Nodeware, and related services at https://www.nodeware.com. The content of our websites shall not be deemed part of this report.
Employees
As of December 31, 2019, we have 59 full-time employees, including 40 in information technology services, three in executive management, three in accounting, finance and administration, three in software development and ten in marketing and sales. We are not subject to any collective bargaining agreements and we believe that relations with our employees and independent contractors are good. We believe that we are currently staffed at an appropriate level to administratively implement and carry out our business plan for the next 12 months. However, we expect to add positions in sales, technical support, marketing and cybersecurity consulting to meet growing demands.
Our ability to develop and market our services, and to establish and maintain a competitive position in our businesses will depend, in large part, upon our ability to attract and retain qualified technical, marketing and managerial personnel, of which there can be no assurance.
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General Information
We were incorporated under the laws of the state of Delaware on October 14, 1986. Our principal corporate headquarters are located at 175 Sully’s Trail, Suite 202, Pittsford, NY 14534. Our business is in the field of delivering cybersecurity services, licensing and selling our cybersecurity solutions, including Nodeware, and distributing third party software licenses.
Item 1A. Risk Factors
In addition to the other information provided in our reports, you should consider the following factors carefully in evaluating our business and us. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, such as competitive conditions, may also impair our business operations. If any of the following risks occur, our business, financial condition, or results of operations could be materially adversely affected.
Risks Related to our Industry
The IT cybersecurity services industry is highly competitive, and we may not be able to compete effectively.
We operate in a highly competitive industry that includes many participants. We believe that we currently compete principally with other IT professional services firms, technology vendors and the internal information systems groups of our clients. Many of the companies that provide services in our markets have significantly greater financial, technical and marketing resources than we do. Our marketplace continues to experience rapid changes in its competitive landscape. Some of our competitors have sought access to public and private capital and others have merged or consolidated with better-capitalized partners. These changes may create more or larger and better-capitalized competitors with enhanced abilities to compete for market share generally and our clients specifically, in some cases, through significant economic incentives to clients to secure contracts. These competitors may also be better able to compete for skilled professionals by offering them large compensation incentives. One or more of our competitors may develop and implement methodologies that result in superior productivity and price reductions without adversely affecting the competitors' profit margins. In addition, there are relatively few barriers to entry into our markets and we have faced, and expect to continue to face, competition from new entrants into our markets. As a result, we may be unable to continue to compete successfully with our existing or any new competitors.
If we fail to meet our contractual obligations to our clients, our ability to compete for future work and our financial condition may be adversely affected.
If we fail to meet our contractual obligations, we could be subject to legal liability, which could adversely affect our business, operating results and financial condition. The provisions we typically include in our contracts which are designed to limit our exposure to legal claims relating to our services may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions. It is possible, because of the nature of our business, that we may be exposed to legal claims in the future. We have errors and omissions insurance with coverage limits of $1 million, subject to a $100,000 deductible payable by us. The policy limits may not be adequate to provide protection against all potential liabilities. As a consulting firm, we depend on our relationships with our clients and our reputation for high-quality services to retain and attract clients and employees. As a result, claims made against us may damage our reputation, which in turn, could impact our ability to compete for new business.
Our sales may suffer if our patent application for the technology used by our product, Nodeware, is not approved.
In May 2016, we filed a provisional patent application for our proprietary product, Nodeware, to protect the technology that we developed and applied. In May 2017, we filed a utility patent application for Nodeware. Our patent application is ready for examination by the U.S. patent application examiner. We may not have the full protection until it is fully approved. This may provide an opportunity for our competitors to develop similar products and technologies and directly compete with us. This may harm our sales and our ability to earn a return on our investments in this technology.
Our gross margin from our contracts will suffer if we are not able to maintain our pricing and utilization rates and control our costs.
Our gross profit margin is largely a function of the rates we charge for our IT Services and the utilization rate, or chargeability, of our employees. Accordingly, if we are not able to maintain the rates we charge for our services or an appropriate utilization rate for our employees, we will not be able to sustain our gross profit margin and earn a sufficient amount to fund our operating expenses. The rates we charge for our IT Services are affected by several factors, including:
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our clients' perception of our ability to add value through our services;
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introduction of new services or products by us or our competitors;
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pricing policies of our competitors; and
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general economic conditions.
Our utilization rates are also affected by several factors, including: seasonal trends, primarily because of holidays, vacations, and slowdowns by our clients, which may have a more significant effect in the fourth quarter; our ability to transition employees from completed engagements to new engagements; our ability to forecast demand for our services and thereby maintain an appropriately balanced and sized workforce; and our ability to manage employee turnover.
We have implemented cost-management programs to manage our costs, including personnel costs, support and other overhead costs. Some of our costs, like office rents, are fixed in the short term, which limits our ability to reduce costs in periods of declining sales. Our current and future cost-management initiatives may not be sufficient to maintain our margins as our level of sales varies.
We sell our product, Nodeware, to various customers, and we are therefore subject to risks associated with our sales and operations.
Our potential growth in certain markets could be adversely affected by:
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trade regulations and procedures and actions affecting pricing and marketing of products, including policies adopted by countries that may champion or otherwise favor domestic companies and technologies over foreign competitors;
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changes in the international, national or local regulatory and legal environments; and
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import, export or other business licensing requirements or requirements relating to foreign software licenses, which could increase our cost of doing business in certain jurisdictions, prevent us from delivering our product to certain countries or markets.
These and other factors could harm our ability to generate future revenue and impact our business, results of operations and financial condition.
We may be unable to protect our intellectual property adequately, which could harm our business, financial condition, and results of operations.
We believe that our intellectual property is an asset that may contribute to the growth and profitability of our business. We rely on a combination of patent and confidentiality procedures and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. The efforts we have taken to protect our intellectual property may not be sufficient or effective, and no patents may ultimately issue from any patent applications we have made or may make. Any U.S. or other patents issued to us may not be sufficiently broad to protect our proprietary technology or be enforceable at all. We may not be effective in policing unauthorized use of our intellectual property. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions we may be unable to protect our proprietary technology adequately against unauthorized third party copying or use. If we do detect violations, litigation may be necessary to enforce our intellectual property rights. Any enforcement efforts we undertake, including litigation, could be time consuming and expensive. It could divert management’s attention and may result in a court determining that our intellectual property rights are unenforceable. If we are not successful in cost effectively protecting our intellectual property rights, our business, financial condition, and results of operations could be harmed.
If we or our channel partners fail to properly complete cybersecurity assessments and other projects for customers, the customers may assert that we have contributed to cybersecurity issues that they may incur and seek recourse from us.
We perform cybersecurity assessments and other projects for our customers. We issue reports that state the results of our work. If a customer encounters a cybersecurity issue, it may assert that we did not identify and suggest remediation for the issue.
Our channel partners use Nodeware in cybersecurity projects. Our channel partners may incur the same risks that we incur in completing cybersecurity projects using Nodeware.
For any security breaches against customers that use our Nodeware scanner or services, breaches against those customers may result in customers and the public believing that Nodeware or our services failed. Our customers may look to our competitors for alternatives to Nodeware and our services. Real or perceived security breaches of our customers’ networks could cause disruption or damage to their networks or other negative consequences and could result in negative publicity to us, damage to our reputation, declining sales, increased expenses and customer relations issues. Any real or perceived defects in our product and services, or failure of our product and services to detect a vulnerability could result in:
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a loss of existing or potential customers or channel partners;
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delayed or lost revenue and harm to our financial condition and results of operations;
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a delay in attaining, or the failure to attain, market acceptance;
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an increase in warranty claims, or an increase in the cost of servicing warranty claims, either of which would adversely affect our gross margins; and
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litigation, regulatory inquiries, or investigations that may be costly and further harm our reputation.
These and other factors could harm our results of operations and financial condition.
We depend on third party vendors and incur risks associated with cloud-based technologies and our product, Nodeware.
We store certain information in a cloud-based environment with third party vendors. We are dependent on them to maintain a high level of security to protect our information and may incur adverse consequence if each vendor does not provide sufficient security.
If we cannot continue to produce quality products and services, our reputation, business, and financial performance may suffer.
In operating our business, we must address quality issues associated with our product, services, and solutions, including defects in engineering, design and manufacturing processes and unsatisfactory performance under service contracts, including defects in third-party components used in our product and unsatisfactory performance or even malicious acts by third party contractors or their employees. To address quality issues, we test our product to determine the causes of problems and to develop and implement appropriate solutions. However, the product, services, and solutions that we offer may be complex, and our testing and quality control efforts may not be effective in controlling or detecting all quality issues, particularly with respect to faulty components manufactured by third parties. If we are unable to determine the cause, find an appropriate solution to address quality issues with our product, we may delay shipment to customers, which could delay revenue recognition and receipt of customer payment and could adversely affect our revenue, cash flows and profitability. After products are delivered, quality issues may require us to repair or replace such products. Addressing quality issues can be expensive and may result in additional repair, replacement and other costs, adversely affecting our financial performance. If our customers are dissatisfied with our services or solutions, our results of operations could be adversely affected, and we could face possible claims if we fail to meet our customers' expectations. In addition, quality issues can impair our relationships with our customers which could adversely affect our results of operations.
System security risks, data protection breaches, cyberattacks, and systems integration issues could disrupt our internal operations or IT services provided to customers, and any such disruption could reduce our revenue, increase our expenses, damage our reputation.
We sell cybersecurity services, third-party software as well as our internally developed software, Nodeware. As a result, we have been and will be a target of cyber-attacks designed to impede the performance of our products, penetrate our network security or the security of our cloud platform or our internal systems, or that of our customers, misappropriate proprietary information and/or cause interruptions to our services. For example, because Nodeware is a network vulnerability management tool, a successful cyber-attack on us may be perceived as a victory for the cyber attacker, thereby increasing the likelihood that we may be a target of more cyber-attacks, even absent financial motives. Further, if our systems are breached as a result of third-party action, employee error or misconduct, attackers could learn critical information about how our primary product operates to help protect our customers’ IT infrastructures from cyber risk, thereby making our customers more vulnerable to cyber-attacks. In addition, if actual or perceived breaches of our network security occur, they could adversely affect the market perception of our Nodeware product, negatively affecting our reputation, and may expose us to the loss of our proprietary information or information belonging to our customers, investigations or litigation and possible liability, including injunctive relief and monetary damages. Such security breaches could also divert the efforts of our technical and management personnel. In addition, such security breaches could impair our ability to operate our business and provide products to our customers. If this happens, our reputation could be harmed, our revenue could decline, and our business could suffer. We monitor our network continuously with our Nodeware product as well as other cybersecurity software.
We are not aware of or identified an incident leading to a breach of our internal or external facing systems. We have implemented several proactive policies and procedures to mitigate any internal incidents from outside forces. This includes deploying additional monitoring software, phishing training, creating an internal incident response team, and additional awareness through internal communications around typical attempts that outside forces use. While we have seen phishing attempts sent to certain email addresses, we have mitigated those through the aforementioned steps. Our internal security team has blocked the associated addresses and/or domains of the senders and has enhanced email security features to identify external emails. Overall, our internal security posture continues to evolve as the market evolves. We have a cyber insurance policy which will cover certain expenses related to an attack, such as certain business interruption costs associated with an incident.
We depend on prime contracts or subcontracts with the federal, state and local governments for a substantial portion of our sales, and our business would be seriously harmed if the government ceased doing business with us or our prime contractors or significantly decreased the amount of business it does with us or our prime contractors.
We derived approximately 70% of our sales in 2019 from contracts as either a prime contractor or a subcontractor from government contracts. We expect that we will continue to derive a substantial portion of our sales for the foreseeable future from work performed under government contracts, as we have in the past, and from marketing efforts focused on commercial enterprises. If we or our prime contractors were suspended or prohibited from contracting with federal, state or local governments, or if our reputation or relationship with the federal, state or local governments and commercial enterprises were impaired, or if any of the foregoing otherwise ceased doing business with us or our prime contractors or significantly decreased the amount of business it does with us or our prime contractors, our business, prospects, financial condition and operating results would be materially adversely affected.
Our business could be adversely affected by changes in budgetary priorities of the federal, state and local governments.
Because we derive a significant portion of our sales from contracts with federal, state and local governments, we believe that the success and development of our business will continue to depend on our successful participation in their contract programs. Changes in federal, state and local government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs which call for the types of services that we provide or a change in government contracting policies, could cause U.S. Governmental agencies as well as state and local governments to reduce their expenditures under contracts, to exercise their right to terminate contracts at any time without penalty, not to exercise options to renew contracts or to delay or not originate new contracts. Any of those actions could seriously harm our business, prospects, financial condition or operating results. Moreover, although our contracts with governmental entities may contemplate that our services will be performed over a period of several years, government entities usually must approve funds for a given program each government fiscal year and may significantly reduce or eliminate funding for a program. Significant reductions in these appropriations could have a material adverse effect on our business. Additional factors that could have a serious adverse effect on our government contracting business include, but may not be limited to:
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changes in government programs or requirements;
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budgetary priorities limiting or delaying government spending generally, or by specific departments or agencies and changes in fiscal policies or available funding, including potential governmental shutdowns;
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reductions in the government's use of technology solutions firms;
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a decrease in the number of contracts reserved for small businesses, or small business set asides, which could result in our inability to compete directly for these prime contracts; and
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curtailment of the government uses of IT or related professional services.
The Office of Management and Budget process for ensuring government agencies properly support capital planning initiatives, including information technology investments, could reduce or delay federal information technology spending and cause us to lose revenue.
The Office of Management and Budget, or OMB, supervises spending by federal agencies, including enforcement of the Government Performance Results Act. This Act requires, among other things, that federal agencies make an adequate business justification to support capital planning initiatives, including all information technology investments. The factors considered by the OMB include, among others, whether the proposed information technology investment is expected to achieve an appropriate return on investment, whether related processes are contemporaneously reviewed, whether inter-operability with existing systems and the capacity for these systems to share data across government has been considered, and whether existing off-the-shelf products are being utilized to the extent possible. If our clients do not adequately justify proposed information technology investments to the OMB, the OMB may refuse funding for their new or continuing information technology investments, and we may lose revenue as a result.
Our contracts with federal, state and local governments may be terminated or adversely modified prior to completion, which could adversely affect our business.
U.S. Government contracts generally contain provisions, and are subject to laws and regulations, that give the U.S. Government rights and remedies not typically found in commercial contracts, including provisions permitting the U.S. Government to:
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terminate our existing contracts;
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reduce potential future revenues from our existing contracts;
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modify some of the terms and conditions in our existing contracts;
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suspend or permanently prohibit us from doing business with the U.S. Government or with any specific government agency;
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impose fines and penalties;
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subject us to criminal prosecution;
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suspend work under existing multiple year contracts and related task orders if the necessary funds are not appropriated by Congress;
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decline to exercise an option to extend an existing multiple year contract;
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subject the award of some contracts to protest or challenge by competitors, which may require the contracting U.S. agency or department to suspend our performance pending the outcome of the protest or challenge and which may also require the government to solicit new bids for the contract or result in the termination, reduction or modification of the awarded contract; and
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claim rights in technologies and systems invented, developed or produced by us.
The U.S. Government may terminate a contract with us either for convenience (for instance, due to a change in its perceived needs or its desire to consolidate work under another contract) or if we default by failing to perform under the contract. If the U.S. Government terminates a contract with us for convenience, we generally would be entitled to recover only our incurred or committed costs, settlement expenses and profit on the work completed prior to termination. If the U.S. Government terminates a contract with us based upon our default, we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the U.S. Government in procuring undelivered items from an alternative source. We may in the future receive show-cause or cure notices under contracts that, if not addressed to the U.S. Government's satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts.
Our U.S. Government contracts typically have terms of one or more base years and one or more option years. Many of the option periods cover more than half of the contract's potential term. U.S. Governmental agencies generally have the right not to exercise options to extend a contract. A decision to terminate or not to exercise options to extend our existing contracts could have a material adverse effect on our business, prospects, financial condition and results of operations.
Certain of our U.S. Government contracts also contain organizational conflict of interest clauses that could limit our ability to compete for certain related follow-on contracts. For example, when we work on the design of a solution, we may be precluded from competing for the contract to install that solution. While we actively monitor our contracts to avoid these conflicts, we cannot guarantee that we will be able to avoid all organizational conflict of interest issues.
In addition, U.S. Government contracts are frequently awarded only after formal competitive bidding processes, which have been and may continue to be protracted, and typically impose provisions that permit cancellation if funds are unavailable to the public agency.
The competitive bidding process presents several risks, including the following:
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we expend substantial funds, managerial time and effort to prepare bids and proposals for contracts that we may not win;
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we may be unable to estimate accurately the resources and costs that will be required to service any contract we win, which could result in substantial cost overruns; and
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we may encounter expense and delay if our competitors protest or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract.
Unfavorable government audits could require us to refund payments we have received, to forgo anticipated sales and could subject us to penalties and sanctions.
The federal, state and local government entities we work for generally have the authority to audit and review our contracts with them and/or our subcontracts with prime contractors. As part of that process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. If the audit agency determines that we have improperly received payment or reimbursement, we would be required to refund any such amount. If a government audit uncovers improper or illegal activities by us, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with the government. Any such unfavorable determination could adversely impact our ability to bid for new work which would have a negative impact on our business.
The failure by federal, state and local governments to approve budgets on a timely basis could delay procurement of our services and solutions and cause us to lose future revenues.
On an annual basis, Congress, and state and local governments must approve budgets that govern spending by government entities that we support. In years when governments do not complete the budget process before the end of their fiscal year, governments may fund operations pursuant to a continuing resolution. A continuing resolution allows U.S. Government agencies and other government entities to operate at spending levels approved in the previous budget cycle. When the government operates under a continuing resolution, it may delay funding we expect to receive from clients on work we are already performing and will likely result in new initiatives being delayed or in some cases cancelled.
We may lose money on some contracts if we do not accurately estimate the expenses, time, and resources necessary to satisfy our contractual obligations.
We may originate two types of government contracts for our services: time-and-materials and fixed-price. Each of these types of contracts, to varying degrees, involves some risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit we earn or lead to a financial loss on the contract.
Under time and materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for certain expenses. We assume financial risk on time and material contracts because we assume the risk of performing those contracts at negotiated hourly rates.
Under fixed-price contracts, we perform specific tasks for a fixed price. Compared to cost-plus contracts, fixed price contracts generally offer higher margin opportunities, but involve greater financial risk because we bear the impact of cost overruns and bear the risk of underestimating the level of effort required to perform the contractual obligations, which could result in increased costs and expenses.
Our profits could be adversely affected if our costs under any of these contracts exceed the assumptions we used in bidding for the contract.
If we fail to establish and maintain important relationships with government entities, our ability to successfully bid for new business may be adversely affected.
To develop new business opportunities, we rely on establishing and maintaining relationships with various government entities. We may be unable to successfully maintain our relationships with government entities, and any failure to do so could materially adversely affect our ability to compete successfully for new business.
Our business may suffer if our facilities or our employees are unable to obtain or retain the security clearances or other qualifications needed to perform services for our clients.
Many of our U.S. Government contracts require employees and facilities used in specific engagements to hold security clearances and to clear National Agency Checks and Defense Security Service checks. Some of our contracts require us to employ personnel with specified levels of education, work experience and security clearances. Depending on the level of clearance, security clearances can be difficult and time-consuming to obtain. If our employees or our facilities lose or are unable to obtain necessary security clearances or successfully clear necessary National Agency or Defense Security Service checks, we may not be able to win new business and our existing clients could terminate their contracts with us or decide not to renew them, and in each instance our operating results could be materially adversely affected.
We must comply with a variety of laws, regulations and procedures and our failure to comply could harm our operating results.
We must observe laws and regulations relating to the formation, administration and performance of government contracts which affect how we do business with our clients and impose added costs on our business. For example, the Federal Acquisition Regulation and the industrial security regulations of the Department of Defense and related laws include provisions that:
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allow U.S. Government entities to terminate or not renew contracts if we come under foreign ownership, control or influence;
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require us to disclose and certify cost and pricing data in connection with contract negotiations;
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require us to prevent unauthorized access to classified information; and
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require us to comply with laws and regulations intended to promote various social or economic goals.
We are subject to industrial security regulations of the U.S. Government agencies that are designed to safeguard against foreigners' access to classified information. If we were to come under foreign ownership, control or influence, we could lose our facility security clearance, which could result in our U.S. Government clients terminating or deciding not to renew an existing contract and could impair our ability to obtain new contracts.
In addition, our employees and independent contractors must often comply with procedures required by the specific agency for which work is being performed, such as time recordation or prohibition on removal of materials from a location.
Our failure to comply with applicable laws, regulations or procedures, including U.S. Government procurement regulations and regulations regarding the protection of classified information, could result in contract termination, loss of security clearances, suspension or prohibition from contracting with government entities, civil fines and damages and criminal prosecution and penalties, any of which could materially adversely affect our business.
Federal, state and local governments may revise their procurement or other practices in a manner adverse to us.
Federal, state and local governments may revise their procurement practices or adopt new contracting rules and regulations, such as cost accounting standards. New contracting methods may be adopted relating to GSA contracts, government-wide contracts, or new standards for contract awards intended to achieve certain social or other policy objectives, such as establishing new set-aside programs for small or minority-owned businesses. In addition, government entities may face restrictions from new legislation or regulations, as well as pressure from government employees and their unions, on the nature and amount of services they may obtain from private contractors. These changes could impair our ability to obtain new contracts or contracts under which we currently perform when those contracts are put up for re-competition bid. Any new contracting methods could be costly or administratively difficult for us to implement and could harm our operating results. For example, the Truthfulness, Responsibility and Accountability in Contracting Act, proposed in 2001, would have limited and severely delayed the U.S. Government's ability to use private service contractors. Although this proposal was not enacted, it or similar legislation could be proposed at any time. Any reduction in the U.S. Government's use of private contractors to provide federal information technology services could materially adversely impact our business.
Failure to maintain strong relationships with government and commercial contractors could result in a decline in our sales.
We derived approximately 78% of our sales in 2019 from contracts under which we acted as a subcontractor. Our subcontracts with prime contractors contain many of the same provisions as the prime contracts and therefore carry many of the same risks previously identified in these Risk Factors. As a subcontractor, we often lack control over fulfillment of a contract, and poor performance on the contract by others could tarnish our reputation, even when we perform as required. We expect to continue to depend on relationships with other contractors for a significant portion of our sales in the foreseeable future. Moreover, our sales and operating results could be materially adversely affected if any prime contractor chooses to offer services of the type that we provide or if any prime contractor teams with other companies to independently provide those services.
Risks Related to our Business and Financial Condition
Our results of operations may be negatively impacted by the coronavirus outbreak.
In December 2019, the 2019 novel coronavirus surfaced in China and the virus has now spread to other countries, including the United States and infections have been reported globally. The impacts of the outbreak are unknown and rapidly evolving.
To date, the outbreak has not had a material adverse impact on our operations. However, the future impact of the outbreak is highly uncertain and cannot be predicted and there is no assurance that the outbreak will not have a material adverse impact on our business, operations and the market for our securities. The extent of the impact, if any, will depend on future developments, including actions taken to contain the coronavirus. There can be no assurance that our personnel will not be impacted by these pandemic diseases and ultimately see our workforce productivity reduced or incur increased medical costs / insurance premiums as a result of these health risks.
In addition, a significant outbreak of coronavirus could result in a widespread global health crisis that could adversely affect global economies and financial markets resulting in an economic downturn.
We are highly leveraged, which increases our operating deficit and makes it difficult for us to grow.
At December 31, 2019, we had current liabilities of approximately $3.8 million and long-term liabilities of $1.0 million and stockholders’ deficiency of $3,907,310. We had a working capital deficit of approximately $3.3 million and a current ratio of .13. For 2019, we had operating income of approximately $330,000 and provided cash of approximately $30,000 for operating activities. Working capital shortages may impair our business operations and growth strategy, and accordingly, our business, operations, and financial condition will be materially adversely affected. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.
We have been dependent on a limited number of high net worth individuals to fund our working capital needs.
From 2003 through 2019, we received approximately $4.7 million in a combination of equity, debt conversion and debt transactions from several high net worth investors. We cannot provide assurance that we will be able to continue to raise additional capital from this group of investors, or that we will be able to secure funding from additional sources.
At December 31, 2019, we have current notes payable of $332,500 to third parties, which includes convertible notes payable of approximately $290,000. We have current maturities of long-term obligations to third parties of $950,000 comprised of $264,000 that was due on January 1, 2020, $265,000 which was due on January 1, 2018, $175,000 which was due on August 31, 2018 and $246,000 which was due to the PBGC on September 15, 2018 in accordance with the October 2011 Settlement Agreement. We have notes payable to related parties of $58,000 and maturities of our long-term notes to related parties of $512,935. We cannot provide assurance that we will be able to repay current notes payable or obtain extensions of maturity dates for long-term notes payable when they mature or that we will be able to repay or otherwise refinance the notes at their scheduled maturities.
We may require additional financing in the future, which may not be available on acceptable terms.
We may require additional funds for working capital and general corporate purposes. We cannot provide assurance that adequate additional financing will be available or, if available, will be offered on acceptable terms.
Moreover, our IT services billings generate accounts receivable that are generally paid within 30 to 60 days from the invoice date. The cost of those sales generally consists of employee salaries and benefits that we must pay prior to our receipt of the accounts receivable to which these costs relate. We therefore need sufficient cash resources to cover such employee-related costs which, in many cases, require us to borrow funds at costly terms.
We have secured an accounts receivable financing line of credit from an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2 million, including a sublimit for one major client of $1.5 million. This provides us with the cash needed to finance certain costs and expenses. At December 31, 2019, we had $67,000 of financing availability, based on eligible accounts receivable under this line. We pay fees based on the length of time that the invoice remains unpaid. As we grow, additional working capital may be required to support this difference in the timing of cash receipts versus payroll disbursements. Moreover, our accounts receivable financing lender may decide to cease subsequent advances at any time in its discretion, upon our failure to meet certain contractual requirements or upon the occurrence of certain events or contingencies that are out of our control. In such event, our short-term cash requirements would exceed available cash on hand resulting in material adverse consequences to our business.
Finally, any additional equity financing and conversions by the holders of existing notes payable to common stock will be dilutive to stockholders. Debt financings, if available, may involve restrictive covenants that further limit our ability to make decisions that we believe will be in our best interests. If we cannot obtain additional financing on terms acceptable to us when required, our operations will be materially adversely affected, and we may have to cease or substantially reduce operations.
We rely on one customer for a large portion of our revenues.
We depend on one customer for a large portion of our revenue. During 2019, sales to one customer, including sales under subcontracts, accounted for 62.6% of total sales and 22.1% of accounts receivable at December 31, 2019. The loss of this customer could have a significant impact on our revenues and harm our business and results of operations.
Events affecting the credit markets may restrict our ability to access additional financing.
Over the last several years, the U.S. and worldwide capital and credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in certain financial markets, making terms for certain financings less attractive, costlier, and in some cases, have resulted in the unavailability of financing. Continued uncertainty and volatility in the capital and credit markets may negatively impact our business, including our ability to access additional financing at reasonable terms, which may negatively affect our ability to fund current operations or expand our business. These events also may make it more difficult or costly for us to raise capital through the issuance of our debt and equity securities.
If we acquire businesses or business assets and do not successfully integrate the acquisitions, our results of operations could be adversely affected.
We may grow our business by acquiring or investing in companies and businesses and assets that we feel have synergy and will complement our business plan. As such, we periodically evaluate potential business combinations and investments in other companies and assets. We may be unable to profitably manage businesses and assets that we may acquire or invest in. We may fail to integrate these businesses and assets successfully without incurring substantial expenses, delays or other problems that could negatively impact our results of operations.
Our investments in cybersecurity and other business initiatives may not be successful.
We have invested in and continue to invest in cybersecurity capabilities to add new products and services to address the needs of our clients, including our newly introduced product, Nodeware. Our investments may not be successful or increase our revenues. If we are not successful in creating value from our investments by increasing sales, our financial condition and prospects could be harmed.
If we fail to adequately manage the size of our business, it could have a severe negative impact on our financial results or stock price.
Our management believes that to be successful we must appropriately manage the size of our business. This may mean reducing costs and overhead in certain economic periods, and selectively growing in periods of economic expansion. In addition, we will be required to implement operational, financial and management information procedures and controls that are efficient and appropriate for the size and scope of our operations. The management skills and systems currently in place may not be adequate and we may not be able to manage any significant reductions or growth effectively.
We may have difficulties in managing our growth.
Our future growth depends, in part, on our ability to expand, train and manage our employee base and provide support to an expanded client base. We must also enhance and implement new operating and software systems to accommodate our growth and expansion of IT product and service offerings. If we cannot manage growth effectively, it could have a material adverse effect on our results of operations, business and financial condition. In addition, acquisitions, investments and expansion involve substantial infrastructure costs and working capital. We cannot provide assurance that we will be able to integrate acquisitions, if any, and expansions efficiently. Similarly, we cannot provide assurance that any investments or expansion will enhance our profitability. If we do not achieve sufficient sales growth to offset increased expenses associated with our expansion, our results will be adversely affected.
We depend on the continued services of our key personnel.
Our future success depends, in part, on the continuing efforts of our senior executive officers. The loss of any of these key employees may materially adversely affect our business.
Our future success depends on our ability to continue to retain and attract qualified employees.
We believe that our future success depends upon our ability to continue to train, retain, effectively manage and attract highly skilled technical, managerial, sales and marketing personnel. This includes skills for our new initiatives in cybersecurity. Employee turnover is generally high in the IT services industry. If our efforts in these areas are not successful, our costs may increase, our sales efforts may be hindered, and the quality of our client service may suffer. Although we invest significant resources in recruiting and retaining employees, there is often significant competition for certain personnel in the IT services industry. From time to time, we experience difficulties in locating enough highly qualified candidates in desired geographic locations, or with required specific expertise.
We may lose revenue and our cash flow and profitability could be negatively affected if expenditures are incurred prior to final receipt of a contract or contract funding modification.
We provide professional services and sometimes procure materials on behalf of our clients under various contract arrangements. From time to time, to ensure that we satisfy our clients’ delivery requirements and schedules, we may elect, based on verbal authorization, to initiate procurements or provide services in advance of receiving formal written contractual authorization from the government client or a prime contractor. If our government or prime contractor requirements should change or the government directs the anticipated procurement to a contractor other than us, or if the materials become obsolete or require modification before we are under contract for the procurement, our investment might be at risk. If we do not receive the required funding, our cost of services incurred that exceed contractual funding may not be recoverable. This could reduce anticipated revenue or result in a loss, negatively affecting our cash flow and profitability.
Our employees or subcontractors may engage in misconduct or other improper activities, which could cause us to lose contracts.
While we have ethics and compliance programs in place, we are exposed to the risk that employee fraud or other misconduct could occur. We may enter into arrangements with prime contractors and joint venture partners to bid on and execute contracts or programs. As a result, we are exposed to the risk that fraud or other misconduct or improper activities by such persons may occur. Misconduct by employees, prime contractors or joint venture partners could include intentional failures to comply with federal laws, including U.S. Government procurement regulations, proper handling of sensitive or classified information, compliance with the terms of our contracts that we receive, and falsifying time records or failures to disclose unauthorized or unsuccessful activities to us. These actions could lead to civil, criminal, and/or administrative penalties (including fines, imprisonment, suspension and/or bars from performing U.S. Government contracts) and harm our reputation. The precautions we take to prevent and detect such activity may not be effective in controlling unknown or unmanaged risks or losses, and such misconduct by employees, prime contractors or joint venture partners could result in serious civil or criminal penalties or sanctions or harm to our reputation, which could cause us to lose contracts or cause a reduction in revenue.
Risks Related to our Common Stock
Certain stockholders own a significant portion of our stock and may delay or prevent a change in control or adversely affect the stock price through sales in the open market.
As of March 25, 2020, one related party and one third party, who is a former member of the board of directors, hold convertible notes payable with the right to convert the notes payable and accrued interest into shares of common stock at $.05 per share. If these parties converted all principal and accrued interest into common stock, these two individuals would own approximately 12.1% and 27.1%, respectively, (39.2% in the aggregate of our then outstanding common stock, excluding stock options. However, such notes may not be converted if such conversion would result in a change in control which would limit the use of our net operating loss carryforwards. We estimate as of the date of this report that substantially all convertible notes payable and accrued interest due to all related parties could be converted to shares of common stock, which may affect a change of control that would limit the use of our net operating loss carryforwards.
The concentration of large percentages of ownership by a single stockholder or a few stockholders may delay or prevent a change in control. Additionally, the sale of a significant number of our shares in the open market by a single stockholder or otherwise could adversely affect our stock price.
The price of our common stock may be adversely affected by the possible issuance of shares to third parties upon conversion of outstanding notes.
We have three convertible notes outstanding to third parties that are convertible into shares of common stock at prices ranging from $.05 to $.25 per share. If these notes were converted into common stock, the holders would receive 4,700,000 shares of our common stock or approximately 13.9% of our common stock outstanding as of March 25, 2020.
Our stock price is volatile and could be further affected by events not within our control.
The trading price of our common stock has been volatile and will continue to be subject to volatility in the trading markets and other factors.
The closing market price for our common stock varied between a low of $.005 and a high of $.085 in 2019. This volatility may affect the price at which a stockholder could sell its shares of common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock. Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including variations in our quarterly operating results and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, or capital commitments.
Our common stock is currently quoted on the Over The Counter (OTC) Bulletin Board. Because there is a limited public market for our common stock, a stockholder may not be able to sell shares when he or she wants. We cannot assure you that an active trading market for our common stock will ever develop.
There is limited trading in our common stock, and we cannot assure you that an active public market for our common stock will ever develop. The lack of an active public trading market means that a stockholder may not be able to sell shares of common stock when wanted, thereby increasing market risk. Until our common stock is listed on an exchange, we expect that the shares will continue to be quoted on the OTC Bulletin Board. However, an investor may find it difficult to obtain accurate quotations regarding the common stock’s market value. In addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect the shares liquidity. Moreover, our ability to obtain future financing may be adversely affected by the consequences of our common stock trading on the OTC Bulletin Board.
Our common stock may be considered a “penny stock” and may be difficult to buy or sell.
The Securities and Exchange Commission (SEC) has adopted regulations which generally define “penny stock” to be an equity security that has a market or exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is currently below $5.00 per share and therefore may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to accept our share certificates into a customer account and may affect the ability of our stockholders to sell their shares.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
The table below lists our facility location and square feet owned or leased. Beginning on August 1, 2016, we lease our headquarters facility under an operating lease agreement. Our rent expense is $80,000 annually during the first year of the lease term and increases by 1.5% annually thereafter. We have the right to terminate the lease upon six months prior notice after three years of occupancy.
At December 31, 2019 | | | | |
| Pittsford, New York | - | 7,112 | $ 83,654 | June 30, 2022 |
We believe our facility is in good operating condition. We do not own or intend to invest in any real property and currently have no policy with respect to investments or interests in real estate, real estate mortgage loans or securities or interests in persons primarily engaged in real estate activities.
Item 3. Legal Proceedings
We are not presently involved in any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the OTC Bulletin Board under the symbol IMCI. The following table sets forth, for the periods indicated, the high and low closing bid quotations per share for our common stock for each quarter within the last two fiscal years, as reported by the OTC Bulletin Board. Quotations represent interdealer prices without an adjustment for retail markups, markdowns or commissions and may not represent actual transactions:
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| Year Ended December 31, 2019 | | |
| | | |
| First Quarter | $.024 | $.005 |
| Second Quarter | $.030 | $.010 |
| Third Quarter | $.085 | $.018 |
| Fourth Quarter | $.059 | $.028 |
| | | |
| Year Ended December 31, 2018 | | |
| | | |
| First Quarter | $.025 | $.015 |
| Second Quarter | $.029 | $.015 |
| Third Quarter | $.039 | $.013 |
| Fourth Quarter | $.015 | $.010 |
At March 24, 2020, we had 198 record stockholders and estimate that we had approximately 1,200 beneficial stockholders.
Dividend Policy
We have never declared or paid a cash dividend on our common stock. It has been the policy of our board of directors (the Board) to retain all available funds to finance the development and growth of our business. The payment of cash dividends in the future will be dependent upon our earnings and financial requirements and other factors deemed relevant by our Board.
Item 6. Selected Financial Data
As a smaller reporting company, we are not required to provide the information in response to this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary statement identifying important factors that could cause our actual results to differ from those projected in forward-looking statements.
Readers of this report are advised that this document contains both statements of historical facts and forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward-looking statements. Examples of forward-looking statements include, but are not limited to (i) projections of sales, income or loss, earnings per share, capital expenditures, dividends, capital structure, and other financial items, (ii) statements of our plans and objectives with respect to business transactions and enhancement of stockholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report.
Business
Headquartered in Pittsford, New York, Infinite Group, Inc. (IGI) is --- a developer of cybersecurity software and a provider of cybersecurity consulting services to commercial businesses and government organizations that was expanded and built from our foundation of managed IT and virtualization services. As part of these offerings we:
●
focus on key cybersecurity services (virtual CISO, compliance review and assessment, incident response, penetration testing, managed detection and response and vulnerability assessments) to solve and simplify security for small and medium sized enterprises (SMEs), government agencies, and certain large commercial enterprises. We act as the cybersecurity layer to both internal IT and third-party IT (MSPs, VARs, MSSPs) organizations. We work with both our channel partners and direct customers to provide these services;
●
developed and brought to market our patent pending, automated vulnerability management solution through our OEM business, Nodeware®, which we sell through distribution and channel partners. We are also master distributor for other security solutions such as Webroot, a cloud-based endpoint security platform solution, where we market to and provide support for over 300 reseller partners across North America;
●
provide level 2 technical and security support across the application layer and physical and virtual infrastructure including software-based managed services supporting enterprise and federal government customers through our partnership with Perspecta; and
●
are an Enterprise Level sales and professional services partner with VMware selling virtualization licenses and solutions and providing virtualization services support to commercial and government customers including the New York State and Local Government and Education (SLED) entities and the New York State Office of General Services (NYS OGS).
Business Strategy
Our strategy is to build our business by designing, developing, and marketing cybersecurity-based services, products and solutions that address the evolving landscape in cybersecurity for our channel and customers. We have patent pending technology in the market and continue to develop other additional products and solutions that can be added to our channel of domestic and international partners and distributors. Our products and solutions are designed to simplify the security needs in customer and partner environments, with a focus on the mid-tier Enterprise market and below. We enable our partners by providing recurring revenue-based business models for both recurring services and through our automated and continuous security solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions. Our ability to differentiate ourselves in the market at a time when competition and consolidation in these markets is on the rise has proven successful.
Our cybersecurity business is comprised of three components: managed security services, product development and deployment, and integration of third-party security solutions into our security offerings to our channel and customers. We provide cybersecurity services and technical consulting resources to support both our channel partners and end customers. For example, we sell our proprietary product, Nodeware, through both our direct partners and through other 3rd party partner distribution and agents so they can either sell it as a standalone solution or part of other technical services they provide to their customers. This enables the channel partner to develop a base of recurring revenue. We also provide our cybersecurity services through our channel partners as a cybersecurity overlay to the technical services they already provide.
We are working to expand our managed services business with our prime partner, Perspecta, and the current federal enterprise customer and its customers.
Business Overview
We had sales of approximately $7.1 million in 2019 and approximately $6.4 million in 2018. We generated operating income of approximately $329,000 in 2019 as compared to approximately $210,000 in 2018. We had net income of approximately $48,000 in 2019 and $37,000 in 2018. We recorded other income of $83,250 in 2018 from the write-off of a note payable. We derived approximately 80% of our sales in 2019 and 77% in 2018 from contracts as either a prime contractor or a subcontractor with the remainder coming from our software business.
Results of Operations - Comparison of the years ended December 31, 2019 and 2018
The following table compares our statements of operations data for the years ended December 31, 2019 and 2018.
| | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Sales | $7,094,279 | 100.0% | $6,370,336 | 100.0% | $723,943 | 11.4% |
| Cost of sales | 4,422,533 | 62.3 | 4,158,408 | 65.3 | 264,125 | 6.4 |
| Gross profit | 2,671,746 | 37.7 | 2,211,928 | 34.7 | 459,818 | 20.8 |
| General and administrative | 1,334,051 | 18.8 | 1,084,260 | 17.0 | 249,791 | 23.0 |
| Selling | 1,008,558 | 14.2 | 917,975 | 14.4 | 90,583 | 9.9 |
| Total operating expenses | 2,342,609 | 33.0 | 2,002,235 | 31.4 | 340,374 | 17.0 |
| Operating income | 329,137 | 4.7 | 209,693 | 3.3 | 119,444 | 57.0 |
| Other income | 0 | 0.0 | 83,250 | 1.3 | (83,250) | (100.0 |
| Interest expense | (281,160) | 4.0 | (255,943) | 4.0 | 25,217 | 9.9 |
| Net income | $47,977 | 0.7% | $37,000 | 0.6% | $10,977 | 29.7% |
| Net income per share - basic and diluted | $.00 | | $.00 | | $.00 | |
Sales
For 2019 and 2018, in each year, our:
���
managed support service and virtualization project sales comprised approximately 70% of our total sales;
●
cybersecurity projects, Nodeware and commercial sales to small and medium sized enterprises (SMEs), were approximately 22% of our total sales; and
●
other IT consulting services comprise the balance of our sales with 8%.
During 2019 and 2018, we delivered VMware virtualization software licenses and project credits to New York State of approximately $265,000 and $510,000, respectively. Since these are agent sales and are reported net of cost of sales, we recorded sales of $ 27,590 and $22,065 for 2018.
Sales of virtualization subcontract projects increased in 2019. Our virtualization subcontract project sales increased by 14% from 2018 to 2019. However, our virtualization sales decreased by 19.9% for the fourth quarter of 2019 as compared to the fourth quarter of 2018. Our cybersecurity services business has grown by approximately $400,000 in revenues in 2019 versus 2018. We began to close sales of Nodeware with our channel partners during 2017 and have seen continued increases in sales in 2018 and 2019. Our commercial SME business continues to establish new relationships with channel partners who purchase cybersecurity solutions from us. We expect continuing future sales from Nodeware sales, security assessments, and related projects by our cybersecurity personnel.
Cost of Sales and Gross Profit
Cost of sales principally represents the cost of employee services related to our IT Services Group. In smaller amounts, we also incurred cost of sales for third party software licenses for our commercial SME partners.
Gross profit increased by 20.8% while sales increased by 11.4% for 2019. This was primarily due to increased gross profit earned by our managed services business group. This was done by continued cost controls in this group, especially related to reducing headcount.
General and Administrative Expenses
General and administrative expenses include corporate overhead such as compensation and benefits for executive, administrative and finance personnel, rent, insurance, professional fees, travel, and office expenses. General and administrative expenses increased in 2019 consisting of offsetting fluctuations in various expense items and increases in salaries of approximately $107,000 and professional fees of $64,700.
Selling Expenses
The increase in selling expenses in 2019 is principally due to the increase of employee salaries and benefits totaling approximately $330,400 due primarily to the growth to the cyber security and Nodeware sales team.
Operating Income
The increase in our operating income for 2019 is attributable to an increase in our gross profit of $459,818 offset by increases in our general and administrative expenses of $249,791 and our selling expenses of $90,583.
Other Income
In 2018, we wrote off a note and accrued interest to a debtholder in the amount of $83,250.
Interest Expense
Interest expense includes interest on indebtedness, amortization of loan fees and fees for financing accounts receivable invoices. The increase in interest expense is principally attributable to a higher average prime rate in 2019 compared to 2018 as well as increased borrowing from debtholders and an option fee associated with that debt.
Net Income/Loss
The increase in net income is attributable to the items discussed above for 2019 as compared to 2018.
Liquidity and Capital Resources
At December 31, 2019, we had cash of $6,398 available for working capital needs and planned capital asset expenditures. During 2019, we financed our business activities 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 December 31, 2019, we had approximately $67,000 under this line. At December 31, 2019, we had a working capital deficit of approximately $3,297,000 and a current ratio of .13. Our objective is to improve our working capital position through profitable operations, and we may continue to borrow to provide cash for working capital.
At December 31, 2019, we have current notes payable of approximately $332,500 to third parties, which includes convertible notes payable of approximately $290,000. Also included is $12,500 in principal amount of a note payable due on June 30, 2016 but not paid by then. This note was issued in payment of software we purchased in February 2016 and secured by a security interest in the software. To date, the holder has not taken any action to collect the amount past due on this note or to enforce the security interest in the software.
We have current maturities of long-term obligations of approximately $246,000 to the Pension Benefit Guaranty Corporation (the PBGC) with all principal due on September 15, 2018, which has not been extended. We have maturities of our long-term notes to third parties of $265,000 due on January 1, 2018, which has not been renewed or amended, $175,000 due on August 31, 2018, and $264,000 due on January 1, 2020, which has not been amended. We also have approximately $513,000 of liabilities due to related parties due on January 1, 2020, which has not been amended. These notes have not been paid. We plan to renegotiate the terms of the notes payable, seek funds to repay the notes or use a combination of both alternatives. We cannot provide assurance that we will be able to repay current notes payable or obtain extensions of maturity dates for long-term notes payable when they mature or that we will be able to repay or otherwise refinance the notes at their scheduled maturities.
The following table summarizes our cash flow information for the years presented, described below, and should be read in conjunction with our financial statements appearing at Item 15, Page F-1, et seq., of this report.
| | |
| | | |
| Net cash provided (used) in operating activities | $29,572 | $(130,122) |
| Net cash used in investing activities | (196,160) | (546) |
| Net cash provided by financing activities | 143,270 | 86,650 |
| Net decrease in cash | $(23,318) | $(44,018) |
Cash Flows Used in Operating Activities
Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. We bill our clients weekly or monthly after services are performed, depending on the contract terms. Our net income of $47,977 for 2019 was increased by non-cash expenses for depreciation, amortization and stock-based compensation of $74,455. In addition, an increase in accounts payable and accrued expenses of $115,891 offset by increases in accounts receivable and other assets of $208,751 resulted in net cash provided in operating activities of $29,572.
We are marketing Webroot and Nodeware to our IT channel partners who resell to their customers. We are making investments in our cyber security team for penetration testing, vCISO and other services as well as expanding our virtualization sales of projects and VMware licenses to our customers. Due to the lengthy lead times typically needed to generate these new sales, we do not expect to realize a return from our sales and marketing personnel for one or more quarters. As a result, we may continue to experience small operating income or operating losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows and incremental borrowings, as needed.
Cash Flows Used in Investing Activities
In 2019, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business.
Cash Flows Provided by Financing Activities
During 2019, we borrowed $200,000 from a related party under the terms of a note payable. The note allows for up to $500,000 credit and is due in August 2026. During 2018, we borrowed $70,000 from a related party under the terms of a demand note and $20,000 from a related party under the terms of our LOC financing agreement. During 2018, we made principal payments of $56,730 to a related party note holders.
We plan to evaluate alternatives which may include renegotiating the terms of the notes, seeking conversion of the notes to shares of common stock and seeking funds to repay the notes. We continue to evaluate repayment of our notes payable based on our cash flow.
Credit Resources
We maintain an accounts receivable financing line of credit from an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain costs and expenses. At December 31, 2019, we had financing availability, based on eligible accounts receivable, of approximately $67,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately $348,400 of available credit under various lines of credit as of December 31, 2019.
During May 2019, we originated a line of credit note payable for a $500,000 with a related party and borrowed $200,000 and have $300,000 available to borrow for working capital. This agreement matures in August 2026.
During 2017, we originated two lines of credit with related parties totaling $175,000. At December 31, 2018, we had $15,000 available under these financing agreements which mature in July 2022 and January 2023, respectively.
On December 1, 2014, we entered into an unsecured line of credit financing agreement (the LOC Agreement) with a member of our board of directors. The LOC Agreement provides for working capital of up to $400,000 through January 1, 2020. This agreement has been extended with no date at this time. At December 31, 2019, we had $33,400 of availability under the LOC Agreement.
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 and third parties; issuance of equity; use of our existing accounts receivable credit facility; or a refinancing of our accounts receivable credit facility.
Critical Accounting Policies and Estimates
See Note 3 to the Financial Statements for a discussion of the Company’s accounting policies and estimates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report beginning on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in the 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, our chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Infinite Group have been detected.
(b) Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Our management has concluded that, as of December 31, 2019, our internal control over financial reporting was effective based on these criteria.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Information required by this item is disclosed elsewhere herein.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Set forth below are the names, ages and positions of our executive officers and directors.
| Name | | Position | |
| James Villa (1) | 62 | Chief Executive Officer and President | 2003 |
| Donald W. Reeve (1) | 73 | Chairman of the Board | 2013 |
| Andrew Hoyen | 49 | Director and Chief Operating Officer | 2014 |
| Richard Glickman | 58 | VP Finance and Chief Accounting Officer | 2019 |
________________________
(1) Member of the audit and compensation committees.
Each director is elected for a period of one year and serves until his successor is duly elected and qualified. Officers are elected by and serve at the will of our Board.
Background
The principal occupation of each of our directors and executive officers for at least the past five years is as follows:
James Villa is our President and Chief Executive Officer and a director. He became a director on July 1, 2008, our President on February 25, 2010 and our Chief Executive Officer on January 21, 2014. He is also chairman of the audit and compensation committees. Mr. Villa was our Acting Chief Executive Officer from December 31, 2010 to January 21, 2014. Mr. Villa brings to the Board his experience with us since 2003 as well as professional experience gained from his services to a variety of public and privately held middle market businesses.
Donald W. Reeve became a director on December 31, 2013. He became Chairman of the Board on August 20, 2019. Since January 2013, he has been the principal partner at ReTech Services, LLC, a management consulting practice. Since August 2013, Mr. Reeve has been providing consulting services to us on a part time basis without cash compensation. Previously, Mr. Reeve was Senior Vice President and Chief Information Officer for Wegmans Food Markets, Inc. (Wegmans) from May 1986 until his retirement in August 2012. In that position, he managed an information technology staff of approximately 300 professionals with responsibilities for development, application and support services of computer technology. Prior to May 1986 and since 1970, he held various positions of increasing responsibility for Wegmans. He attended Monroe Community College and SUNY Empire State College, earned an associate's degree at Rochester Business Institute and is a veteran of the U.S. Army. Mr. Reeve brings to the Board the experience of managing the IT requirements for a growing company in a competitive environment. Mr. Reeve provides strategic guidance to the Board and our management as we continue to enter various commercial IT markets.
Andrew Hoyen was appointed Chief Administrative Officer and Senior Vice President of Business Development on October 1, 2014. In January 2016, he was appointed Chief Operating Officer. On July 18, 2017, he was elected to the board of directors. Mr. Hoyen is responsible for developing and implementing our strategic direction through improved operations, sales and marketing, product development, and overall collaboration across the enterprise. Previously, since 2011, he was Vice President of National Accounts at Toyota Material Handling North America. Prior to that, from 2002 to 2011, he served in several executive roles in operations, service and sales at Eastman Kodak Company and their spin-off, Carestream Health. His last position at Carestream Health was Vice President of Sales and Service for the Northeast Region. He holds a Bachelor of Science degree in biotechnology from Worcester Polytechnic Institute, a Master of Public Health degree from State University of New York at Albany and a Master of Business Administration degree from Rochester Institute of Technology.
Committees of the Board of Directors
Our Board has an audit committee and a compensation committee. The audit committee reviews the scope and results of the audit and other services provided by our independent registered public accounting firm and our internal controls. The compensation committee is responsible for the approval of compensation arrangements for our officers and the review of our compensation plans and policies. Each committee is comprised of Mr. Villa and Mr. Reeve.
Audit Committee Financial Expert
Our audit committee is comprised of Mr. Villa, as chairman, and Mr. Reeve. The Board has determined that Mr. Villa qualifies as our audit committee financial expert, as that term is defined in Item 407(d)(5) of Regulation S-K. Neither Mr. Villa nor Mr. Reeve is independent for audit committee purposes under the definition contained in Section 10A(m)(3) of the Exchange Act.
Code of Ethics
We have adopted a code of business conduct and ethics that applies to our principal executive officer, principal financial officer and other persons performing similar functions, as well as all employees and directors. This code of business conduct and ethics is posted on our website at www.IGIus.com under Business Conduct Guidelines.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten-percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to us, or written representations that no Forms 5 were required, we believe that all required Section 16(a) filings were timely made for the year ended December 31, 2019. With respect to any of our former directors, officers, and greater than ten-percent stockholders, we have no knowledge of any known failure to comply with the filing requirements of Section 16(a).
Item 11. Executive Compensation
The Summary Compensation Table below includes, for each of the years ended December 31, 2019 and 2018, individual compensation for services to Infinite Group, Inc. paid to: (i) our Chief Executive Officer, our Chief Financial Officer and (ii) the next most highly paid executive officers whose total compensation exceeded $100,000 for the year ended December 31, 2019 (together, the Named Executives).
| Name and Principal Position | Year | | | |
| James Villa | 2019 | $223,401 | $5,575 | $228,976 |
| Chairman, President and Chief Executive Officer | 2018 | $215,000 | $- | $215,000 |
| Andrew Hoyen | 2019 | $214,251 | $8,875 | $223,126 |
| Chief Operating Officer | 2018 | $210,000 | $- | $222,450 |
| James Witzel** | 2019 | $30,846 | $- | $30,846 |
| Chief Financial Officer | 2018 | $100,000 | $- | $100,000 |
| Richard Glickman | 2019 | $97,308 | $3,325 | $100,633 |
| VP Finance and Chief Accounting Officer | | | | |
_________________
* The amounts in this column reflect the grant date fair value for stock option awards granted during the year and do not reflect whether the recipient has realized a financial gain from such awards such as by exercising stock options. The fair value of the stock option awards was determined using the Black-Scholes option pricing model. See Note 3 to the financial statements in this report regarding assumptions underlying valuation of equity awards.
** James Witzel retired in July 2019.
Stock Options
The following table provides information with respect to the value of all unexercised options previously awarded to our Named Executives as of December 31, 2019.
| Name | Number of Securities Underlying Unexercised Options - Exercisable | Number of Securities Underlying Unexercised Options - Unexercisable | | Option Expiration Date |
| James Villa | 500,000 | - | $.115 | 1/20/2024 |
| | 500,000 | - | $.04 | 9/29/2021 |
| | 250,000 | - | $.05 | 12/22/2024 |
| | | | | |
| Andrew Hoyen | 250,000 | - | $.02 | 6/1/2026 |
| | 500,000 | - | $.04 | 9/29/2021 |
| | 400,000 | - | $.04 | 7/31/2022 |
| | 100,000 | - | $.04 | 7/17/2022 |
| | 200,000 | - | $.04 | 12/09/2024 |
| | 250,000 | - | $.05 | 12/22/2024 |
| | | | | |
| James Witzel | 300,000 | - | $.145 | 6/17/2020 |
| | 473,000 | - | $.093 | 8/11/2021 |
| | 210,000 | - | $.115 | 1/20/2024 |
| | 100,000 | - | $.05 | 12/30/2024 |
| | 40,000 | - | $.05 | 3/2/2025 |
| | | | | |
| Richard Glickman | 100,000 | 100,000 | $.02 | 7/23/2024 |
| | 50,000 | - | $.04 | 12/9/2024 |
Employment Agreements
We do not have any employment agreements with any of the Named Executives.
Compensation of Directors
Effective August 13, 2019, we established that in connection with rendering services as a Board of Directors, each non-management Director may receive compensation, as applicable to each Director, if approved by the Board. Directors are reimbursed for the costs relating to attending Board and committee meetings.
Effective August 20, 2019, the Board resolved to compensate Donald W. Reeve $12,000 annually as Chairman of the Board.
At December 31, 2019, Donald W. Reeve held exercisable options for:
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600,000 shares of our common stock at an exercise price of $.05 per share which expires on November 30, 2024;
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500,000 shares of common stock at an exercise price of $.15 per share which expires on September 4, 2023; and
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800,000 shares of common stock at an exercise price of $.04 per share which expires on September 29, 2021; and
●
250,000 shares of common stock at an exercise price of $.05 per share which expires on December 22, 2024.
On December 1, 2014, we entered into an unsecured line of credit financing agreement with Mr. Reeve. We paid an origination fee consisting of (i) 600,000 shares of our common stock valued at $30,000 and (ii) an immediately exercisable option to purchase 600,000 shares of our common stock at an exercise price of $.05 valued at $23,400 using the Black-Scholes option-pricing model.
On September 30, 2016, the unsecured line of credit financing agreement maturity date was extended from December 31, 2017 to January 1, 2020. As consideration for extending the maturity date, we granted an immediately exercisable option to purchase 800,000 common shares at $.04 per share with an estimated fair value of $14,720 using the Black-Scholes option-pricing model.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of our common stock, our only class of voting securities, as of March 24, 2020 by:
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each person known to us to be the beneficial owner of more than 5% of our outstanding shares;
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each Named Executive named in the Summary Compensation Table above; and
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all directors and executive officers as a group.
Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of common stock owned by them. All information with respect to beneficial ownership has been furnished to us by the respective stockholder. The address of record of each individual listed in this table, except if set forth below, is c/o Infinite Group, Inc., 175 Sully’s Trail, Suite 202, Pittsford, New York 14534.
| Name of Beneficial Owner (1) | Shares of Common Stock Beneficially Owned (1) | |
| Richard Glickman | 190,000 (3) | 0.7% |
| Andrew Hoyen | 2,136,734 (4) | 6.9% |
| Donald W. Reeve | 2,981,460 (5) | 9.6% |
| James Villa | 6,963,137 (6) | 19.8% |
| All Directors and Officers (4 persons) as a group | 12,271,331 (2) | 31.1% |
| | | |
| 5% Stockholders: | | |
| Paul J. Delmore | | |
| One America Place | | |
| 600 West Broadway, 28th Floor | | |
| San Diego, CA 92101 | 2,545,151 (8) | 8.8% |
| | | |
| James Leonardo | 2,500,000 | 8.6% |
| 435 Smith Street | | |
| Rochester, New York 14608 | | |
| | | |
| Allan M. Robbins | 12,544,887 (9) | 30.9% |
| 44 Hampstead Drive | | |
| Webster, NY 14580 | | |
| | | |
| James Witzel | 2,024,901 (7) | 6.6% |
| 12677 Dundee Lane | | |
| Naples , FL 34120 | | |
| (1) | Pursuant to the rules of the Securities and Exchange Commission, shares of common stock include shares for which the individual, directly or indirectly, has voting or shares voting or disposition power, whether or not they are held for the individual’s benefit, and shares which an individual or group has a right to acquire within 60 days from March 25, 2020 pursuant to the exercise of options or upon the conversion of securities are deemed to be outstanding for the purpose of computing the percent of ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. On March 25, 2020, we had 29,061,883 shares of common stock outstanding. |
(2)
| Assumes that all currently exercisable options, which total 5,473,000 shares, and convertible securities, which total 16,565,566 shares, owned by members of the group have been exercised. |
| (3) | Includes 150,000 shares subject to currently exercisable options. |
| (4) | Includes 250,000 shares, which are issuable upon the conversion of a note in the principal amount of $25,000 through March 25, 2020; and 1,250,000 shares subject to currently exercisable options. |
| (5) | Includes 2,150,000 shares subject to currently exercisable options. |
| (6) | Includes 4,901,137 shares, which are issuable upon the conversion of notes to Northwest Hampton Holdings, LLC, whose sole member is James Villa, including principal in the amount of $146,300 and accrued interest in the amount of $98,757 through March 24, 2020; and 1,000,000 shares subject to currently exercisable options. |
(7)
| Includes 317,594 shares, which are issuable upon the conversion of a note in the principal amount of $9,000 and accrued interest in the amount of $6,880 through March 24, 2020; and 1,123,000 shares subject to currently exercisable options. |
| (8) | Includes 2,360,000 shares owned of record by Upstate Holding Group, LLC, an entity wholly-owned by Mr. Delmore. |
| (9) | Includes 11,544,887 shares, which are issuable upon the conversion of the notes including principal in the amount of $304,000 and accrued interest in the amount of $295,063 through March 24, 2020. |
Securities Authorized for Issuance Under Equity Compensation Plans
The Company’s Board and stockholders approved a stock option plans adopted in 2005, which has authority to grant options to purchase up to an aggregate of 990,000 common shares at December 31, 2019. Since this plan has expired, no more options may be granted.
The 2009 Plan was established in February 2009 to align the interests of our employees, consultants, agents and affiliates with those of our stockholders to incent them to increase their efforts on our behalf and to promote the success of our business. Under the 2009 Plan up to 4,000,000 shares of common stock were authorized for option grants. The 2009 Plan expired on February 3, 2019; therefore, expired options after that date could not be re-issued. Generally, the 2009 Plan is administered by the compensation committee of the Board and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. As of December 31, 2019, an aggregate of 3,000 shares were available under our 2009 stock option plan (the 2009 Plan) for option grants.
The 2019 Plan was established in August 2019 to align the interests of our employees, consultants, agents and affiliates with those of our stockholders to incent them to increase their efforts on our behalf and to promote the success of our business. Under the 2019 Plan up to 1,500,000 shares of common stock were authorized for option grants. Generally, the 2019 Plan is administered by the compensation committee of the Board and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. As of December 31, 2019, an aggregate of 141,500 shares were available under our 2019 stock option plan (the 2019 Plan) for option grants.
The following table summarizes, as of December 31, 2019, the (i) options granted under our option plans and (ii) all other securities subject to contracts, options, warrants, and rights or authorized for future issuance outside of our plans. The shares covered by outstanding options or authorized for future issuance are subject to adjustment for changes in capitalization stock splits, stock dividends and similar events.
| | Equity Compensation Plan Table |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | | |
| Equity compensation plans previously approved by security holders (1) | 990,000 | $.10 | - |
| Equity compensation plans not previously approved by security holders (2) | 5,120,500 | $.05 | 144,500 |
| Individual option grants that have not been approved by security holders (3) | 4,800,000 | $.04 | - |
| Total | 10,910,500 | $.05 | 144,500 |
___________________________
| (1) | Consists of grants under our 2005 Stock Option Plans of which all are exercisable at December 31, 2019. |
| (2) | Consists of grants under our 2009 Plan and 2019 Plan of which 4,995,500 are exercisable at December 31, 2019. |
| (3) | Consists of individual option grants approved by the Board of which all are exercisable at December 31, 2019. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Officers, Directors, and Equity Investment
On May 7, 2019, we entered into a note payable agreement for up to $500,000 with Dr. Harry Hoyen. Dr. Harry Hoyen is the brother of Mr. Andrew Hoyen, our Chief Operating Officer and member of our Board. The note has an interest rate of 7.5% and is due on August 31, 2026. We borrowed $200,000 during the year ended December 31, 2019, which remains outstanding as of December 31, 2019. As consideration for providing this financing, we granted a stock option to purchase a total of 2,500,000 common shares at an exercise price of $.02 and recorded interest expense of $14,250 using the Black-Scholes option pricing model to determine the estimated fair value of the option.
On July 12, 2018, we issued an unsecured demand note payable to Northwest Hampton Holdings, LLC (Northwest) in the principal amount of $70,000 with interest at 6% per annum. On June 19, and July 17, 2017, we issued unsecured demand notes payable to Northwest in the principal amount of $12,000 with interest at 6% per annum. On August 1, 2019, we paid $40,000 plus accrued interest to the noteholder. On December 11, 2019, we paid $4,000 of principal only to the noteholder. Mr. James Villa, our Chief Executive Officer and President, is the sole member of Northwest.
On June 29, 2017, we issued an unsecured demand note payable to Mr. Donald Reeve, a member of our board, in the principal amount of $20,000 with interest at 6% per annum.
On July 18, 2017, we entered into an unsecured line of credit financing agreement for $100,000 with Mr. Andrew Hoyen, our Chief Operating Officer and member of our Board. The LOC Agreement provides for working capital of up to $100,000 with interest at 6% due quarterly through July 1, 2022. The principal balance owed was $90,000 at December 31, 2019. In consideration for providing the financing, Mr. Andrew Hoyen was granted an option to purchase 400,000 shares of common stock at $.04 per share with an estimated fair value of $9,960 using the Black-Scholes option-pricing model. The option expires on July 31, 2022.
On September 21, 2017, we entered into an unsecured line of credit financing agreement for $75,000 with Mr. Harry Hoyen, a related party. The LOC Agreement provides for working capital of up to $75,000 with interest at 6% due quarterly through January 2, 2023. The principal balance owed was $70,000 at December 31, 2019. In consideration for providing the financing, Mr. Harry Hoyen was granted an option to purchase 400,000 shares of common stock at $.04 per share with an estimated fair value of $4,080 using the Black-Scholes option-pricing model. The option expires on January 2, 2023.
We are obligated under a convertible note payable to Northwest. At March 24, 2020, Northwest is the holder of a convertible note bearing interest at 6% with principal of $146,300 and convertible accrued interest of $98,757 which matured on January 1, 2020 and is convertible into shares of our common stock at a conversion price of $.05 per share for a total of 4,901,137 shares. Principal of $203,324 was reduced by payments of $53,700 during 2015 and $3,324 during 2014 on this note.
At March 24, 2020, Mr. James Witzel, our former Chief Financial Officer, is the holder of a convertible note bearing interest at 6%, with principal of $9,000 and convertible accrued interest of $6,880 which matures on January 1, 2021 and is convertible into shares of our common stock at a conversion price of $.05 per share for a total 317,594 shares.
The interest rates on the notes payable to Northwest and Mr. Witzel (collectively, the Notes) are adjusted annually, on January 1st of each year, to a rate equal to the prime rate in effect on December 31st of the immediately preceding year, plus one and one quarter percent, but in no event less than 6% per annum. The interest rate was 6% at March 24, 2020. The Notes are secured by a security interest in all our assets.
Generally, upon notice, prior to the maturity date, note holders can convert all or a portion of the outstanding principal on the Notes. However, the Notes are not convertible into shares of our common stock to the extent conversion would result in a change of control which would limit the use of our net operating loss carryforwards; provided, however, this limitation will not apply if we close a transaction with another third party or parties that results in a change of control which will limit the use of our net operating loss carryforwards. Prior to any conversion, the holders of the Notes are entitled to convert their Notes, on a pari passu basis and upon any such participation the requesting note holder shall proportionately adjust his conversion request such that, in the aggregate, a change of control, which will limit the use of our net operating loss carryforwards, does not occur; provided, however, the right to participate is only available to a noteholder if his Note is then convertible into 5% or more of our common stock.
On December 1, 2014, we entered into an unsecured line of credit financing agreement with Mr. Donald W. Reeve, a member of our board of directors which provides for working capital of up to $400,000. We paid an origination fee consisting of (i) 600,000 shares of our common stock valued at $30,000 and (ii) immediately exercisable options to purchase 600,000 shares of our common stock at an exercise price of $.05 valued at $23,400 using the Black-Scholes option-pricing model. On September 30, 2016, the maturity date was extended from December 31, 2017 to January 1, 2020. As consideration for extending the maturity date to January 1. 2020, we granted an immediately exercisable option to purchase 800,000 common shares at $.04 per share with an estimated fair value of $14,720 using the Black-Scholes option-pricing model. The note balance was $363,955 at March 24, 2020 with interest at 6.60% payable monthly in arrears.
On February 12, 2015, we issued a note payable to Mr. Andrew Hoyen, our Chief Administrative Officer and Senior Vice President of Business Development, in the principal amount of $25,000 with interest at 7% per annum which matured on March 31, 2018. During, 2019, Mr. Hoyen extended the maturity date to March 31, 2021. At the election of the holder, the principal of the note is convertible into shares of our common stock at a conversion price of $.10 per share for a total of 250,000 shares.
Director Independence
Our Board has determined that Donald Reeve is independent in accordance with the NASDAQ’s independence standards. Our audit and compensation committees consist of Mr. Villa and Mr. Reeve, of which only Mr. Reeve is sufficiently independent for compensation committee purposes under NASDAQ’s standards and neither of them is sufficiently independent for audit committee purposes under NASDAQ’s standards due to their respective beneficial ownership of our common stock.
Item 14. Principal Accountant Fees and Services
The aggregate fees billed by our principal accounting firm, Freed Maxick CPAs, P.C. for the years ended December 31, 2019 and 2018 are as follows:
| | | |
| Audit fees | $80,000 | $70,500 |
Audit fees for 2019 and 2018 were for professional services rendered for the audits of our annual financial statements and reviews of the financial statements included in our Quarterly Reports on Form 10-Q. There were no tax or other non-audit related services provided by the independent accountants for 2019 and 2018.
As a matter of policy, each permitted non-audit service is pre-approved by the audit committee or the audit committee’s chairman pursuant to delegated authority by the audit committee, other than de minimus non-audit services for which the pre-approval requirements are waived in accordance with the rules and regulations of the SEC.
Audit Committee Pre-Approval Policies and Procedures
The audit committee charter provides that the audit committee will pre-approve audit services and non-audit services to be provided by our independent auditors before the accountant is engaged to render these services. The audit committee may consult with management in the decision-making process, but may not delegate this authority to management. The audit committee may delegate its authority to pre-approve services to one or more committee members, provided that the designees present the pre-approvals to the full committee at the next committee meeting.
Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this report: |
(1) Financial Statements – See the Index to the financial statements on page F-1.
(b) Exhibits:
Exhibit
No. Description
| 3.1 | Certificate of Incorporation of the Company dated April 29, 1993. (1) |
| 3.5 | By-Laws of the Company. (1) |
| 4.1 | Specimen Stock Certificate. (1) |
| 10.3 | Form of Stock Option Agreement. (1) |
| 10.9 | Modification Agreement No. 3 to Promissory Notes between Allan Robbins and the Company dated October 1, 2005. (6) |
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| 10.22 | Promissory Note in favor of the PBGC dated October 17, 2011. (15) |
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| 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.
**Management contract or compensatory plan or arrangement.
# Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Omitted portions have been filed separately with the SEC.
(1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (File #33- 61856) and incorporated herein by reference.
(2) Incorporated by reference to Appendix II of the Company's DEF14A filed on February 1, 2006.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006.
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
(11) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended June 30, 2010.
(12) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2010.
(13) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
(14) Incorporated by reference to the Company's Current Report on Form 8-K filed on September 12, 2011.
(15) Incorporated by reference to the Company's Current Report on Form 8-K filed on November 7, 2011.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
(17) Incorporated by reference to the Company's Current Report on Form 8-K filed on December 4, 2014.
(18) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
(19) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2015.
(20) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2016.
(21) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended June 30, 2017.(22) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2017.
(23) Incorporated by reference to the Company's Current report on Form 10-K for the fiscal year ended December 31, 2017.(24) Incorporated by reference to the Company's Current Report on Form 8-K filed on May 16, 2019.
(25) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 22, 2019.
Information required by schedules called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Infinite Group, Inc. | |
| | | | |
| Date: March 30, 2020 | By: | /s/ James Villa | |
| | | James Villa | |
| | | Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
| /s/ James Villa | | | |
| James Villa | | Chief Executive Officer and President (Principal Executive Officer) | March 30, 2020 |
| | | | |
| /s/ Richard Glickman | | | |
| Richard Glickman | | VP Finance and Chief Accounting Officer | March 30, 2020 |
| | | (Principal Financial and Accounting Officer) | |
| | | | |
| /s/ Andrew Hoyen | | | |
| Andrew Hoyen | | Chief Operating Officer and Director | March 30, 2020 |
| | | | |
| /s/ Donald W. Reeve | | | |
| Donald W. Reeve | | Chairman of the Board | March 30, 2020 |
INFINITE GROUP, INC.
Infinite Group, Inc.
We have audited the accompanying balance sheets of Infinite Group, Inc. (the Company) as of December 31, 2019 and 2018, the related statements of operations, changes in stockholders’ deficiency and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has negative working capital, a stockholders’ deficiency, and will be dependent on obtaining future financing. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Freed Maxick CPAs, P.C.
We have not been able to determine the specific year that we began serving as the Company’s auditor; however, we are aware that we have served as the Company’s auditor since at least 1995.
INFINITE GROUP, INC.
NOTE 1. - BASIS OF PRESENTATION & BUSINESS
The accompanying financial statements consist of the financial statements of Infinite Group, Inc. (the Company).
The Company operates in one segment, the field of information technology (IT) consulting services, with all operations based in the United States. The primary consulting services are in the cybersecurity and VMWare support services. There were no significant sales from customers in foreign countries during 2019 and 2018. All assets are located in the United States.
NOTE 2. - MANAGEMENT PLANS
The Company reported operating income of $329,137 in 2019 and $209,693 in 2018, net income of $47,977 in 2019 and $37,000 in 2018, and stockholders’ deficiencies of $3,907,310 and $4,000,094 at December 31, 2019 and 2018, respectively. Accordingly and due to current working capital deficit of approximately $3.3 million, there is substantial doubt about the Company’s ability to continue as a going concern within one year of issuance of the financial statements.
The Company’s mission is to drive shareholder value by developing and bringing to market automated, cost effective, and innovative cybersecurity technologies. The Company’s strategy is to build its business by designing, developing, and marketing IT security-based products and solutions that fill technology gaps in cybersecurity.
The Company brought one product to market and intends to bring other proprietary products and solutions to market through a channel of partners and distributors. The products and solutions are designed to simplify the security needs in customer and partner environments, with a focus on Small and Medium-Sized Enterprises (SMEs). The Company enables its partners by providing recurring revenue-based business models that use its automated plug and play solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of security and related IT functions. The Company’s ability to succeed depends on how successful it is in differentiating itself in the market at a time when competition in these markets is on the rise. The Company works with its partner, Webroot, to increase its base of channel partners and to increase sales of Webroot’s cloud-based endpoint security solution, with the objective of growing its recurring revenue model.
The Company’s cybersecurity services business is conducted within its professional services organization (PSO). The Company provides services and technical resources to support both its channel partners and end customers. The Company’s goal is to expand on these services throughout the United States via its growing partner network and salesperson team.
The Company is working to expand its managed services business with its current federal enterprise customer and its customers.
Nodeware assesses vulnerabilities in a computer network using scanning technology to capture a comprehensive view of the security exposure of a network infrastructure. Users receive alerts and view network information through a proprietary dashboard. Continuous and automated internal scanning and external on demand scanning are available within this offering.
Nodeware continues to release upgrades with the most recent one in August 2019. This upgrade provides a next generation of the Platform. The new platform’s features include integration of a new, cutting-edge scanning engine, a new reporting engine to easily access reports within the Dashboard, allowing users to securely archive every report and retrieve them instantly and greater technology enhancements around device identification and fingerprinting. Another new feature added to Nodeware was on-demand report generation, which enables IGI’s channel partners to easily pull reports for customers and run reports simultaneously for better cybersecurity management.
Nodeware creates an opportunity for resellers, including managed service providers, managed security service providers, distributors, and value-added resellers. The Company sells Nodeware in the commercial sector through its channel partners and agents.
The Company's goal is to increase sales and generate cash flow from operations on a consistent basis. The Company uses a formal financial review and budgeting process as a tool for improvement that has aided expense reduction and internal performance. The Company’s business plans require improving the results of its operations in future periods.
During 2019, the Company borrowed $200,000 from a related party under the terms of a note payable. At December 31, 2019, the Company had $300,000 available under this financing agreements. During 2018, the Company borrowed $90,000 from related parties under the terms of demand notes.
During 2017, the Company originated lines of credit with related parties totaling $175,000 and borrowed $140,000. During 2018, the Company borrowed an additional $20,000. At December 31, 2019, the Company had approximately $15,000 available under these financing agreements.
The Company believes the capital resources available under its factoring line of credit, cash from additional related party and third-party loans and cash generated by improving the results of its operations provide sources to fund its ongoing operations and to support the internal growth of the Company. Although the Company has no assurances, the Company believes that related parties, who have previously provided working capital, and third parties will continue to provide working capital loans on similar terms, as in the past, as may be necessary to fund its on-going operations for at least the next 12 months, however substantial doubt about the Company’s ability to continue as a going concern has not been alleviated. If the Company experiences significant growth in its sales, the Company believes that this may require it to increase its financing line, finance additional accounts receivable, or obtain additional working capital from other sources to support its sales growth.
The Company plans to 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. The Company continues to evaluate repayment of our notes payable based on its cash flow.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These transactions qualify for a sale of assets since (1) the Company has transferred all of its right, title and interest in the selected accounts receivable invoices to the financial institution, (2) the Purchaser may pledge, sell or transfer the selected accounts receivable invoices, and (3) the Company has no effective control over the selected accounts receivable invoices since it is not entitled to or obligated to repurchase or redeem the invoices before their maturity and it does not have the ability to unilaterally cause the Purchaser to return the invoices. Under FASB ASC 860, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.
Pursuant to the provisions of FASB ASC 860, the Company reflects the transactions as a sale of assets and establishes an accounts receivable from the Purchaser for the retained amount less the costs of the transaction and less any anticipated future loss in the value of the retained asset. The retained amount is equal to 10% of the total accounts receivable invoice sold to the Purchaser. The fee is charged at prime plus 3.6% (effective rate of 8.35% at December 31, 2019) against the average daily outstanding balance of funds advanced.
The estimated future loss reserve for each receivable included in the estimated value of the retained asset is based on the payment history of the accounts receivable customer and is included in the allowance for doubtful accounts, if any. As collateral, the Company granted the Purchaser a first priority interest in accounts receivable and a blanket lien, which may be junior to other creditors, on all other assets.
The financing line provides the Company the ability to finance up to $2,000,000 of selected accounts receivable invoices, which includes a sublimit for one of the Company’s customers of $1,500,000. During the year ended December 31, 2019, the Company sold approximately $4,742,933 ($5,181,140 - 2018) of its accounts receivable to the Purchaser. As of December 31, 2019, $324,125 ($363,213 - 2018) of these receivables remained outstanding. Additionally, as of December 31, 2019, the Company had $67,000 available under the financing line with the financial institution ($0 - 2018). After deducting estimated fees and advances from the Purchaser, the net receivable from the Purchaser amounted to $32,412 at December 31, 2019 ($36,321 - 2018) and is included in accounts receivable in the accompanying balance sheets as of that date.
There were no gains or losses on the sale of the accounts receivable because all were collected. The cost associated with the financing line was approximately $53,600 for the year ended December 31, 2019 ($53,600 - 2018). These financing line fees are classified on the statements of operations as interest expense.
The Company’s revenues are generated under both time and material and fixed price agreements. Managed Support services revenue is recognized when the associated costs are incurred, which coincides with the consulting services being provided. Time and materials service agreements are based on hours worked and are billed at agreed upon hourly rates for the respective position plus other billable direct costs. Fixed price service agreements are based on a fixed amount of periodic billings for recurring services of a similar nature performed according to the contractual arrangements with clients. These agreements are arrangements for monthly or weekly support services. Under both types of agreements, the delivery of services occurs when an employee works on a specific project or assignment as stated in the contract or purchase order. Based on historical experience, the Company believes that collection is reasonably assured.
The Company sells licenses of Nodeware and third-party software, principally Webroot. Substantially all customers are invoiced monthly at fixed rates for license fees and revenue is recognized over time.
The Company sells VMware software and service credits. Sales are recorded upon receipt of the software or credits by the customer. The Company does not take title to the software or credits. Accordingly, the Company accounts for these as agent sales and reduces its sales amount by the related cost of sales.
The Company’s total revenue recognized from contracts from customers was comprised of three major services: Managed support services, Cybersecurity projects and software and Other IT consulting services. The categories depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. There were no material unsatisfied performance obligations at December 31, 2019 or 2018 for contracts with an expected original duration of more than one year. The following table summarizes the revenue recognized by the major services:
Managed support services consist of revenue primarily from our subcontracts for services to its end clients, principally a major establishment of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments.
● We generate revenue primarily from these subcontracts through fixed price service and support agreements. Revenues are earned and billed weekly and are generally paid within 45 days. The revenues are recognized at time of service.
Cyber security projects and software revenue includes the selling of licenses of Nodeware™ and third-party software, principally Webroot™ as well as performing cybersecurity assessments, testing and consulting as a vCISO (Virtual Chief Information Security Officer).
● Nodeware™ and Webroot™ software offerings consist of fees generated from the use of the respective software by our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Substantially all customers are billed in the month of the service and is cancellable upon notice per the respective agreements. Substantially all payments are electronically billed, and the billed amounts are paid to the Company instantaneously via an online payment platform. If payments are made in advance, revenues related to the term associated with our software licenses is recognized ratably over the contractual period.
● Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our standalone selling price.
● Cybersecurity assessments, testing and vCISO services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For substantially all these contracts, revenue is recognized when the specific performance obligation is satisfied. If the contract has multiple performance obligations, the revenue is recognized when the performance obligations are satisfied. Depending on the nature of the service, the amounts recognized are either based on an allocation of the transaction price to each performance obligation based on a relative standalone selling price of the products sold.
● In substantially all agreements, a 50% to 75% down payment is required before work is initiated. Down payments received are deferred until revenue is recognized. For the year ended December 31, 2019, we recognized revenue of $17,497 that was included in the accrued expenses-other liability balance at the beginning of the period presented. Deferred revenue that will be realized during the succeeding 12-month period is $168,824, and the remaining deferred revenue of $10,000 is scheduled to be realized in 2022.
Other IT consulting services consists of services such as project management and general IT consulting services.
● We generate revenue via fixed price service agreements. These are based on periodic billings of a fixed dollar amount for recurring services of a similar nature performed according to the contractual arrangements with clients. The revenues are recognized at time of service.
Based on historical experience, the Company believes that collection is reasonably assured.
During 2019, sales to one client, including sales under subcontracts for services to several entities, accounted for 62.6% of total sales (69.7% - 2018) and 22.1% of accounts receivable at December 31, 2019 (10.5% - 2018).
The Company periodically reviews tax positions taken to determine if it is more likely than not that the position would be sustained upon examination. The Company did not have any material unrecognized tax benefit at December 31, 2019 or 2018. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2019 and 2018, the Company recognized no interest and penalties.
The Company files U.S. federal tax returns and tax returns in various states. The tax years 2016 through 2019 remain open to examination by the taxing jurisdictions to which the Company is subject.
Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 is defined as unobservable inputs in which little or no market data exist and requires the Company to develop its own assumptions.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The carrying amounts of cash, accounts receivable and accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity. Based on the borrowing rates currently available to the Company for loans similar to its term debt and notes payable, the fair value approximates the carrying amounts.
The following table sets forth the computation of basic and diluted loss per share as of December 31, 2019 and 2018:
Certain common shares issuable under stock options and convertible notes payable have been omitted from the diluted net income (loss) per share calculation because their inclusion is considered anti-dilutive because the exercise or conversion prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.
NOTE 4. - PROPERTY AND EQUIPMENT
Depreciation expense was $4,567 and $10,267 for the years ended December 31, 2019 and 2018, respectively.
NOTE 5. - LOAN FEES
The unamortized deferred financing costs are recorded as a reduction of the principal owed and are expensed over the life of the debt or the extension period. At December 31, 2019, the Company has deferred financing costs of $52,220 less accumulated amortization expenses of $39,110 ($25,195 - 2018) with a net carrying value of $13,110 ($27,025 - 2018). These amounts are shown as a reduction to the debt. See Note 7.
NOTE 6. - NOTES PAYABLE - CURRENT
NOTE 7. - LONG-TERM OBLIGATIONS
The Company executed collateral security agreements with the note holders providing for a subordinate security interest in all the Company’s assets. Generally, upon notice, prior to the note maturity date, the Company can prepay all or a portion of the outstanding notes.
The Notes are convertible into shares of common stock subject to the following limitations: The Notes are not convertible to the extent that shares of common stock issuable upon the proposed conversion would result in a change in control of the Company which would limit the use of its net operating loss carryforwards; provided, however, if the Company closes a transaction with another third party or parties that results in a change of control which will limit the use of its net operating loss carryforwards, then the foregoing limitation shall lapse. Prior to any conversion by a requesting note holder, each note holder holding a note which is then convertible into 5% or more of the Company’s common stock shall be entitled to participate on a pari passu basis with the requesting note holder and upon any such participation the requesting note holder shall proportionately adjust his conversion request such that, in the aggregate, a change of control, which will limit the use of the Company’s net operating loss carryforwards, does not occur.
As of December 31, 2019, minimum future annual payments of long-term obligations and amortization of deferred financing costs are as follows:
NOTE 8. - STOCKHOLDERS' DEFICIENCY
NOTE 9. - STOCK OPTION PLANS AND AGREEMENTS
The Company grants stock options to its key employees and independent service providers as it deems appropriate. Options expire from five to ten years after the grant date.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions. Volatility is based on the Company’s historical volatility. The expected life of the options was determined using the simplified method for plain vanilla options as stated in FASB ASC 718 to improve the accuracy of this assumption while simplifying record keeping requirements until more detailed information about the Company’s exercise behavior is available. The risk-free rate for the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The following assumptions were used for the years ended December 31, 2019 and 2018.
The following is a summary of stock option activity, including qualified and non-qualified options for the years ended December 31, 2019 and 2018:
At December 31, 2019, there was $0 of total unrecognized compensation cost related to outstanding non-vested options.
The weighted average fair value of options granted was $.03 and $.01 per share for the years ended December 31, 2019 and 2018, respectively. The exercise price for all options granted equaled or exceeded the market value of the Company’s common stock on the date of grant.
NOTE 10. - INCOME TAXES
At December 31, 2019, the Company had federal net operating loss carryforwards of approximately $7,300,000 ($7,600,000 - 2018) and various state net operating loss carryforwards of approximately $3,200,000 ($3,400,000 - 2018) which expire from 2020 through 2039. These carryforwards exclude federal net operating loss carryforwards from inactive subsidiaries and net operating loss carryforwards from states that the Company does not presently operate in. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of the net operating loss carryforwards before utilization.
At December 31, 2019, a net deferred tax asset, representing the future benefit attributed primarily to the available net operating loss carryforwards and defined benefit plan expenses in the amount of approximately $1,943,000 ($1,998,000 - 2018), had been fully offset by a valuation allowance because management believes that the statutory limitations on utilization of the operating losses and concerns over achieving profitable operations diminish the Company’s ability to demonstrate that it is more likely than not that these future benefits will be realized before they expire.
The following is a summary of the Company's temporary differences and carryforwards which give rise to deferred tax assets and liabilities.
The differences between the U.S. statutory federal income tax rate and the effective income tax rate in the accompanying statements of operations are as follows:
NOTE 11. - EMPLOYEE RETIREMENT PLANS
NOTE 12. - LEASE
Beginning on August 1, 2016, the Company leases its headquarters facility under an operating lease agreement that expires on June 30, 2022. The Company has the right to terminate the lease upon six months prior notice after three years of occupancy. Rent expense is $80,000 annually during the first year of the lease term and increases by 1.5% annually thereafter.
Upon adoption of the ASU on January 1, 2019, the Company recognized a right-of-use asset of $265,825 and a lease liability of $265,825 related to the existing office lease that is classified as an operating lease.
Supplemental balance sheet information related to the operating lease was as follows:
NOTE 13. - RELATED PARTY ACCRUED INTEREST PAYABLE
NOTE 14. - SUBSEQUENT EVENT
In December 2019, a novel strain of coronavirus was reported in Wuhan, Hubei province, China. In the first several months of 2020, the virus, SARS-CoV-2, and resulting disease, COVID-19, spread to the United States, including New York State, the geographic location in which the Company’s headquarters operates. On March 21, 2020, New York Governor Andrew Cuomo issued an Executive Order entitled “New York State on PAUSE” (Policy that Assures Uniform Safety for Everyone) (the “Order”), pursuant to which, all non-essential employees (as defined by the State) must stay at home starting March 22, 2020 through April 19, 2020. The Company was deemed essential. On March 25, 2020, Colorado Governor Jared Polis announced an executive order for Coloradans to stay at home in order to help prevent the spread of coronavirus. The stay-at-home order went into effect Thursday, March 26, 2020 at 6 a.m. and will last through Saturday, April 11, 2020.
Beginning March 16, 2020, prior to the Order, most of the Company’s New York employees began temporarily working remotely to ensure the safety and well-being of our employees and their families. The Colorado employees began working remotely on March 26, 2020. The Company’s technology infrastructure, for some time, has been set up to handle offsite seamless operations to address alternative disaster recovery disruption. As a result, all employees will continue to work remotely unless they report needing sick leave or family leave pursuant to regulated benefits.
