Note 2. Management Plans - Capital Resources
The
Company reported net loss of $6,062 and a net income of $35,036 for
the three months ended March 31, 2020 and 2019, respectively, and
stockholders’ deficiencies of $3,911,242 and $3,907,310 at
March 31, 2020 and December 31, 2019, respectively. Accordingly and
due to current working capital deficit of approximately $3.4
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 goal is to increase
sales and generate cash flow from operations on a consistent basis.
The Company uses a formal financial review and budgeting process as
a tool for improvement that has aided expense reduction and
internal performance. The Company’s business plans require
improving the results of its operations in future
periods.
The
Company believes the capital resources available under its
factoring line of credit, cash from additional related party and
third-party loans and cash generated by improving the results of
its operations provide sources to fund its ongoing operations and
to support the internal growth of the Company. Although the Company
has no assurances, the Company believes that related parties, who
have previously provided working capital, and third parties will
continue to provide working capital loans on similar terms, as in
the past, as may be necessary to fund its on-going operations for
at least the next 12 months. If the Company experiences significant
growth in its sales, the Company believes that this may require it
to increase its financing line, finance additional accounts
receivable, or obtain additional working capital from other sources
to support its sales growth.
Note
3. Summary of Significant Accounting Policies
There
are several accounting policies that the Company believes are
significant to the presentation of its financial statements. These
policies require management to make complex or subjective judgments
about matters that are inherently uncertain. Note 3 to the
Company’s audited financial statements for the year ended
December 31, 2019 presents a summary of significant accounting
policies as included in the Company's Annual Report on Form 10-K as
filed with the SEC.
Reclassifications - The Company reclassifies amounts in its
financial statements to comply with recently adopted accounting
pronouncements.
Fair Value of Financial Instruments - The carrying amounts
reported in the balance sheets for cash, accounts receivable,
accounts payable, and accrued expenses approximate fair value
because of the immediate short-term maturity of these financial
instruments. The carrying value of notes payable and convertible
notes payable approximates the fair value based on rates currently
available from financial institutions and various
lenders.
Revenue -
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 March 31, 2020 or 2019 for contracts with an
expected original duration of more than one year. The following
table summarizes the revenue recognized by the major
services:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
$1,141,761
|
$1,228,747
|
Cybersecurity
projects and software
|
646,834
|
310,608
|
|
Other IT consulting
services
|
111,000
|
148,439
|
|
Total
sales
|
$1,899,595
|
$1,687,794
|
Managed support services
Managed
support services consist of revenue primarily from our subcontracts
for services to its end clients, principally a major establishment
of the U.S. Government for which we manage one of the
nation’s largest physical and virtual Microsoft Windows
environments.
●
We generate revenue primarily from these subcontracts through fixed
price service and support agreements. Revenues are earned and
billed weekly and are generally paid within 45 days. The revenues
are recognized at time of service.
Cybersecurity projects and software
Cybersecurity
projects and software revenue includes the selling of licenses of
Nodeware® and third-party software, principally Webroot™
as well as performing cybersecurity assessments and
testing.
●
Nodeware® and Webroot™ software offerings consist of
fees generated from the use of the respective software by our
customers. Revenue is recognized on a ratable basis over the
contract term beginning on the date that our service is made
available to the customer. Substantially all customers are billed
in the month of the service and is cancellable upon notice per the
respective agreements. Substantially all payments are
electronically billed, and the billed amounts are paid to the
Company instantaneously via an online payment platform. If payments
are made in advance, revenues related to the term associated with
our software licenses is recognized ratably over the contractual
period.
●
Some of our customers have the option to purchase additional
subscription and support services at a stated price. These options
generally do not provide a material right as they are priced at our
standalone selling price.
●
Cybersecurity assessments and testing services are considered
distinct performance obligations when sold stand alone or with
other products. These contracts generally have terms of one year or
less. For substantially all these contracts, revenue is recognized
when the specific performance obligation is satisfied. If the
contract has multiple performance obligations, the revenue is
recognized when the performance obligations are satisfied.
Depending on the nature of the service, the amounts recognized are
based on an allocation of the transaction price to each performance
obligation based on a relative standalone selling price of the
products sold.
●
In substantially all agreements, a 50% to 75% down payment is
required before work is initiated. Down payments received are
deferred until revenue is recognized. Upon completion of
performance obligation of service, payment terms are 30
days.
Other IT consulting services
Other
IT consulting services consists of services such as project
management and general IT consulting services.
●
We generate revenue via fixed price service agreements. These
are based on periodic billings of a fixed dollar amount for
recurring services of a similar nature performed according to the
contractual arrangements with clients. The revenues are
recognized at time of service.
Based
on historical experience, the Company believes that collection is
reasonably assured.
During
the three months ended March 31, 2020, sales to one client,
including sales under subcontracts for services to several
entities, accounted for 58.4% of total sales (65.0% - 2019) and
48.9% of accounts receivable at March 31, 2020 (22.1% - December
31, 2019).
Capitalization of Software for Resale - The Company
capitalizes the software development costs for software to be sold,
leased, or otherwise marketed. Capitalization begins upon the
establishment of technological feasibility of a new product or
enhancements to an existing product, which is generally the
completion of a working prototype that has been certified as having
no critical bugs and is a release candidate. Costs incurred after
the enhancement has reached technological feasibility and before it
is released in the market are capitalized and are primarily labor
costs related to coding and testing. Amortization begins once the
software is ready for its intended use, generally based on the
pattern in which the economic benefits will be consumed. Costs
associated with major upgrade releases begin amortization in the
month after release. The amortization period is three years. As of
March 31, 2020, there was $251,737 of costs capitalized ($194,215
as of December 31, 2019) and $19,077 of accumulated amortization
($9,539 as of December 31, 2019). During the quarter ended March
31, 2020 there was $9,538 of amortization expense recorded ($0 in
2019). Costs incurred prior to reaching technological feasibility
are expensed as incurred. Labor amounts expensed related to these
development costs amounted to approximately $17,400 and $49,100
during the quarter ended March 31, 2020 and 2019,
respectively.
Leases - In February 2016, the FASB issued amended guidance
for lease arrangements to increase transparency and comparability
by providing additional information to users of financial
statements regarding an entity's leasing activities. The new
standard requires entities to recognize a liability for their lease
obligations and a corresponding right-of-use asset, initially
measured at the present value of the lease payments. Subsequent
accounting depends on whether the agreement is deemed to be a
financing or operating lease. For operating leases, a lessee
recognizes its total lease expense as an operating expense over the
lease term. For financing leases, a lessee recognizes amortization
of the right-of-use asset as an operating expense over the lease
term separately from interest on the lease liability. The ASU
requires that assets and liabilities be presented and disclosed
separately, and the liabilities must be classified appropriately as
current and noncurrent. The ASU further requires additional
disclosure of certain qualitative and quantitative information
related to lease agreements. The ASU was effective for the Company
beginning on January 1, 2019, at which time we adopted the new
standard using the modified retrospective approach as of the date
of adoption. Upon
adoption, we recognized a right-of-use asset of $265,825 and a
lease liability of $265,825 related to the existing office lease
that is classified as an operating lease. Supplemental balance
sheet information related to the lease on March 31, 2020 and
December 31, 2019 is as follows:
|
Description
|
Classification
|
|
|
|
Right of Use Asset
– Lease, net
|
Other
assets (non-current)
|
$177,189
|
$195,441
|
|
Operating Lease
liability – Short-term
|
Accrued
liabilities
|
75,809
|
74,373
|
|
Operating Lease
liability – Long-term
|
Other long-term
liabilities
|
103,119
|
122,605
|
Note 4. Sale of Certain Accounts Receivable
The
Company has available a financing line with a financial institution
(the Purchaser), which enables the Company to sell accounts
receivable to the Purchaser with full recourse against the Company.
Pursuant to the provisions of FASB ASC 860, the Company reflects
the transactions as a sale of assets and establishes an accounts
receivable from the Purchaser for the retained amount less the
costs and fees of the transaction and less any anticipated future
loss in the value of the retained asset.
The
retained amount is 10% of the total accounts receivable invoice
sold to the Purchaser. The fee is charged at prime plus 3.6%
(effective rate of 6.85% at March 31, 2020) against the average
daily outstanding balance of funds advanced. The estimated future
loss reserve for each receivable included in the estimated value of
the retained asset is based on the payment history of the accounts
receivable customer and is included in the allowance for doubtful
accounts, if any. As collateral, the Company granted the Purchaser
a first priority interest in accounts receivable and a blanket
lien, which may be junior to other creditors, on all other
assets.
The
financing line provides the Company the ability to finance up to
$2,000,000 of selected accounts receivable invoices, which includes
a sublimit for one of the Company’s customers of $1,500,000.
During the three months ended March 31, 2020, the Company sold
approximately $1,052,000 ($1,082,000 - March 31, 2019) of its
accounts receivable to the Purchaser. As of March 31, 2020,
approximately $99,000 ($324,000 - December 31, 2019) of these
receivables remained outstanding. Additionally, as of March 31,
2020, the Company had approximately $156,000 available under the
financing line with the financial institution ($67,000 - December
31, 2019). After deducting estimated fees, allowance for bad debts
and advances from the Purchaser, the net receivable from the
Purchaser amounted to $9,900, at March 31, 2020 ($32,400 - December
31, 2019), and is included in accounts receivable in the
accompanying balance sheets.
There
were no gains or losses on the sale of the accounts receivable
because all were collected. The cost associated with the financing
line totaled $11,026 for the three months ended March 31, 2020
($13,782 - March 31, 2019). These financing line fees are
classified on the statements of operations as interest
expense.
Note 5: Debt Obligations
Three
debt obligations became due on January 1, 2020. The total amount of
these debt instruments is approximately $774,000 as of March 31,
2020. The due dates have not been extended. The amount of debt with
related parties is approximately $510,000 as of March 31,
2020.
Note 6. Earnings per Share
Basic
earnings per share is based on the weighted average number of
common shares outstanding during the periods presented. Diluted
earnings per share is based on the weighted average number of
common shares outstanding, as well as dilutive potential common
shares which, in the Company’s case, comprise shares issuable
under convertible notes payable and stock options. The treasury
stock method is used to calculate dilutive shares, which reduces
the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options and warrants assumed
to be exercised. In a loss period, the calculation for basic and
diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.
The
following table sets forth the computation of basic and diluted net
income (loss) per share for the three months ended:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
Numerator for basic
and diluted net income (loss) per share:
|
|
|
|
Net
income (loss)
|
$(6,062)
|
$35,036
|
|
Basic and diluted
net income (loss) per share
|
$.00
|
$.00
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
|
Basic and diluted
shares
|
29,061,883
|
29,061,883
|
|
|
|
|
|
Anti-dilutive
shares excluded from net income (loss) per share
calculation
|
32,673,741
|
28,123,143
|
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 prices were greater than the
average market price of the common shares or their inclusion would
have been anti-dilutive.
Note 7. Stock Option Plans and Agreements
The
Company has approved stock options plans and agreements covering up
to an aggregate of 11,020,000 shares of common stock. Such options
may be designated at the time of grant as either incentive stock
options or nonqualified stock options. Stock based compensation
consists of charges for stock option awards to employees, directors
and consultants.
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. 75,000 options were
granted for the three months ended March 31, 2020. 50,000 options
were granted for the three months ended March 31, 2019. The
following assumptions were used for the three months ended March
31, 2020.
|
Risk-free interest
rate
|
1.40%
|
|
Expected dividend
yield
|
0%
|
|
Expected stock
price volatility
|
100%
|
|
Expected life of
options
|
2.75 years
|
The
Company recorded expense for options issued to employees and
independent service providers of $2,130 and $260 for the three
months ended March 31, 2020 and 2019, respectively.
At
March 31, 2020, there was no unrecognized compensation cost related
to non-vested options. 25,000 options vested during the three
months ended March 31, 2020.
A
summary of all stock option activity for the three months ended
March 31, 2020 follows:
|
|
Number
of Options Outstanding
|
Weighted
Average Exercise Price
|
|
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at
December 31, 2019
|
10,910,500
|
$.05
|
|
|
|
|
|
Granted
|
75,000
|
.05
|
|
|
|
|
|
Forfeited
|
0
|
.00
|
|
|
|
|
|
Expired
|
(35,000)
|
.05
|
|
|
|
|
|
Outstanding at
March 31, 2020
|
10,950,500
|
$.05
|
|
3.8
years
|
|
$174,700
|
|
|
|
|
|
|
|
|
|
At March 31, 2020 -
vested or
|
|
|
|
|
|
|
|
expected to vest
and exercisable
|
10,950,500
|
$.05
|
|
3.8
years
|
|
$174,700
|
Note 8. Related Party Accounts Receivable and Accrued Interest
Payable
Included
in accrued interest payable is amounts due to related parties of
$165,216 at March 31, 2020 ($157,067 - December 31,
2019).
Note 9. Subsequent Events
Subsequent
to March 31, 2020, the Company entered into a U. S. Small Business
Administration (“SBA”) Note Payable agreement (the
“Note”) with Upstate National Bank
(“Lender”). The signed Note was provided to the Company
on April 10, 2020. The Note provides funding to the Company in the
amount of $957,373 and is restricted to certain uses and cannot be
used to repay debt. The interest rate on the Note is fixed at 1.00%
and the payments of principal and interest shall be deferred for
six months from the date of the Note. Interest shall continue to
accrue. The loan evidenced by the Note was made under the Paycheck
Protection Plan (15 U.S.C. § 636(a)(36)) enacted by Congress
under the Coronavirus Aid, Relief and Economic Security Act (the
“Act”). The Act (including the guidance issued by SBA
and U.S. Department of the Treasury related thereto) provides that
all or a portion of this Note may be forgiven upon request from
Borrower to Lender, subject to requirements in the Note and
Act. All remaining
principal and accrued interest is due and payable two (2) years
from date of Note.
On
April 15, 2020, the Company’s Board approved the 2020 stock
option plan, which grants options to purchase up to an aggregate of
1,500,000 common shares. Options are nonqualified since the Company
has decided not to seek stockholder approval of the 2020
Plan.
************
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This
discussion contains forward-looking statements, the accuracy of
which involves risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking
statements for many reasons including, but not limited to, those
discussed under the heading “Forward Looking
Statements” above and elsewhere in this report. We disclaim
any obligation to update information contained in any
forward-looking statements.
The
following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction
with our financial statements and the notes thereto appearing
elsewhere in this report.
Impact of COVID-19 on Our Business
The
COVID-19 pandemic has resulted, and is likely to continue to
result, in significant economic disruption. It has already
disrupted global travel and supply chains and adversely impacted
global commercial activity. Considerable uncertainty still
surrounds COVID-19 and its potential long-term economic effects, as
well as the effectiveness of any responses taken by government
authorities and businesses. The travel restrictions, limits on
hours of operations and/or closures of non-essential businesses,
and other efforts to curb the spread of COVID-19 have significantly
disrupted business activity globally.
During
the first quarter of 2020, our managed support services,
cybersecurity projects and software license revenues were minimally
impacted by the impact of the COVID-19 pandemic on our
customers’ operational priorities. We are also continuing to
adapt our operations to meet the challenges of this uncertain and
rapidly evolving situation, including establishing remote working
arrangements for our employees, limiting non-essential business
travel, and transitioning towards virtual sales and marketing
events. Our sales and marketing expenses decreased during the first
quarter of 2020, and we expect these expenses will be lower
compared to prior year periods due to the ongoing impact of the
COVID-19 pandemic on travel and in-person marketing events.
We will continue to actively monitor the nature and extent of the
impact to our business, operating results, and financial
condition.
Business
Headquartered
in Pittsford, New York, Infinite Group, Inc. is a provider of
managed IT and virtualization services and a developer and provider
of cybersecurity tools and solutions to private businesses and
government agencies. As part of these services we:
●
focus on key
security services (virtual CISO, compliance review and assessment,
incident response, penetration testing, 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 security 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 a
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 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.
Our
goal is to maintain our base of opportunities in our VMware
business in both the public and commercial sector.
Opportunistically, we will continue to identify license and
services engagements as they arise.
We are
working to expand our managed services business with our prime
partner, Perspecta, and the current federal enterprise customer and
its customers.
Results of Operations
Comparison of the Three Months Ended March 31, 2020 and
2019
The
following table compares our statements of operations data for the
three months ended March 31, 2020 and 2019. The trends suggested by
this table are not indicative of future operating
results.
|
|
Three Months Ended March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$1,899,595
|
100.0%
|
$1,687,794
|
100.0%
|
$211,801
|
12.5%
|
|
Cost of
sales
|
1,123,066
|
59.1
|
1,057,170
|
62.6
|
65,896
|
6.2
|
|
Gross
profit
|
776,529
|
40.9
|
630,624
|
37.4
|
145,905
|
23.1
|
|
General and
administrative
|
374,530
|
19.7
|
277,605
|
16.4
|
96,925
|
34.9
|
|
Selling
|
346,701
|
18.3
|
253,306
|
15.0
|
93,395
|
36.9
|
|
Total costs and
expenses
|
721,231
|
38.0
|
530,911
|
31.4
|
190,320
|
35.8
|
|
Operating
income
|
55,298
|
2.9
|
99,713
|
5.9
|
(44,415)
|
(44.5)
|
|
Interest
expense
|
(61,360)
|
(3.2)
|
(64,677)
|
(3.8)
|
(3,317)
|
(5.1)
|
|
Net income
(loss)
|
$(6,062)
|
(0.3)%
|
$35,036
|
2.1%
|
$(41,098)
|
(117.3)%
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share - basic and diluted
|
$.00
|
|
$.00
|
|
$.00
|
|
Sales
Our
managed support service sales comprised approximately 60% of our
sales in 2020 and approximately 73% in 2019. Our cybersecurity
projects and software sales, primarily to SMEs, were approximately
34% of our total sales as compared to approximately 18% for
2019.
Sales
of virtualization subcontract projects have continued to decrease
since 2015 because VMware has continued to assign fewer projects to
us. Our virtualization subcontract project sales decrease of
approximately 76% from 2019 to 2020 was more than offset by sales
growth of approximately 108% from our cybersecurity projects and
software business during the three months ended March 31, 2019 as
compared to 2018. Our goal is to continue to grow our cybersecurity
projects and software business by using our expanding salesforce as
well as channel partners. We also hope to recapture some of our
VMware business in both the public and commercial sector by
building VMware license sales volume and services concurrently
directly with customers rather than relying on subcontract project
services. Other IT projects comprised the balance of our
sales.
Cost
of Sales and Gross Profit
Cost of
sales principally represents the cost of employee services related
to our IT Services Group. We have grown our cybersecurity projects
team to meet demand and terminated some support personnel in the
last year as part of efficiency measures. As virtualization project
sales decreased, related personnel cost of sales also
decreased.
Our
gross profit improved by $145,905 primarily due to improved
cybersecurity projects sales and better cost containment of
salaries as noted.
General
and Administrative Expenses
General
and administrative expenses include corporate overhead such as
compensation and benefits for executive, administrative and finance
personnel, rent, insurance, professional fees, travel, and office
expenses. General and administrative expenses increased due
primarily to personnel increases and increases to professional fees
for legal and accounting services.
Selling
Expenses
The
increase in selling expenses is due to the hiring of salespeople
throughout 2019 to sell our cybersecurity services and software and
associated commissions due to the increased sales. The increase in
selling expenses from the hiring of new personnel was offset by
approximately $57,000 for capitalized labor relating to software
development costs.
Operating
Income
The
decrease in our operating income from the previous year is
principally attributable to the growth of our sales team and the
associated costs as well as professional fees incurred for the
three months ended March 31, 2020 as compared to 2019.
Interest
Expense
The
decrease in interest expense is principally attributable to the
decrease in interest rates over the last year.
Net
Income (loss)
The
decrease is attributable to the items discussed above for the three
months ended March 31, 2020 as compared to 2019.
Liquidity and Capital Resources
At
March 31, 2020, we had cash of $106,439 available for working
capital needs and planned capital asset expenditures. At March 31,
2020, we had a working capital deficit of approximately $3,386,000
and a current ratio of .15.
During
2020, we financed our business activities principally through cash
flows provided by operations and sales with recourse of our
accounts receivable. Our primary source of liquidity is cash
provided by collections of accounts receivable and our factoring
line of credit. We maintain an accounts
receivable financing line of credit with an independent financial
institution that allows us to sell selected accounts receivable
invoices to the financial institution with full recourse against us
in the amount of $2,000,000, including a sublimit for one major
client of $1,500,000. This provides us with the cash needed to
finance certain of our on-going costs and expenses. At March 31,
2020, we had financing availability, based on eligible accounts
receivable, of approximately $156,000 under this line. We pay fees
based on the length of time that the invoice remains
unpaid.
We
entered into unsecured lines of credit financing agreement (the
“LOC Agreements”) with three related parties in
previous years. The LOC Agreements provide for working capital of
up to $400,000 through January 1, 2020, $100,000 through July 31,
2022 and $75,000 through January 2, 2023. At March 31, 2020, we had
approximately $38,000 of availability under the LOC
Agreements.
At
March 31, 2020, we have current notes payable of $332,500 to third
parties, which includes convertible notes payable of $290,000. Also
included is $12,500 in principal amount of a note payable due on
June 30, 2016 but not paid. This note was issued in payment of
software we purchased in February 2016 and secured by a security
interest in the software. To date, the holder has not taken any
action to collect the amount past due on this note or to enforce
the security interest in the software.
We have
$950,000 of current maturities of long-term obligations to third
parties. This is comprised of various notes including $264,000 due
on January 1, 2020 which
has not been extended. We also have current maturities of long-term
obligations of approximately $246,000 to the Pension Benefit
Guaranty Corporation (the PBGC) with all principal due by September
15, 2018, which the due date has not been extended. We have
maturities of our long-term notes to third parties of $265,000 due
on January 1, 2018, which has not been renewed or amended and
$175,000 due on August 31, 2018, which have not been renewed or
amended.
We also
have current maturities of our long-term debt to related parties of
approximately $544,000 of which approximately $510,000 was due on
January 1, 2020 and has not been extended. Also included is a note
payable for $25,000 due to an officer of the Company which is due
on March 31, 2021 and a separate note for $9,000 due on January 1,
2021. We also have a current demand note payable to a related party
of $34,000.
We plan
to renegotiate the terms of the various 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.
We have
a LOC Agreement which was entered into on September 17, 2017 and
provides for working capital of up to $75,000 with interest at 6%
due quarterly through January 2, 2023. The balance is $70,000 at
March 31, 2020.
We
cannot provide assurance that we will be able to repay current
notes payable or obtain extensions of maturity dates for long-term
notes payable when they mature or that we will be able to repay or
otherwise refinance the notes at their scheduled
maturities.
We have
long-term obligations to third parties of $500,000 due on December
31, 2021.
We have
an unsecured line of credit financing agreement with our Chief
Operating Officer. It provides for working capital of up to
$100,000 with an interest rate of prime plus 1.5% due quarterly
through July 31, 2021. The balance is $90,000 at March 31,
2020.
We have
a note payable agreement for up to $500,000 with a related party.
The note has an interest rate of 7.5% and is due on August 31,
2026. The balance is $200,000 at March 31, 2020.
The following table
sets forth our cash flow information for the periods
presented:
|
Three
Months Ended March 31,
|
|
|
|
|
|
Net cash provided
(used) by operating activities
|
$169,167
|
$(15,203)
|
|
Net cash used by
investing activities
|
(62,446)
|
0
|
|
Net cash used by
financing activities
|
(6,680)
|
(2,010)
|
|
Net increase
(decrease) in cash
|
$100,041
|
$(17,213)
|
Cash
Flows Provided (Used) by Operating Activities
Our
operating cash flow is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect
from our clients in a timely manner, and our ability to manage our
vendor payments. We bill our clients weekly or monthly after
services are performed as well as collect down payments depending
on the contract terms. Our net loss of $6,062 for 2020 was offset
in part by non-cash expenses and credits of $19,406. In addition, a
decrease in accounts receivable and other assets of $5,828, offset
by an increase in accrued payroll and other expenses payable of
$78,002 and in accounts payable of $71,993 resulting in cash
provided by operating activities of $169,167.
We
market Webroot and Nodeware to our IT channel partners who resell
to their customers. We continue to make investments in expanding
our sales of cyber security and Nodeware licenses to a growing
channel and direct commercial customers. Due to the time of
investment in cultivating relationships with our channel partners
and end customers needed to generate these new sales, we do not
expect to realize a return from our sales and marketing efforts for
one or more quarters. As a result, we may continue to experience
operating losses from these investments in personnel until
sufficient sales are generated. We expect to fund the cost for the
new sales personnel from our operating cash flows and incremental
borrowings, as needed.
Cash
Flows Used by Investing Activities
Cash
used by investing activities was $62,446 during the three months
ended March 31, 2020. It was primarily for capitalization of
software development costs as well as computer hardware for new
employees.
Cash
Flows Used by Financing Activities
Cash
used by financing activities was $6,680 for the three months ended
March 31, 2020 consisted of principal repayments to related
parties.
Credit Resources
We
believe the capital resources available under our factoring line of
credit, cash from additional related party and third-party loans
and cash generated by improving the results of our operations
provide sources to fund our ongoing operations and to support our
internal growth. Although we have no assurances, we believe that
related parties, who have previously provided working capital, and
third parties will continue to provide working capital loans on
similar terms, as in the past, as may be necessary to fund our
on-going operations for at least the next 12 months, however,
substantial doubt about our ability to continue as a going concern
has not been alleviated. If we experience significant growth in its
sales, we believe that this may require us to increase our
financing line, finance additional accounts receivable, or obtain
additional working capital from other sources to support its sales
growth.
We plan
to evaluate alternatives which may include renegotiating the terms
of our notes, seeking conversion of the notes to shares of common
stock and seeking funds to repay our notes. We continue to evaluate
repayment of our notes payable based on its cash flow.