As filed with the Securities and Exchange Commission on November 1, 2022

Registration No. 333-262167

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1/A

(Pre-Effective Amendment No. 8)

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

INFINITE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

7372

 

52-1490422

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

Infinite Group, Inc.

175 Sully’s Trail, Suite 202

Pittsford, New York 14534

(585) 385-0610

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

James Villa

Chief Executive Officer

Infinite Group, Inc.

175 Sully’s Trail, Suite 202

Pittsford, New York 14534

(585) 385-0610

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With copies to:

 

Alexander R. McClean, Esq.

C. Christopher Murillo, Esq.

Harter Secrest & Emery LLP

1600 Bausch & Lomb Place

Rochester, New York 14604

(585) 232-6500

 

Anthony W. Basch, Esq.

J. Britton Williston, Esq.

Kaufman & Canoles, P.C.

1021 East Cary Street, Suite 1400

Richmond, Virginia 23219

(804) 771-5700

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated Filer

☒

Smaller reporting company

☒

 

 

Emerging growth company

☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

_______________________________________

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the Company is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED NOVEMBER 1, 2022

 

Up to 3,500,000 Common Units

Each Consisting of

    

One Share of Common Stock and

Three Redeemable Warrants Each to Purchase One Share of Common Stock

 

Up to 3,500,000 Pre-funded Units

Each Consisting of

 

One Pre-funded Warrant to Purchase One Share of Common Stock and

Three Redeemable Warrants Each to Purchase One Share of Common Stock

  

imci_s1aimg2.jpg

This prospectus relates to the firm commitment public offering of 3,500,000 units of Infinite Group, Inc. (“Infinite Group,” the “Company,” “we,” “our,” or “us”), a Delaware corporation, based on an assumed initial offering price of $4.38 per common unit. We are offering up to 3,500,000 of units consisting of either (i) one share of common stock and three redeemable warrants each to purchase one share of common stock (the “common units”); or (ii) one pre-funded warrant to purchase one share of common stock at an exercise price of $0.001 per share and three redeemable warrants each to purchase one share of common stock (the “pre-funded units” and together with the common units, the “units”). We anticipate that the initial public offering price will be $4.38. The offering price of units at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business, may be at a discount to the current market price of our shares of common stock.

 

The pre-funded units are being offered to purchasers in lieu of common units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock. There can be no assurance that we will sell any of the pre-funded units being offered.  The purchase price of each pre-funded unit is equal to the price per unit being sold to the public in this offering, minus $0.001. The pre-funded warrants will be immediately exercisable and may be exercised at any time until all of the pre-funded warrants are exercised in full. We are offering the pre-funded units at an assumed public offering price of $4.379 per pre-funded unit based on an assumed initial offering price of $4.38 per common unit.

 

The units have no stand-alone rights and will not be certificated or issued as stand-alone securities. The shares of our common stock or pre-funded warrants, as the case may be, and the redeemable warrants comprising our units can only be purchased together in this offering, but the securities included in the units are immediately separable and will be issued separately in this offering.

 

The redeemable warrants included within the units will be exercisable immediately, have an exercise price per share of common stock of $4.00, and will expire five years from the date of issuance or when redeemed.

  

Our common stock is presently traded on the over-the-counter market and quoted on the OTCQB market under the symbol “IMCI.” We have applied to list our common stock and redeemable warrants on the Nasdaq Capital Market under the symbols “IMCI” and “IMCIW,” respectively. No assurance can be given that our application will be approved. On October 13, 2022, the last reported sale price of our common stock was approximately $5.4225 per share after giving effect to the 75-to-1 reverse stock split. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not complete this offering. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system.

 

The final offering price of the units will be determined between the underwriter and us at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business, and may be at a discount to the current market price. Therefore, the recent market price used throughout this prospectus may not be indicative of the actual public offering price for our units.

  

On December 15, 2021, our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1, to be effective at the ratio and date to be determined by our board of directors. Our stockholders approved the reverse stock split range at our annual meeting on January 26, 2022. On October 17, 2022 our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio of 75-to-1, which became effective October 19, 2022. Unless otherwise noted, the share and per share information in this prospectus reflects the effect of the reverse stock.

 

This prospectus contains or incorporates by reference summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information. All summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed or have been incorporated by reference as exhibits to the registration statement of which this prospectus forms a part, and you may obtain copies of those documents as described in this prospectus under the heading “Where You Can Find More Information.”

 

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus. You should carefully consider these risk factors, as well as the information contained in this prospectus before you invest.

 

 

 

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

Per Unit

 

 

Total

 

Public Offering Price

 

$

 

 

$

 

Underwriting Discounts and Commissions (1)

 

$

 

 

$

 

Proceeds to us before expenses (2)

 

$

 

 

$

 

   

1.

We have also agreed to issue warrants to purchase shares of our common stock to the underwriter and to reimburse the underwriter for certain expenses. Does not include a non-accountable expense allowance equal to 1% of the public offering price. See “Underwriting” for additional information regarding total underwriter compensation.

 

 

2.

The amount of offering proceeds to us presented in this table does not give effect to any exercise of the: (i) over-allotment option (if any) we have granted to the managing underwriter as described below and (ii) warrants being issued to the underwriter in this offering; or (iii) the redeemable warrants.

 

We have granted the underwriters a 45-day option to purchase up to 525,000 additional shares of common stock and/or pre-funded warrants, representing 15% of the shares and pre-funded warrants sold in the offering and/or up to 1,575,000 additional redeemable warrants, representing 15% of the redeemable warrants sold in the offering, solely to cover over-allotments, if any. The purchase price to be paid per additional share of common stock will be equal to the public offering price of one common unit, less the purchase price for the redeemable warrants included within the common unit and the underwriting discount. The purchase price to be paid per pre-funded warrant will be equal to the public offering price of one pre-funded unit, less the purchase price for the one redeemable warrant included within the pre-funded unit and the underwriting discount. The purchase price to be paid per each additional redeemable warrant will be $0.01.

 

The underwriter expects to deliver the securities against payment to the investors in this offering on or about                , 2022.

 

 

Sole Book-Running Manager

 

 

 

Aegis Capital Corporation

 

The date of this prospectus is                            , 2022.

 

 

 

 

 

TABLE OF CONTENTS

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

iii

 

PROSPECTUS SUMMARY

 

1

 

THE OFFERING

 

6

 

RISK FACTORS

 

8

 

USE OF PROCEEDS

 

22

 

CAPITALIZATION

 

23

 

DETERMINATION OF OFFERING PRICE

 

24

 

MARKET FOR OUR COMMON STOCK AND REDEEMABLE WARRANTS

 

24

 

DILUTION

 

25

 

OUR BUSINESS

 

26

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY

 

33

 

PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

MANAGEMENT AND BOARD OF DIRECTORS

 

45

CORPORATE GOVERNANCE

 

47

 

EXECUTIVE AND DIRECTOR COMPENSATION

 

49

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

52

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

53

 

DESCRIPTION OF SECURITIES

 

54

 

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

60

 

UNDERWRITING

 

65

 

LEGAL MATTERS

 

69

 

EXPERTS

 

69

 

WHERE YOU CAN FIND MORE INFORMATION

 

69

 

INDEX TO FINANCIAL STATEMENTS

 

F-1

 

 

You should rely only on information contained in this prospectus. We have not authorized anyone to provide you with additional information or information different from the information contained in this prospectus. Neither the delivery of this prospectus nor the sale of our securities means that the information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful or in any state or other jurisdiction where the offer is not permitted.

 

The information in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

No person is authorized in connection with this prospectus to give any information or to make any representations about us, the securities offered hereby or any matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us.

 

We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

 

 
ii

Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are intended to qualify for the “safe harbor” created by those sections. The words “anticipate,” “believe,” “could,” “estimate,” “continue,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” “is likely”, “forecast”, “seek” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. All statements other than statements of historical facts contained in this prospectus, including among others, statements regarding this offering, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements.

 

Our actual results and the timing of certain events may differ materially from those expressed or implied in such forward-looking statements due to a variety of factors and risks, including, but not limited to, those set forth under “Risk Factors,” those set forth from time to time in our other filings with the SEC, including risks related to the following:

 

 

·

our ability to continue as a going concern and our history of losses;

 

·

our ability to obtain additional financing;

 

·

the ongoing coronavirus (“COVID-19”) pandemic;

 

·

our lack of significant revenues;

 

·

our ability to prosecute, maintain or enforce our intellectual property rights;

 

·

disputes or other developments relating to proprietary rights and claims of infringement;

 

·

the accuracy of our estimates regarding expenses, future revenues and capital requirements;

 

·

the implementation of our business model and strategic plans for our business and technology;

 

·

the successful development of our sales and marketing capabilities;

 

·

the potential markets for our products and our ability to serve those markets;

 

·

the rate and degree of market acceptance of our products and any future products;

 

·

our ability to retain key management personnel;

 

·

regulatory developments and our compliance with applicable laws; and

 

·

our liquidity.

   

The forward-looking statements involve known and unknown risks, uncertainties and other important 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 the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

 

The forward-looking statements in this prospectus are made only as of the date hereof or as indicated and represent our views as of the date of this prospectus. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as the result of new information, future events or otherwise, except as required by law.

 

Notwithstanding the above, Section 27A of the Securities Act and Section 21E of the Exchange Act expressly state that the safe harbor for forward looking statements does not apply to companies that issue penny stocks. We believe we will not be considered an issuer of penny stock after this offering. However, if we are considered to be an issuer of penny stock, the safe harbor for forward looking statements under Section 27A of the Securities Act and Section 21E of the Exchange Act will not be available to us.

 

Industry and Market Data

 

This prospectus contains estimates made, and other statistical data published, by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this prospectus from our own research as well as from industry and general publications, surveys and studies conducted by third parties. This data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are inherently subject to a high degree of uncertainty and actual events or circumstances may differ materially from events and circumstances reflected in this information. We caution you not to give undue weight to such projections, assumptions and estimates. While we believe that these publications, studies and surveys are reliable, we have not independently verified the data contained in them. In addition, while we believe that the results and estimates from our internal research are reliable, such results and estimates have not been verified by any independent source.

 

 
iii

Table of Contents

 

 

PROSPECTUS SUMMARY

 

This summary highlights certain information appearing elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information you should consider before investing in our securities and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information included elsewhere in this prospectus. Before you make an investment decision, you should read this entire prospectus carefully, including the risks of investing in our securities discussed under the section of this prospectus entitled “Risk Factors” and similar headings. You should also carefully read our financial statements, and the exhibits to the registration statement of which this prospectus is a part.

 

Overview

 

Headquartered in Pittsford, New York, Infinite Group is a developer of cybersecurity software and related cybersecurity consulting, advisory, and managed information security services. We principally sell our software and services through indirect channels such as Managed Service Providers (“MSPs”), Managed Security Services Providers (“MSSPs”), agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.

 

We believe our ability to succeed depends on how successful we are in differentiating ourselves in the cybersecurity market at a time when competition and consolidation in these markets are on the rise. Our strategy to differentiate our cybersecurity software and services from our competitors is to combine customized software and professional services, and grow our business by designing, developing, and marketing cybersecurity software-as-a-service (“SaaS”) solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI CyberLabs (“CyberLabs”), to fill technology gaps we identify, and then we bring these software and services to market through our existing channel partner and customer relationships. Our software and services are designed to simplify and manage the security needs of our customers and channel partners in a variety of environments. We focus on the small and medium-sized enterprises market. We support our channel partners by providing recurring-revenue business models for both services and through our cybersecurity SaaS solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions.

 

As part of these software and service offerings we:

 

 

 

 

·

Internally developed and brought to market Nodeware®, a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware provides an economical solution for small and medium-sized enterprises as compared to more costly solutions focused on enterprise-sized customers, and is designed to accommodate the varying network needs of our end customers’ organizations and networks. Nodeware’s flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. We intend to continue to develop our intellectual property to serve as the core to our proprietary software and services. In addition to our proprietary software and services we also act as a master distributor for other cybersecurity software, principally Webroot, a cloud-based endpoint security platform solution, where we market to and provide support for over 225 small channel partners across North America. For the six months ended June 30, 2022, our software revenue was approximately $532,000, with approximately 29% of that being related to Nodeware. For the twelve months ended December 31, 2021, our software revenue was approximately $1,011,000, with approximately 17% of that being related to Nodeware;

 

·

Provide cybersecurity consulting and advisory services to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology. As part of our consulting and advisory services, we are contracted to support existing information technology and executive teams at both the customer and channel partner level, and provide security leadership and guidance. We validate overall corporate and infrastructure cybersecurity with the goal of maintaining and securing the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from threats and incidents. For the six months ended June 30, 2022, our cybersecurity consulting services revenue, excluding software sales, was approximately $627,000. For the twelve months ended December 31, 2021, our cybersecurity consulting services revenue, excluding software sales, was approximately $1,769,000; and

 

·

Provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, by providing in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment. For the six months ended June 30, 2022, our managed support services revenue was approximately $2,205,000. For the twelve months ended December 31, 2021, our managed support services revenue was approximately $4,325,000.

 

 

 

  

 
1

Table of Contents

 

 

Sales and Marketing Strategy

 

During 2021, approximately 89% of our business comes from our channel sales and approximately 11% from direct sales to end customers. Managed support services accounts for approximately 60% of total sales, cybersecurity software and services accounts for approximate 38% of total sales and other consulting services accounts for approximately 2% of total sales.

 

Virtually all managed information security support services revenue is derived from one customer, a major independent agency of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments as a subcontractor through our channel partner, Peraton. We are working to expand our managed information security support services business with our channel partner Peraton, and to potentially grow the current federal enterprise customer and to expand to other Peraton customers.

 

We sell our cybersecurity software and services, including Nodeware, through our channel partners, which include direct channel partners, Telarus, TD SYNNEX, and Staples, and through our direct cybersecurity services teams. Our cybersecurity services include Chief Information Security Team as a Service (CISOTaaS ™), PenLogic™ penetration testing services, security assessments, incident response and others, and are provided through our channel partners and direct to end customers as a cybersecurity solution to the technical services they provide. Our channel partners utilize our expertise in cybersecurity to bring additional services to their end customers that are beyond their normal scope of offerings, and building our network of channel partners allows us the ability to efficiently gain access to a greater number of customers. We continue to drive development of our cybersecurity business through channel and direct marketing, social media programs, and fostering our extensive cybersecurity industry relationships. We are not reliant on any one customer for our cybersecurity software and services sales given that we work with a number of channel partners and direct customers. In addition to our cybersecurity software and services, we provide from time to time other information technology consulting services to existing clients.

 

Recent Developments

 

During the six months ended June 30, 2022, we had sales of approximately $3,364,000 million, an operating loss of approximately $1,295,000 and a net loss of approximately $1,701,000. During the year ended December 31, 2021, we had sales of approximately $7.2 million, an operating loss of approximately $1.4 million and a net loss of approximately $1.6 million. These losses were due primarily to increased investment in sales and marketing for Nodeware and related services, together with increased costs associated with our preparations to list on Nasdaq and with assessing potential acquisition targets. As a result of growing demand and accelerated growth in the cybersecurity market, we continue to grow our team of cybersecurity sales and technical consultants internally and leverage contractors when needed to fill short term gaps. For the six months ended June 30, 2022, we added 3 new employees, primarily to the sales and marketing team. We added 12 new employees, primarily in the areas of sales, marketing, and technical consulting for cybersecurity services in 2021. We had full year sales of approximately $7.2 million in 2020 and $7.1 million in 2019, generating operating income of approximately $1,000 and $329,000 and net income of approximately $676,000 and $48,000, respectively.

 

On August 8, 2022, the Company, as borrower, entered into a financing arrangement (the “Loan Agreement”) with Celtic Bank (the “Lender”), a Utah corporation. Pursuant to the Loan Agreement, the Lender agreed to lend the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the Loan Agreement, payments are due beginning August 15, 2022, and shall consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher. Subsequent payments shall also consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher, with the final payment due on February 6, 2024. The Loan is subject to customary events of default.

 

On July 29, 2022, the Company and Andrew Hoyen (“Hoyen Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Hoyen Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Hoyen Lender (the “Hoyen Note”). The Hoyen Note and the Hoyen Modification was approved by the disinterested members of our Board of Directors. The Hoyen Modification extends the due date of the Hoyen Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Hoyen Modification, the Company agreed to repay to Lender $16,000 of the accrued interest on the Hoyen Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 5,333 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Note was $10,930 as of July 29, 2022. Except as set forth in the Hoyen Modification, the terms of the Hoyen Note remain the same.

 

On June 30, 2022, and September 6, 2022 the Company and Donald W. Reeve (“Reeve Lender”), a director of the company, entered into note modification agreements (each a “Reeve Modification” and collectively, the “Reeve Modifications”) with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The 2020 Note, the 2021 Note and the Reeve Modifications were each approved by the disinterested members of our Board of Directors.  The Reeve Modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note of $100,000 to January 1, 2023. The Reeve Modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616 will be due.  Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.

 

In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware Cloud security solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing channel partner relationships.

 

On November 3, 2021, we entered into a financing arrangement (the “Bridge Loan”) with Mast Hill Fund, L.P. (“Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, the Mast Hill agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 18,667 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On February 15, 2022, we entered into a second financing arrangement (the “Second Bridge Loan”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 12,333 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On April 12, 2022, we entered into a third financing arrangement (the “Third Bridge Loan”) with Talos Victory Fund, LLC (“Talos” and together with Mast Hill, the “Lenders”) on substantially the same terms as our financing arrangements with Mast Hill. In exchange for a promissory note, the Talos agreed to lend the Company $296,000, which bears interest at a rate of eight percent (8%) per annum, less $29,600 original issue discount. As additional consideration for the financing, the Company issued Talos a 5-year warrant to purchase 9,867 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On May 31, 2022, we entered into a fourth financing arrangement (the “Fourth Bridge Loan” and together with the Bridge Loan, Second Bridge Loan, and Third Bridge Loans, the “Loans”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 11,833 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on the one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lenders have the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. On April 29, 2022, Mast Hill exercised the warrant issued to them on November 3, 2021 in full on a cashless basis and acquired 11,470 shares of Common Stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for more information regarding the Loans.

 

As of October 19, 2022, Mast Hill holds warrants to purchase 13,516 shares of Common Stock and Talos holds warrants to purchase 9,867 shares of Common Stock issued in connection with the Loans (collectively, the “Loan Warrants”). The anti-dilution provisions of the Loan Warrants take effect if the Company’s common stock (or common stock equivalents, such as warrants) is sold or issued at a price lower than the initially stated $12.00 exercise price of the Loan Warrants. Accordingly, at the current assumed unit offering price of $4.38 (with warrants with an exercise price of $4.00 per share of common stock), the exercise price of the Loan Warrants would be reduced to $4.00 per share at the option of the holders thereof.  In addition, the conversion price of the Loans upon default or prepayment would be reduced from $7.50 to $4.00 per share.

 

 
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On December 15, 2021, our board of directors (the “Board”) approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock and recommended that the stockholders of the Company authorize the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On January 26, 2022, the company’s stockholders voted to authorize the reverse stock split. On October 17, 2022, the Board approved a reverse stock split of our outstanding shares of common stock by a ratio of 75-to-1, which became effective October 19, 2022. The reverse stock split did not impact the number of authorized shares of common stock which remains at 60,000,000 shares. Unless otherwise noted, the share and per share information in this prospectus reflects the effect of the reverse stock split.

 

Business Strategy

 

We have a threefold business strategy composed of:

 

 

 

 

·

providing differentiated cybersecurity software and services to small to mid-sized enterprises who lack the internal resources to focus on cybersecurity related matters by combining customized software and professional services;

 

·

designing, developing, and marketing cybersecurity SaaS solutions, including our Nodeware solution; and

 

·

identifying other cybersecurity companies to acquire as part of a roll-up strategy.

 

 

 

We believe our ability to succeed depends on how successful we are in differentiating ourselves in the market at a time when competition and consolidation in these markets is on the rise. Our software and services are designed to simplify the security needs of our customers and channel partners, with a focus on the small to mid-sized enterprises, and we believe our ability to integrate our product and service offerings differentiates them from our competitors. In addition, we support our channel partners by providing recurring-revenue business models for both services and our cybersecurity SaaS solutions.

 

Cybersecurity is a constantly evolving field, so we devote significant efforts in developing proprietary software and services to meet our customer and channel partners’ evolving needs. These efforts have resulted in the development of our patented and patent-pending Nodeware solution. We expect to continue to make significant investments in developing other intellectual property to serve as the core to other proprietary software and services.

 

Historically, a significant portion of our revenues has been derived through our managed support services, however, we believe our cybersecurity SaaS solutions, including Nodeware, present an opportunity for significant growth. We believe that Nodeware’s ability to be deployed in an underserved market segment, across a wide variety of networks and the ability to integrate it into existing and new cybersecurity software and services, will allow us to significantly grow this segment of our business. Similarly, we believe Nodeware’s SaaS recurring revenue business model and its flexibility as a standalone or integrated solution makes it an attractive part of our channel partners’ portfolio of products. Accordingly, in 2021 we made significant investments in Nodeware sales and marketing to grow our team of cybersecurity sales and technical consultants. As a result, we believe we are seeing the pipeline growth expected from focused efforts, which we anticipate will convert to revenue growth in 2022 and beyond.

 

We believe the market for cybersecurity services for small and medium-sized enterprises is fragmented and does not currently meet the needs of this customer base. The market is fragmented and is beginning to consolidate, which is why we are seeking to strategically acquire other cybersecurity technology and services companies.

 

Intellectual Property

 

We believe that our intellectual property is an asset that will contribute to the growth and profitability of our business. We rely on a combination of patented, patent-pending and confidentiality procedures, trademarks and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks.

 

Our current patent and trademark portfolio consists of a patent for the Nodeware solution and process for scanning for vulnerabilities and a pending patent covering the methodologies associated with identifying and cataloging the assets on or across any physical or cloud network, together with a registered trademark for the “Nodeware” name and other trademarks and tradenames associated with our company and products. We intend to continue to work to enhance our intellectual property position on the Nodeware solution and in other appropriate cybersecurity technology we generate.

 

 

 
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Research and Development

 

Our research and development efforts are focused on ensuring our software and services continually adapt to ever-evolving cybersecurity threats, developing new and improved functionality to meet our customers’ needs, and to enable robust and efficient integration with other industry solutions. Our research and development team is responsible for the design, development, testing and quality of our software, including Nodeware, and works to ensure that our software is available, reliable and stable. Costs incurred prior to reaching technological feasibility are expensed as incurred, subsequently they are capitalized until product launch.

 

Listing on the Nasdaq Capital Market

 

Our common stock is presently traded on the over-the-counter market and quoted on the OTCQB market under the symbol “IMCI.” We have applied to list our common stock and redeemable warrants on the Nasdaq Capital Market under the symbols “IMCI” and “IMCIW,” respectively. No assurance can be given that our application will be approved. On October 13, 2022, the last reported sale price of our common stock was approximately $5.4225 per share, after giving effect to the 75-to-1 reverse stock split. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not complete this offering. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system.

 

 

 
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Summary of Principal Risks

 

An investment in shares of our units involves a high degree of risk. If any of the factors enumerated below or in the section entitled “Risk Factors” occurs, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. In that case, the market price of our securities could decline, and you may lose some or all of your investment. Some of the more significant risks relating to this offering and an investment in our units include:

 

 

 

 

·

our ability to continue as a going concern, which could cause our stockholders to lose some or all of their investment in us;

 

·

the ongoing COVID-19 pandemic and its impact on our business and our operations;

 

·

our history of fluctuating operating results;

 

·

our ability to raise additional capital in this offering or through additional offerings, which may not be available on favorable terms, if at all, and without which we may not be able to continue as a going concern;

 

·

our highly leveraged financial status and working capital deficit;

 

·

our accrued liability for a previously-offered retirement plan;

 

·

our past and possible future use of an accounts receivable credit facility;

 

·

our ability to successfully protect our intellectual property rights, and claims of infringement by others;

 

·

our ability to successfully commercialize our patented software;

 

·

the risk of losing a major customer that accounts for a large portion of our revenue;

 

·

our reliance on our channel partners to generate a substantial amount of our revenue;

 

·

our reliance on certain of our vendors to competently operate certain functions of our business;

 

·

our reliance on third-party vendors and third-party software;

 

·

the impact to our business if federal, state, or local governments decreased the amount of business they do with us or our prime contractors;

 

·

our ability to effectively compete in a highly competitive environment;

 

·

the ability of our software and services to gain market acceptance, obtain market share, and maintain market share;

 

·

the ability of our software and services to correctly detect and identify vulnerabilities;

 

·

the ability of our software and services to meet and comply with applicable regulations and industry standards;

 

·

the market for cloud solutions for information technology, security, and compliance may not evolve as we anticipate;

 

·

our compliance with software licenses;

 

·

our compliance with federal, state, and local tax regulations governing sales and use tax or other taxes;

 

·

our ability to effectively manage the size of our business;

 

·

our ability to effectively manage and integrate businesses or business assets we acquire;

 

·

our ability to manage growth effectively;

 

·

our ability to retain key management personnel;

 

·

the exposure of our directors or officers because of our lack of directors and officers liability insurance;

 

·

our ability to create value from our investments;

 

·

our ability to hire and retain qualified and experienced technical, sales, and marketing teams;

 

·

cybersecurity, privacy, and data handling threats and incidents;

 

·

the volatility of our stock price, even once listed on Nasdaq;

 

·

our expectation that we will not declare dividends to our stockholders for the foreseeable future;

 

·

the immediate and substantial dilution in net tangible book value;

 

·

the dilution of our shares as a result of the issuance of additional shares in connection with financing arrangements;

 

·

the impact of the 75-to-1  reverse stock split on the liquidity of our shares;

 

·

the decline in the price of our stock due to offers or sales of substantial number of our shares;

 

·

the limited trading volume and price fluctuations of our shares;

 

·

the broad discretion of our management over the proceeds from this offering;

 

·

the speculative nature of the redeemable warrants offered in this offering;

 

·

the lack of established trading market for the redeemable warrants offered in this offering;

 

·

the redeemable warrants offered in this offering will only confer the right to acquire our shares at a fixed price, until such time as the redeemable warrants are exercised or redeemed;

 

·

the redeemable warrants offered in this offering could discourage an acquisition of us by a third party;

 

·

our ability to meet and comply with Nasdaq’s initial listing requirements;

 

·

our ability to meet and comply with Nasdaq’s initial listing requirements; and

 

·

our ability to maintain an effective system of disclosure controls.

 

 

 

Corporate Information

 

We were incorporated under the laws of the state of Delaware on October 14, 1986. Our principal corporate headquarters are located at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534 and our phone number is (585) 385-0610. Our website address is www.igicybersecurity.com. We have not incorporated by reference into this prospectus the information included on or linked from our website and you should not consider it to be part of this prospectus.

  

 

 
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THE OFFERING

 

 

 

Issuer:

 

Infinite Group, Inc.

 

 

 

Units offered:

 

We are offering up 3,500,000 units consisting of either (i) common units or (ii) pre-funded units.  The units will be offered at an assumed public offering price of $4.38 per unit.

 

 

 

Common units offered:

 

Each common unit consists of one share of our common stock and three redeemable warrants each to purchase one share of our common stock. The common units will not be certificated or issued in stand-alone form. The shares of our common stock and the redeemable warrants comprising the common units are immediately separable upon issuance and will be issued separately in this Offering.

 

 

 

Pre-funded units offered:

 

We are also offering to those purchasers, if any, whose purchase of units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded units in lieu of common units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock. There can be no assurance that we will sell any of the pre-funded units being offered. Each pre-funded unit will consist of a pre-funded warrant and three redeemable warrants. The purchase price of each pre-funded unit is equal to the price per unit being sold to the public in this offering, minus $0.001. The pre-funded warrants will be immediately exercisable and may be exercised at any time until all of the pre-funded warrants are exercised in full. We are offering the pre-funded units at an assumed public offering price of $4.379 per pre-funded unit based on an assumed initial offering price of $4.38 per common unit. For each pre-funded unit we sell, the number of common units we are offering will be decreased on a one-for-one basis. Because we will issue three redeemable warrants as part of each common unit or pre-funded unit, the number of redeemable warrants sold in this offering will not change as a result of a change in the mix of the common units and pre-funded units sold. This prospectus also relates to the offering of the common shares issuable upon exercise of the pre-funded warrants. 

.

 

 

 

Shares of common stock outstanding prior to the offering (1):

 

453,149 shares.

 

 

 

Shares of common stock outstanding after the offering (1):

 

3,953,149 shares (assuming the exercise of any pre-funded warrants and none of the redeemable warrants issued in this offering are exercised).

 

 

 

Over-allotment option:

 

We have granted the underwriters a 45-day option to purchase up to 525,000 additional shares of common stock and/or pre-funded warrants, representing 15% of the shares and pre-funded warrants sold in the offering and/or up to 1,575,000 additional redeemable warrants, representing 15% of the redeemable warrants sold in the offering, solely to cover over-allotments, if any. The purchase price to be paid per additional share of common stock will be equal to the public offering price of one unit, less the purchase price for the redeemable warrants included within the unit and the underwriting discount. The purchase price to be paid per pre-funded warrant will be equal to the public offering price of one pre-funded unit, less the purchase price for the redeemable warrants included within the pre-funded unit and the underwriting discount. The purchase price to be paid per additional redeemable warrant will be $0.01.

 

 

 

Use of proceeds:

 

We estimate that the net proceeds to us from this offering will be approximately $13,549,600 after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We plan on using the proceeds from this offering for marketing and sales, development costs, repayment of debt and working capital, among other things. Our management will retain broad discretion over the allocation of the net proceeds from this offering. For a more complete description of our intended use of the net proceeds from this offering, see “Use of Proceeds.”

 

 

 

Description of the redeemable warrants:

 

The redeemable warrants included within the units will be exercisable immediately and have an exercise price per share of common stock of $4.00. Each redeemable warrant is exercisable for one share of common stock, subject to adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our common stock, and in the event that the Company’s common stock trades below the exercise price during the 90 day period following this offering, as described herein. A holder may not exercise any portion of a redeemable warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of the outstanding common stock after exercise, as such percentage ownership is determined in accordance with the terms of the warrants, except that upon notice from the holder to us, the holder may waive such limitation up to a percentage, not in excess of 9.99%. Each redeemable warrant will be exercisable immediately upon issuance and will expire on                , 2027 (five years after the initial issuance date) or when redeemed. The terms of the redeemable warrants will be governed by a Warrant Agreement, dated as of the effective date of this offering, between us and Issuer Direct, as the warrant agent (the “Warrant Agent”).

 

The exercise price and number of shares of common stock issuable upon exercise of the redeemable warrants may be adjusted in certain circumstances within two (2) years from issuance, including in the event of a stock dividend or recapitalization, reorganization, merger, or consolidation. The redeemable warrants will also be adjusted for issuances of common stock at prices below its exercise price under certain circumstances. However, in no event will the exercise price be adjusted to a price below $2.00 per share (equal to 50% of the initial exercise price of $4.00).

 

Additionally, on the date that is 90 calendar days immediately following the initial issuance date of the redeemable warrants, the exercise price of the redeemable warrants will be reduced to the reset price, provided that such value is less than the exercise price in effect on that date. The reset price is equal to the greater of (a) 50% of the initial exercise price or (b) 100% of the lowest daily volume weighted average price per share of common stock occurring during the 90 calendar days following the issuance date of the redeemable warrants. The lowest reset price is $2.00 per share (equal to 50% of the initial exercise price of $4.00).

 

 

 

 

 

This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the redeemable warrants. For more information regarding the redeemable warrants, you should carefully read the section titled “Description of the Securities-Redeemable Warrants” in this prospectus.

 

 

 

Redemption of redeemable warrants:

 

We may redeem the outstanding warrants at a price of $0.01 per warrant share  upon certain conditions where the price of our common stock has equaled or  exceeded $        per share (as adjusted for share splits, share dividends,  recapitalizations and similar events) for a 30 consecutive trading day period.  We must give notice of our intent for redemption at least 30 days prior to the  date of redemption. Upon our notice to warrant holders of our intent to call the  warrants for redemption, each holder will have 30 trading days during  which it may exercise its warrant prior to the planned redemption date; if such  holder does not exercise prior to the redemption date, the warrants held by  such holder will be redeemed and the warrant holder will have no other rights  other than the right to receive the nominal redemption price of $0.01 per warrant share upon surrender of the warrant.

 

• in whole and not in part;

• at a price of $0.001 per warrant;

• upon a minimum of 30 days’ prior written notice of redemption, which we refer to as the 30-day redemption period; and

• if, and only if, the last sale price of our common stock equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for a 20-trading day.

 

 

 

Description of pre-funded warrants:

 

The terms of the pre-funded warrants are substantially similar to the redeemable warrants, except that the pre-funded warrants have an exercise price of $0.001, are not redeemable, and do not expire. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the pre-funded warrants. For more information regarding the pre-funded warrants, you should carefully read the section titled “Description of the Securities-Pre-funded Warrants” in this prospectus.

      

 
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Underwriter’s Warrants:

 

The registration statement of which this prospectus is a part also registers for sale shares underlying warrants (the “Underwriter’s Warrants”) to purchase 140,000 shares of our common stock to Aegis Capital Corp. (the “underwriter”), as the sole underwriter, as a portion of the underwriting compensation payable to the underwriter in connection with this offering. The Underwriter’s Warrants will be exercisable beginning on a date which is six months from the commencement of sales under the registration statement of which this prospectus is a part at an exercise price of $5.48 (125% of the public offering price of the common units) and will expire five years from the date of such commencement of sales. Please see “Underwriting - Underwriter’s Warrants” for a description of these warrants.

 

 

 

Trading symbol:

 

Our common stock is presently traded on the over-the-counter market and quoted on the OTCQB market under the symbol “IMCI.” We have applied to list our common stock and redeemable warrants on the Nasdaq Capital Market under the symbols “IMCI” and “IMCIW,” respectively. No assurance can be given that our application will be approved. On October 13, 2022, the last reported sale price of our common stock was approximately $5.4225 per share, after giving effect to the 75-to-1 reverse stock split. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not complete this offering. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system.

 

 

 

Reverse stock split:

 

On December 15, 2021, our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1, to be effective at the ratio and date to be determined by our board of directors. Our stockholders approved the reverse stock split range at our annual meeting on January 26, 2022. On October 17, 2022 our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio of 75-to-1, which became effective October 19, 2022. Unless otherwise noted, the share and per share information in this prospectus reflects the effect of the reverse stock split.

 

 

 

Lock-up Agreements:

 

We and our directors, officers, and certain principal stockholders (holders of 10% or more of our outstanding shares) have agreed not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock for a period of 180 days after the date of this prospectus. See “Underwriting-Lock-Up Agreements.”

 

 

 

Risk factors:

 

Investing in our securities involves a high degree of risk and purchasers of our securities may lose their entire investment. See “Risk Factors” and the other information included and incorporated by reference into this prospectus for a discussion of risk factors you should carefully consider before deciding to invest in our securities. 

(1)

Unless we indicate otherwise, the number of shares of our common stock outstanding is based on 453,149 shares of common stock outstanding on October 13, 2022, but does not include, as of that date:

 

 

 

 

·

132,034 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $6.07 per share;

 

·

40,636 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $12.375 per share

 

·

61,620 shares authorized for issuance pursuant to equity incentive plans; and

 

·

139,397 shares of our common stock issuable upon conversion of convertible notes.

 

 

 

Except as otherwise indicated, all information in this prospectus assumes:

 

 

 

 

·

no exercise of the outstanding options described above;

 

·

full exercise of any pre-funded warrants included in the pre-funded units;

 

·

no exercise of the redeemable warrants included in the units or the Underwriter’s Warrants;

 

 

·

no exercise of the underwriter’s over-allotment option; and

 

Unless otherwise noted, the share and per share information in this prospectus reflects the effect of the reverse stock split of the outstanding common stock and treasury stock of the Company at a 75-to-1 ratio, which became effective October 19, 2022.

 

 
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RISK FACTORS

 

Any investment in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this prospectus, before you decide whether to purchase our securities. If any of the following risks or uncertainties actually occurs, our business, financial condition, results of operations and prospects would likely suffer, possibly materially. In addition, the trading price of our common stock could decline due to any of these risks or uncertainties, and you may lose part or all of your investment.

 

Risks Related to our Business and Financial Condition

 

In the past, we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern and it is possible that conditions and events in the future may negatively impact our ability to continue as a going concern.

 

As of June 30, 2022, we had a working capital deficit of approximately $4.4 million. We reported a net loss of approximately $1,701,000 for the six months ended June 30, 2022. We reported a stockholders’ deficiency of $5,387,542 as of June 30, 2022. We had net loss of approximately $569,000 for the six months ended June 30, 2021. At December 31, 2021, we had a stockholders’ deficiency of $4,097,889. These factors initially raise substantial doubt about our ability to continue as a going concern but this doubt has been alleviated.

 

During the third quarter of 2022, we entered into a loan agreement with an unrelated third party, resulting in net proceeds to the Company of $139,400. During the second quarter of 2022, we entered into two loan agreements with two unrelated third parties, resulting in net proceeds to the Company of $585,900. During the first quarter of 2022, we entered into a loan agreement with an unrelated third party, resulting in net proceeds to the Company of $333,000. During the fourth quarter of 2021, we engaged in multiple short term funding arrangements. We entered into three demand notes of $12,000 each with three related parties. On October 28, 2021, we entered into a promissory note of $150,000 with our Vice President of Business Development. Additionally, on November 3, 2021, we entered into a loan agreement with an unrelated third party, resulting in net proceeds to the Company of $403,200.

 

In the future, reports from our independent registered public accounting firm may also contain statements expressing substantial doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

 

Our results of operations may be negatively impacted by the COVID-19 pandemic.

 

The COVID-19 pandemic has resulted, and is likely to continue to result, in 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 has continued to disrupt business activity globally. New strains and variants of the coronavirus continue to spread around the world. The ongoing rollout of vaccines around the globe is encouraging, but their long-term impact on the political environment, business environment, and the Company is still uncertain.

 

Effects of the COVID-19 pandemic that may negatively impact our business in future periods include but are not limited to: limitations on the ability of our customers to conduct their business, purchase our products and services, and make timely payments; curtailed consumer spending; deferred purchasing decisions; delayed consulting services implementations; and decreases in cybersecurity services and software license revenues driven by channel partners. As a result of the COVID-19 pandemic, industry conventions and conferences that we anticipated participating in have been and continue to be canceled or altered. We believe this will negatively impact our 2022 results and has negatively impacted our ability to grow our business as quickly as we originally anticipated.

 

We are continuing to adapt our operations to meet the challenges of this uncertain and rapidly evolving situation, including remote working arrangements for our employees, limiting non-essential business travel, and utilizing virtual sales and marketing events. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition.

 

If we are unable to raise sufficient capital, we will be unable to fully fund our operations and to otherwise execute our business plan.

 

Until such time, if ever, that we can generate substantial revenues, we expect to finance our cash needs primarily through equity offerings and debt financings. Our ability to raise capital, whether through equity or through debt, is based, in part, on market events and conditions out of our control. We do not have any future committed source of external funds.

 

 
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If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce, or terminate our future product and service development or commercialization efforts.

 

Our efforts to commercialize our Nodeware solution may not be successful.

 

We have one patent granted and one patent pending relating to our Nodeware solution. The efforts we have taken to protect our intellectual property may not be sufficient or effective. Additionally, there is no guarantee that our Nodeware solution will perform as expected or as needed.

 

In order to protect our interest in Nodeware, we sell licenses permitting customers’ access. Licenses are protected through our EULA (end user licensing agreement), reseller/partner contracts, and through the cloud platform it resides in, enabling us to manage subscriptions, use and distribution of the platform. We face a risk of reputational harm and potential intellectual property theft if a licensee mistakenly or intentionally misuses our products. Licensing may also add an expense to our overall cost structure that is not supported by the market for like products.

 

If we do not successfully develop enhancements or new software, or scale our platform effectively, our operating results and our business may be harmed.

 

The cybersecurity market is characterized by rapid technological advances, customer price sensitivity, short product and service life cycles, intense competition, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards and regulatory mandates. Any of these factors could create downward pressure on pricing and gross margins, and could adversely affect our renewal rates, as well as our ability to attract new customers. Our future success will depend on our ability to enhance existing software, introduce new software on a timely and cost-effective basis, meet changing customer needs, integrate, and extend our core technology into new applications, and anticipate and respond to emerging cybersecurity threats. We must also continually change and improve our software and services in response to changes in operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools and computer language technology. In addition, our future growth depends upon our ability to continue to meet the expanding needs of our customers and to scale our software and services to meet these expanding needs and expanding customer base. As a result, we must continue to dedicate significant financial and other resources to our research and development efforts.

 

We may not be able to anticipate future market needs and opportunities, develop enhancements or new software to meet such needs or opportunities, or scale our platforms to maintain the performance of our software and services, in a timely manner or at all. To the extent that we do not successfully develop enhancements or new software, or scale our platform effectively, our operating results and our business may be harmed.

 

If we are unable to protect our intellectual property rights, our business could be harmed, or we could be required to incur significant expenses to enforce our rights.

 

We believe that our intellectual property is an asset that may contribute to the growth and profitability of our business. We rely on a combination of patented, patent-pending and confidentiality procedures, trademarks, and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks. Despite our efforts, the steps we have taken to protect our intellectual property rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain. Enforcing our intellectual property rights, if necessary, is difficult, time-consuming, resource-intensive, expensive, and uncertain. Litigation may become necessary and, if so, it may come at a substantial cost and cause diversion of management’s resources, which could harm our business.

 

We may need to defend against intellectual property infringement claims or misappropriation claims, which may be time-consuming, resource-intensive, and expensive.

 

Although we have not in the past been subject to claims that any of our products or services infringe intellectual property rights of a third-party, we could be subject to such claims in the future. It is possible that litigation could result. We do not know whether we will prevail in such proceedings given the highly complex, technical issues and inherent uncertainties in intellectual property litigation. Enforcing our intellectual property rights, if necessary, is difficult, time-consuming, resource-intensive, expensive, and uncertain.

 

If a challenge to our intellectual property rights results in an adverse outcome, then we could be required to stop the use of our products, services, or technology, pay damages for infringement, and expend resources developing products, services, or technology that are non-infringing.

 

 
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We experience fluctuations in quarterly and annual operating results.

 

Our quarterly and annual operating results have fluctuated in the past and likely will fluctuate in the future. The demand for our products is driven largely by the demand for cybersecurity solutions. Accordingly, the cybersecurity industry is affected by market conditions that are often outside our control. Our results of operations may fluctuate significantly from period to period due to a number of factors, including general economic, industry and market conditions, the introduction or adoption of new technologies that compete with our software and services, the length and expense of our sales cycle for our software and services, the loss of a key customer and publicity regarding security breaches generally and the level of perceived threats to IT security. As a result of these factors and other risks discussed in this section, or the cumulative effect of some of these factors, may result in fluctuations in our operating results.

 

In addition, we recognize revenues from subscriptions over the term of the relevant service period, which is typically one year. As a result, most of our reported revenues in each quarter are derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a shortfall in demand for our solutions in any period may not significantly reduce our revenues for that period, but could negatively affect revenues in future periods. Accordingly, the effect of significant downturns in bookings may not be fully reflected in our results of operations until future periods.

 

This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of securities analysts or investors, for a particular period. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the trading price of our common stock could fall and we could face costly lawsuits, including securities class action suits.

 

We do not maintain directors and officers liability insurance, which may subject us to significant exposure if one of our directors or officers is sued.

 

As of the date of this Registration Statement, we do not maintain directors and officers liability insurance. In addition to protecting the individual director or officer against personal losses, it can also cover the legal fees and costs an organization may incur as a result of the lawsuit.

 

If a legal action is commenced against one of our directors or officers, including, but not limited to, an action alleging a violation of securities law, we may incur the legal fees and costs associated with defending against the action, which may harm our business. In addition, a potential action could be time-consuming, resource-intensive, expensive, and uncertain.

 

We currently accrue a liability for a discontinued Simple IRA plan.

 

Through December 31, 2012, we offered a Simple (Savings Incentive Match Plan for Employees) IRA plan as a retirement plan for eligible employees and offered a voluntary match. We did not make all required voluntary matches prior to terminating the Simple IRA plan and we have accrued liability for the voluntary match portion of the Simple IRA plan, including interest, which was $280,958 as of June 30, 2022. There can be no assurance that the accrued liability amount will be sufficient to satisfy the Company’s potential liability.

 

We have used and may use our existing credit facility to finance our growth.

 

We have an accounts receivable credit facility with a financial institution, which enables us to sell accounts receivable to the financial institution with full recourse against us. The fee charged is prime plus 3.6% (effective rate of 8.35% at June 30, 2022) against the average daily outstanding balance of funds advanced. We also granted the financial institution a first priority interest in accounts receivable and a blanket lien. The fee charged is based, in part, on market events and conditions out of our control. The terms of the credit facility are subject to change.

 

During the six months ended June 30, 2022 and 2021, the Company sold approximately $2,036,000 and $1,778,000, respectively, of our accounts receivable to the financial institution.

 

During the years ended December 31, 2021 and 2020, we sold approximately $3,630,000 and $1,750,000, respectively, of our accounts receivable to the financial institution.

 

Because of the high relative cost, use of the credit facility, in the aggregate, may harm our business.

 

We rely on one customer for a large portion of our revenues.

 

We depend on one customer for a large portion of our revenue. During the six months ended June 30, 2022, sales to this customer, including sales under subcontracts for services to several entities, accounted for 65.5% of total sales (58.1% in 2021) and 20.7% of accounts receivable at June 30, 2022. Through the 12 months ending December 31, 2021, sales to this customer, including sales under subcontracts, accounted for 59.5% of total sales and 15.3% of accounts receivable. During 2020, sales to this customer, including sales under subcontracts, accounted for 61.2% of total sales and 38.8% of accounts receivable. The loss of this customer could have a significant impact on our revenues and harm our business and results of operations.

 

 
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We rely on our channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.

 

Our success significantly depends upon establishing and maintaining relationships with a variety of channel partners and we anticipate that we will continue to depend on these partners in order to grow our business.

 

For the twelve months ended December 31, 2021, approximately 89% of our business comes from our channel sales and approximately 11% from direct sales to end customers, and the percentage of revenues derived from channel partners may increase in future periods. Our agreements with our channel partners are generally non-exclusive and do not prohibit them from working with our competitors or offering competing solutions, and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors, do not effectively market and sell our software and services, or fail to meet the needs of our customers, then our ability to grow our business and sell our software and services may be adversely affected. In addition, the loss of one or more of our larger channel partners, who may cease marketing our software and services with limited or no notice, and our possible inability to replace them, could adversely affect our sales. Moreover, our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our software and services, which can be complex. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our software and services or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations. Even if we are successful, these relationships may not result in greater customer usage of our software and services or increased revenues.

 

In addition, the financial health of our channel partners and our continuing relationships with them are important to our success. Some of these channel partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency and/or the inability of such distributors to obtain credit to finance purchases of our software and services. In addition, weakness in the end-user market could negatively affect the cash flows of our channel partners who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Our business could be harmed if the financial condition of some of these channel partners substantially weakened and we were unable to timely secure replacement channel partners.

 

We are highly leveraged, which increases our operating deficit and makes it difficult for us to grow.

 

At June 30, 2022, we had current liabilities of approximately $5.3 million and long-term liabilities of $2.1 million and stockholders’ deficiency of $5,387,542. At June 30, 2022, we had a working capital deficit of approximately $4.4 million and a current ratio of 0.16. At December 31, 2021, we had current liabilities of approximately $4.1 million and long-term liabilities of $1.5 million and stockholders’ deficiency of $4,097,889. At December 31, 2020, we had a working capital deficit of approximately $3.1 million and a current ratio of .25.

  

Working capital shortages may impair our business operations and growth strategy, and accordingly, our business, operations.

 

The Company has a number of options, convertible notes and warrants outstanding that have various anti-dilution provisions that may be triggered by this offering. 

 

In the past we have issued options, convertible notes and warrants to purchase shares of our Common Stock as compensation and as part of various financing agreements, and such options convertible notes and warrants typically included anti-dilution provisions which adjust the conversion, exercise price and/or number of shares issuable upon conversion or exercise of such securities.  Such anti-dilution provisions may be triggered by this offering depending on the final offering price. For example, as of October 19, 2022, Mast Hill holds Loan Warrant to purchase 13,516 shares of Common Stock and Talos holds Loan Warrants to purchase 9,867 shares of Common Stock. The anti-dilution provisions of the Loan Warrants take effect if the Company’s common stock is (or securities to issue common stock are) sold or issued at a price lower than the initially stated $12.00 exercise price of the Loan Warrants. Accordingly, at the current assumed unit offering price of $4.38 (which units include warrants with an exercise price of $4.00 per share of common stock), the exercise price of the Loan Warrants would be reduced to $4.00 per share at the option of the holders thereof.  In addition, the conversion price of the Loans upon default or prepayment would be reduced from $7.50 to $4.00 per share. The adjustments made pursuant to the anti-dilution provisions of our options, convertible debt and warrants will reduce the per share proceeds we receive from the conversion or exercise of these securities and may significantly increase the number of shares of common stock issued or issuable upon conversion or exercise of these securities.

 

Potential acquisitions and expansions into new markets may result in significant transaction expense and expose us to risks associated with entering new markets and integrating new or acquired operations.

 

We may encounter risks associated with entering new markets in which we have limited or no experience. New operations require significant capital expenditures and may initially have a negative impact on our short-term cash flow, net income and results of operations and may not become profitable when projected or ever. In addition, our industry is highly fragmented and we expect to consider acquisition opportunities from time to time when we believe they would enhance our business and financial performance.

 

Acquisitions may impose significant strains on our management, operating systems and financial resources, and could experience unanticipated integration issues. The pursuit and integration of acquisitions may require substantial attention from our senior management, which will limit the amount of time they have available to devote to our existing operations. Our ability to realize the expected benefits from any future acquisitions depends in large part on our ability to integrate and consolidate the new operations with our existing operations in a timely and effective manner. Future acquisitions also could result in the incurrence of substantial amounts of indebtedness and contingent liabilities (including environmental, employee benefits and safety and health liabilities), accumulation of goodwill that may become impaired, an increase in amortization expenses related to intangible assets, and potential penalties or other break fees if such negotiated acquisitions are not consummated. Any significant diversion of management’s attention from our existing operations, the loss of key employees or customers of any acquired business, any major difficulties encountered in the integration of acquired operations or any associated increases in indebtedness, liabilities or expenses could have a material adverse effect on our business, financial condition or results of operations.

 

We may not realize the anticipated synergies and cost savings from acquisitions.

 

We may grow our business by acquiring or investing in other companies and businesses and assets that we feel have synergy and will complement our business plan. As such, we periodically evaluate potential business combinations and investments in other companies and assets. However, the integration of future acquisitions may not result in the realization of the full benefits of the revenue and cost synergies that we expected at the time or currently expect within the anticipated time frame or at all. Moreover, we may incur substantial expenses or unforeseen liabilities in connection with the integration of acquired businesses. While we anticipate that certain expenses will be incurred, such expenses are difficult to estimate accurately and may exceed our estimates. Accordingly, the expected benefits may be offset by costs or delays incurred in integrating the businesses. Failure of acquisitions to meet our expectations and be integrated successfully could have a material adverse effect on our financial condition and results of operations.

 

 
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Our investments in cybersecurity and other business initiatives may not be successful.

 

We have invested in and continue to invest in cybersecurity capabilities to add new software and services to address the needs of our clients, including our newly introduced product, Nodeware. Our investments may not be successful or increase our revenues. If we are not successful in creating value from our investments by increasing sales, our financial condition and prospects could be harmed.

 

If we fail to adequately manage the size of our business, it could have a severe negative impact on our financial results or stock price.

 

Our management believes that to be successful we must appropriately manage the size of our business. This may mean reducing costs and overhead in certain economic periods, and selectively growing in periods of economic expansion. In addition, we will be required to implement operational, financial and management information procedures and controls that are efficient and appropriate for the size and scope of our operations. The management skills and systems currently in place may not be adequate and we may not be able to manage any significant reductions or growth effectively.

 

We may have difficulties in managing our growth.

 

Our future growth depends, in part, on our ability to expand, train and manage our employee base and provide support to an expanded client base. We must also enhance and implement new operating and software systems to accommodate our growth and expansion of IT product and service offerings. If we cannot manage growth effectively, it could have a material adverse effect on our results of operations, business and financial condition. In addition, acquisitions, investments and expansion involve substantial infrastructure costs and working capital. We cannot provide assurance that we will be able to integrate acquisitions, if any, and expansions efficiently. Similarly, we cannot provide assurance that any investments or expansion will enhance our profitability. If we do not achieve sufficient sales growth to offset the increased expenses associated with our expansion, our results will be adversely affected.

 

We depend on the continued services of our key personnel.

 

Our future success depends, in part, on the continuing efforts of our senior executive officers. The loss of any of these key employees may materially adversely affect our business. We do not maintain key-person insurance for any member of our senior management team. From time to time, there may be changes in our senior management team resulting from the termination or departure of executives. Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of the services of our senior management or other key employees for any reason could significantly delay or prevent the achievement of our development and strategic objectives and harm our business, financial condition and results of operations.

 

Our future success depends on our ability to continue to retain and attract qualified employees.

 

We believe that our future success depends upon our ability to continue to train, retain, effectively manage and attract highly skilled technical, managerial, sales and marketing personnel. This includes skills for our new initiatives in cybersecurity. Employee turnover is generally high in the IT services industry. If our efforts in these areas are not successful, our costs may increase, our sales efforts may be hindered, and the quality of our client service may suffer. Although we invest significant resources in recruiting and retaining employees, there is often significant competition for certain personnel in the IT services industry. From time to time, we experience difficulties in locating enough highly qualified candidates in desired geographic locations, or with required specific expertise.

 

We believe that our growth will depend, to a significant extent, on our success in recruiting and retaining a sufficient number of qualified sales personnel and their ability to obtain new customers, manage our existing customer base and expand the sales of our software and services. We plan to continue to expand our sales force and make a significant investment in our sales and marketing activities. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the competitive markets where we do business. Competition for highly skilled personnel is frequently intense and we may not be able to compete for these employees. If we are unable to recruit and retain a sufficient number of productive sales personnel, sales of our software and services and the growth of our business may be harmed. Additionally, if our efforts do not result in increased revenues, our operating results could be negatively impacted due to the upfront operating expenses associated with expanding our sales force.

 

 
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If we are required to collect higher sales and use or other taxes on the software and services we sell, we may be subject to liability for past sales and our future sales may decrease.

 

Taxing jurisdictions, including state and local entities, have differing rules and regulations governing sales and use or other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our SaaS solutions in various jurisdictions is unclear. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to state and international jurisdictions for which we may not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our software and services or otherwise harm our business and operating results.

 

Risks Related to our Industry

 

As a provider of cybersecurity software and services, we are subject to a heightened threat of cyberattacks intended to disrupt our internal operations or IT services provided to customers, and any such disruption could reduce our revenue, increase our expenses, damage our reputation.

 

We sell cybersecurity software and services, including third-party software as well as our internally developed software, Nodeware. As a result, we have been and will be a target of cyber-attacks designed to impede the performance of our products, penetrate our network security or the security of our cloud platform or our internal systems, or that of our customers, misappropriate proprietary information and/or cause interruptions to our services. Due to the significant military action against Ukraine launched by Russia, the risk of such cyber-attacks has increased.

 

For example, because Nodeware is a network vulnerability management solution, a successful cyber-attack on us may be perceived as a victory for the cyber attacker, thereby increasing the likelihood that we may be a target of more cyber-attacks, even absent financial motives. Further, if our systems are breached as a result of third-party action, employee error or misconduct, attackers could learn critical information about how our primary product operates to help protect our customers’ IT infrastructures from cyber risk, thereby making our customers more vulnerable to cyber-attacks. In addition, if actual or perceived breaches of our network security occur, they could adversely affect the market perception of our Nodeware solution, negatively affecting our reputation, and may expose us to the loss of our proprietary information or information belonging to our customers, investigations or litigation and possible liability, including injunctive relief and monetary damages. Such security breaches could also divert the efforts of our technical and management personnel. In addition, such security breaches could impair our ability to operate our business and provide products to our customers. If this happens, our reputation could be harmed, our revenue could decline, and our business could suffer.

 

Our information technology systems may be subject to intentional disruption or other security incidents that could result in liability and adversely impact our reputation and future sales.

 

We and our service providers face threats from a variety of sources, including attacks on our networks and systems from numerous sources, including traditional “hackers,” sophisticated nation-state and nation-state supported actors, other sources of malicious code (such as viruses and worms), and phishing attempts. We and our service providers could be a target of cyber-attacks or other malfeasance designed to impede the performance of our software and services, penetrate our network security or the security of our cloud platform or our internal systems, misappropriate proprietary information and/or cause interruptions to our services. Our software, platforms, and system, and those of our service providers, may also suffer security incidents as a result of non-technical issues, including intentional or inadvertent acts or omissions by our employees or service providers. With the increase in personnel working remotely during the current COVID-19 pandemic, we and our service providers are at increased risk for security breaches. Due to the significant military action against Ukraine launched by Russia, the risk of such cyber-attacks, malfeasance, security incidents, and security breaches has increased. The conditions caused by the Russian invasion of Ukraine could also result in disruption or other security incidents for our service providers.

 

We are taking steps to monitor and enhance the security of our software and services, cloud platform, and other relevant systems, IT infrastructure, networks, and data; however, the unprecedented scale of remote work may require additional personnel and resources, which nevertheless cannot be guaranteed to fully safeguard our software and services, our cloud platform, or any systems, IT infrastructure networks, or data upon which we rely. Further, because our operations involve providing cybersecurity software and services to our customers, we may be targeted for cyber-attacks and other security incidents. A breach in our data security or an attack against our service availability, or that of our third-party service providers, could impact our networks or networks secured by our software and services, creating system disruptions or slowdowns and exploiting security vulnerabilities of our software and services, and the information stored on our networks or those of our third-party service providers could be accessed, publicly disclosed, altered, lost, or stolen, which could subject us to liability and cause us financial harm. If an actual or perceived disruption in the availability of our software and services or the breach of our security measures or those of our service providers occurs, it could adversely affect the market perception of our software and services, result in a loss of competitive advantage, have a negative impact on our reputation, or result in the loss of customers, channel partners and sales, and it may expose us to the loss or alteration of information, litigation, regulatory actions and investigations and possible liability. Any such actual or perceived security breach or disruption could also divert the efforts of our technical and management personnel. We also may incur significant costs and operational consequences of investigating, remediating, eliminating and putting in place additional tools and devices designed to prevent actual or perceived security incidents, as well as the costs to comply with any notification obligations resulting from any security incidents. In addition, any such actual or perceived security breach could impair our ability to operate our business and provide software and services to our customers. If this happens, our reputation could be harmed, our revenues could decline and our business could suffer.

 

 
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Although we maintain insurance coverage that may be applicable to certain liabilities in the event of a security breach or other security incident, we cannot be certain that our insurance coverage will be adequate for liabilities that actually are incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material and adverse effect on our business, including our financial condition, operating results and reputation.

 

If our software and services fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.

 

If our software and services fail to detect vulnerabilities in our customers’ IT infrastructures, or if our software and services fail to identify and respond to new and increasingly complex methods of attacks, our business and reputation may suffer. There is no guarantee that our software and services will detect all vulnerabilities. Additionally, our cybersecurity software and services may falsely detect vulnerabilities or threats that do not actually exist. For example, some of our software and services rely on information on attack sources aggregated from third-party data providers who monitor global malicious activity originating from a variety of sources, including anonymous proxies, specific IP addresses, botnets and phishing sites. If the information from these data providers is inaccurate, the potential for false indications of security vulnerabilities increases. These false positives, while typical in the industry, may impair the perceived reliability or usability of our software and services and may therefore adversely impact market acceptance of our software and services and could result in negative publicity, loss of customers and sales, increased costs to remedy any incorrect information or problem, or claims by aggrieved parties. Similar issues may be generated by the misuse of our tools to identify and exploit vulnerabilities.

 

Further, our software and services sometimes are tested against other security products, and may fail to perform as effectively, or to be perceived as performing as effectively, as competitive products for any number of reasons, including misconfiguration. To the extent current or potential customers, channel partners, or others believe there has been an occurrence of an actual or perceived failure of our software and services to detect a vulnerability or otherwise to function as effectively as competitive products in any particular test or indicates our software and services do not provide significant value, our business, competitive position, and reputation could be harmed.

 

In addition, our software and services do not currently extend to cover mobile devices or personal devices that employees may bring into an organization. As such, our software and services would not identify or address vulnerabilities in mobile devices, such as mobile phones or tablets, or personal devices, and our customers’ IT infrastructures may be compromised by attacks that infiltrate their networks through such devices.

 

An actual or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our software and services, could adversely affect the market’s perception of our cybersecurity software and services.

 

If our solutions fail to help our customers achieve and maintain compliance with regulations and industry standards, our revenues and operating results could be harmed.

 

We generate a portion of our revenues from software and services that help organizations achieve and maintain compliance with regulations and industry standards. For example, some of our customers subscribe to our software and services to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council, or the PCI Council, which apply to companies that store cardholder data. Industry organizations like the PCI Council may significantly change their security standards with little or no notice, including changes that could make their standards more or less onerous for businesses. Governments may also adopt new laws or regulations, or make changes to existing laws or regulations, that could impact the demand for or value of our solutions.

 

If we are unable to adapt our software and services to changing regulatory standards in a timely manner, or if our solutions fail to assist with or expedite our customers’ compliance initiatives, our customers may lose confidence in our solutions and could switch to products offered by our competitors. In addition, if regulations and standards related to data security, vulnerability management and other IT, security and compliance requirements are relaxed or the penalties for non-compliance are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our solutions. In any of these cases, our revenues and operating results could be harmed.

 

 
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Our cybersecurity software and services are delivered from a third-party vendor, and any disruption of service at their facilities would interrupt or delay our ability to deliver our software and services to our customers which could reduce our revenues and harm our operating results.

 

Our existing data center facilities providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with the facilities providers on commercially reasonable terms or if in the future we add additional data center facility providers, we may experience costs or downtime in connection with the loss of an existing facility or the transfer to, or addition of, new data center facilities.

 

Any disruptions or other performance problems with our software and services could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenues, cause us to issue credits to customers, subject us to potential liability and cause customers to terminate their subscriptions or not renew their subscriptions.

 

If the market for cloud solutions for IT, security and compliance does not evolve as we anticipate, our revenues may not grow and our operating results would be harmed.

 

Our success depends to a significant extent on the willingness of organizations to increase their use of cloud solutions for their IT, security, and compliance. To date, some organizations have been reluctant to use cloud solutions because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with these solutions. If other cloud service providers experience security incidents, loss of customer data, disruptions in service delivery or other problems, the market for cloud solutions as a whole, including our solutions, may be negatively impacted. Moreover, many organizations have invested substantial personnel and financial resources to integrate on-premise software into their businesses, and as a result may be reluctant or unwilling to migrate to a cloud solution, such as Nodeware. Organizations that use on-premise security products, such as network firewalls, security information and event management products or data loss prevention solutions, may also believe that these products sufficiently protect their IT infrastructure and deliver adequate security. Therefore, they may continue spending their IT security budgets on these products and may not adopt our software and services in addition to or as a replacement for such products.

 

If customers do not recognize the benefits of our cloud software and our services over traditional on-premise enterprise software products, and as a result we are unable to increase sales of subscriptions to our software and services, then our revenues may not grow or may decline, and our operating results would be harmed.

 

We use third-party software and data that may be difficult to replace or cause errors or failures of our software and services that could lead to lost customers or harm to our reputation and our operating results.

 

We license third-party software as well as security and compliance data from various third parties to deliver our software and services. In the future, this software or data may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software or data could result in delays in the provisioning of our software and services until equivalent technology or data is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in or failures of this third-party software or data could result in errors or defects in our software and services or cause our software and services to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.

 

We will need to maintain our relationships with third-party software and data providers, and to obtain software and data from such providers that do not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver effective solutions to our customers and could harm our operating results.

 

Our software contains third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our software and services.

 

Our software contains software licensed to us by third-parties under so-called “open source” licenses, including the GNU General Public License, the GNU Lesser General Public License, the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming that what we believe to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms. If we combine our proprietary software with open source software in certain ways, we could, in some circumstances, be required to release the source code of our proprietary software to the public. Disclosing the source code of our proprietary software could make it easier for cyber attackers and other third parties to discover vulnerabilities in or to defeat the protections of our solutions, which could result in our solutions failing to provide our customers with the security they expect from our services. This could harm our business and reputation. Disclosing our proprietary source code also could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of sales for us. Any of these events could have a material adverse effect on our business, operating results and financial condition.

 

 
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Our software and services could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our software and services.

 

We may collect, store, process and use our customers’ employees or customers personally identifiable information and other data in our transactions with them, and we may rely on third parties that are not directly under our control to do so as well. While we take reasonable measures intended to protect the security, integrity and confidentiality of the personal information and other sensitive information we collect, store or transmit, we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third parties will not gain unauthorized access to this information. If we or our third-party service providers were to experience a breach, disruption or failure of systems compromising our customers’ data, or if one of our third-party service providers or partners were to access our customers’ personal data without our authorization, our brand and reputation could be adversely affected, use of our software and services could decrease and we could be exposed to a risk of loss, litigation and regulatory proceedings.

 

Despite our compliance efforts, we may fail to achieve compliance with applicable privacy or data protection laws and regulations as they evolve, or adhere to contractual obligations regarding the collection, processing, storage and transfer of data (including data from our customers, prospective customers, partners and employees), either due to internal or external factors such as resource limitations or a lack of vendor cooperation. Any actual or perceived failure to comply with these laws or obligations could result in enforcement action against us, including fines, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to any existing customers and prospective customers), any of which could harm our business, results of operations, and financial condition. Further, privacy concerns may inhibit market adoption of our software and services, particularly in certain industries and foreign countries.

 

We depend on prime contracts or subcontracts with the federal, state, and local governments for a substantial portion of our sales, and our business would be seriously harmed if the government ceased doing business with us or our prime contractors or significantly decreased the amount of business it does with us or our prime contractors.

 

We derived approximately 59% of our sales in 2021 and 61% of our sales in 2020 from contracts as either a prime contractor or a subcontractor from government contracts. We expect that we will continue to derive a substantial portion of our sales for the foreseeable future from work performed under government contracts, as we have in the past, and from marketing efforts focused on commercial enterprises. If we or our prime contractors were suspended or prohibited from contracting with federal, state or local governments, or if our reputation or relationship with the federal, state or local governments and commercial enterprises were impaired, or if any of the foregoing otherwise ceased doing business with us or our prime contractors or significantly decreased the amount of business it does with us or our prime contractors, our business, prospects, financial condition and operating results would be materially adversely affected.

 

We operate in a highly competitive environment and, as a result, we may not be able to compete effectively or maintain or increase our sales.

 

We operate in a highly competitive environment with numerous competitors, some of which have greater resources or better brand recognition than we do. This competitive environment subjects us to various risks, including the ability to provide our software and services at competitive prices that allow us to maintain our profitability. Because of this competitive environment, we may have limited ability to increase prices in response to increased costs without losing competitive position which may adversely affect our margins and financial performance. In addition, price reductions by our competitors may result in the reduction of our prices and a corresponding reduction in our profitability. As a result, we may face periods of intense competition in the future, which could have a material adverse effect on our profitability and results of operations.

 

Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, revenues may vary from period to period, which may cause our operating results to fluctuate and could harm our business.

 

The timing of sales of our software and services can be difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large transactions. We sell our cybersecurity software and services primarily to IT departments that are managing a growing set of user and compliance demands, which has increased the complexity of customer requirements to be met and confirmed during the sales cycle and prolonged our sales cycle. Further, the length of time that potential customers devote to their testing and evaluation, contract negotiation and budgeting processes varies significantly, which has also made our sales cycle long and unpredictable. The length of the sales cycle for our software and services typically ranges from six to twelve months but can be more than eighteen months. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result we could lose other sales opportunities or incur expenses that are not offset by an increase in revenues, which could harm our business.

 

 
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Our business could be adversely affected by changes in budgetary priorities of the federal, state and local governments.

 

Because we derive a significant portion of our sales from contracts with federal, state and local governments, we believe that the success and development of our business will continue to depend on our successful participation in their contract programs. Changes in federal, state and local government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs which call for the types of services that we provide or a change in government contracting policies, could cause U.S. Governmental agencies as well as state and local governments to reduce their expenditures under contracts, to exercise their right to terminate contracts at any time without penalty, not to exercise options to renew contracts or to delay or not originate new contracts. Any of those actions could seriously harm our business, prospects, financial condition or operating results. Moreover, although our contracts with governmental entities may contemplate that our services will be performed over a period of several years, government entities usually must approve funds for a given program each government fiscal year and may significantly reduce or eliminate funding for a program. Significant reductions in these appropriations could have a material adverse effect on our business. Additional factors that could have a serious adverse effect on our government contracting business include, but may not be limited to:

 

 

·

changes in government programs or requirements;

 

·

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;

 

·

reductions in the government’s use of technology solutions firms;

 

·

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

 

·

curtailment of the government uses of IT or related professional services.

 

We rely on software-as-a-service vendors to operate certain functions of our business and any failure of such vendors to provide services to us could adversely impact our business and operations.

 

We rely on third-party software-as-a-service vendors to operate certain critical functions of our business, including financial management and human resource management. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated, all of which could harm our business.

 

Risks Relating to our Common Stock and to this Offering

 

Upon exercise of our outstanding options or warrants and conversion of our convertible notes we will be obligated to issue a substantial number of additional shares of common stock which will dilute our present stockholders. 

  

We are obligated to issue additional shares of our common stock in connection with our outstanding options, warrants, and convertible notes. As of October 13, 2022, there were options, warrants, convertible notes outstanding, convertible into 132,034, 40,636 and 139,397 shares of common stock, respectively, at prices ranging from $1.50 to $18.75 per share. The exercise, conversion or exchange of warrants or convertible securities, including for other securities, will cause us to issue additional shares of our common stock and will dilute the percentage ownership of our stockholders. In addition, we have in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to the securities held by other stockholders not participating in such exchange.

 

There is no assurance that once listed on the Nasdaq Capital Market we will not continue to experience volatility in our share price that may be unrelated to the performance of our business.

 

The OTCQB, where our common stock is currently quoted, is an inter-dealer, over-the-counter market that provides significantly less liquidity than the Nasdaq Capital Market. Our stock is thinly traded due to the limited number of shares available for trading on the OTCQB Venture Market thus causing large swings in price. As such, investors and potential investors may find it difficult to obtain accurate stock price quotations, and holders of our common stock may be unable to resell their securities at or near their original offering price or at any price. Our public offering price per common unit may vary substantially from the market price of our common stock after the offering. If an active market for our stock develops and continues, our stock price may nevertheless be volatile. If our common stock experiences extreme volatility, investors may not be able to sell their common stock at or above the public offering price per common unit. Further, volatility in our common stock may be unrelated to the performance of our business making it difficult for investors to assess the value of our common stock and redeemable warrants during periods of extreme volatility. Sales of substantial amounts of our common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short period of time. As a result, our stockholders could suffer losses or be unable to liquidate their holdings. No assurance can be given that the price of our common stock will become less volatile when listed on the Nasdaq Capital Market.

 

 
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Any of the following factors could affect the market price of our common stock:

 

 

·

The sale of large numbers of shares of common stock by former directors and their donees and associates;

 

·

The portion of the purchase price of our common units that investors attribute to the redeemable warrants included in the common unit may differ leading to substantial declines in the price of our common stock or increased volatility in trading of our common stock;

 

·

The continued COVID-19 pandemic and its adverse impact upon the capital markets;

 

·

A market for our redeemable warrants does not currently exist, investors may find it difficult to value our redeemable warrants and the trading market for our redeemable warrants may be volatile;

 

·

The loss of one or more members of our management team;

 

·

Our failure to generate material revenues;

 

·

Regulatory changes including new laws and rules which adversely affect companies in our line of business;

 

·

Our public disclosure of the terms of any financing which we consummate in the future;

 

·

Our failure to become profitable;

 

·

Our failure to raise working capital;

 

·

Acquisitions we may consummate;

 

·

Announcements by us or our competitors of significant contracts, new services, acquisitions, commercial relationships, joint ventures or capital commitments;

 

·

Cancellation of key contracts;

 

·

Our failure to meet financial forecasts we publicly disclose;

 

·

Short selling activities; or

 

·

Changes in market valuations of similar companies.

   

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.

 

Concentration of ownership among our existing executive officers, directors and holders of 10% or more of our outstanding common stock may prevent new investors from influencing significant corporate decisions.

  

As of October 13, 2022, our executive officers and directors beneficially owned, in the aggregate, approximately 30% of our outstanding common stock. In addition, there are a number of holders of 10% or more of our outstanding common who are not our officers and directors. As a result, such persons, acting together, have significant ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

 

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

 

Sales of large blocks of our common stock over a short time could have a significant adverse effect on our common stock price. If our existing stockholders and investors seek to sell a substantial number of shares of our common stock, such selling efforts may cause significant declines in the market price of our common stock. The existence of an overhang, which is the potential dilution in the value of our common stock due to outstanding convertible notes, warrants and stock options, whether or not sales have occurred or are occurring, also could make our ability to raise additional financing through the sale of equity or equity-linked securities more difficult in the future at a time and price that we deem reasonable or appropriate. If our existing stockholders and investors seek to sell a substantial number of shares of our common stock, such selling efforts may cause significant declines in the market price of our common stock.

 

Our common stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our common stock.

 

Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.

 

 
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Because we do not intend to pay cash dividends on our shares of common stock, any returns will be limited to the value of our shares.

 

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the increase, if any, of our share price.

 

If securities analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about our business or if they publish negative evaluations of our stock, the price and trading volume of our stock could decline.

 

The trading market for our common stock will rely, in part, on the research and reports that industry or financial analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by industry or financial analysts. If no, or few, analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock or publish inaccurate or unfavorable research about our business, or provide more favorable relative recommendations about our competitors, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price and trading volume to decline.

 

Risks Related to this Offering and our Reverse Stock Split

 

Investors in this offering will experience immediate and substantial dilution in net tangible book value.

  

The public offering price will be substantially higher than the net tangible book value per share of our outstanding shares of common stock. As a result, investors in this offering will incur immediate dilution of $2.42 per share based on the assumed public offering price of $4.38 per share of common stock. Investors in this offering will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities.

 

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

 

Our management will have broad discretion over the use of proceeds from this offering. We intend to use the net proceeds from this offering for marketing and sales, development costs, repayment of debt, working capital, among other things. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our operating results or enhance the value of our securities.

 

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors, including amount of cash used in our operations, which can be highly uncertain, subject to substantial risks and can often change. Our management will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds of this offering.

 

The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

  

The redeemable warrants are speculative in nature.

  

The redeemable warrants offered in this offering do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of our common stock at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the redeemable warrants may exercise their right to acquire the common stock and pay an exercise price of $4.00 per share, prior to five years from the date of issuance, after which date any unexercised redeemable warrants will expire and have no further value. We may also redeem the redeemable warrants under certain circumstances.

 

 
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There is no established market for the redeemable warrants to purchase shares of our common stock being offered in this offering.

 

There is no established trading market for the redeemable warrants. Although we have applied to list the warrants on the Nasdaq Capital Market there can be no assurance that there will be an active trading market for the redeemable warrants. Without an active trading market, the liquidity of the redeemable warrants will be limited.

 

The pre-funded warrants will not be listed or quoted on any exchange.

 

There is no established public trading market for the pre-funded warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the pre-funded warrants on any national securities exchange or other nationally recognized trading system, including Nasdaq. Without an active market, the liquidity of the pre-funded warrants will be limited.

 

Except as otherwise provided in the redeemable warrants and pre-funded warrants, holders of redeemable warrants and pre-funded warrants purchased in this offering will have no rights as stockholders until such holders exercise their redeemable warrants or pre-funded warrants and acquire our common stock.

 

Except as otherwise provided in the redeemable warrants and pre-funded warrants, until holders of redeemable warrants or pre-funded warrants acquire our common stock upon exercise of the redeemable warrants or pre-funded warrants, holders of redeemable warrants and pre-funded warrants will have no rights with respect to our common stock underlying such redeemable warrants and pre-funded warrants. Upon exercise of the redeemable warrants and pre-funded warrants, the holders will be entitled to exercise the rights of a holder of our common stock only as to matters for which the record date occurs after the exercise date.

 

Provisions of the redeemable warrants offered by this prospectus could discourage an acquisition of us by a third party.

 

In addition to the discussion of the provisions of our Certificate of Incorporation, as amended, and our Amended and Restated Bylaws, certain provisions of the redeemable warrants offered by this prospectus could make it more difficult or expensive for a third party to acquire us. The redeemable warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the redeemable warrants. These and other provisions of the redeemable warrants offered by this prospectus could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to you. 

 

The reverse stock split may decrease the liquidity of the shares of our common stock.

  

The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that are outstanding following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split. In addition, the reverse stock split has increased the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.

 

 
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Even if the reverse stock split achieves the requisite increase in the market price of our common stock, we cannot assure you that we will be able to continue to comply with the minimum bid price requirement of Nasdaq.

 

Even if the reverse stock split achieves the requisite increase in the market price of our common stock to be in compliance with the minimum bid price of the Nasdaq, there can be no assurance that the market price of our common stock following the reverse stock split will remain at the level required for continuing compliance with that requirement. It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split. If the market price of our common stock declines following the recent effectuation of the reverse stock split, the percentage decline may be greater than would occur in the absence of a reverse stock split. In any event, other factors unrelated to the number of shares of our common stock outstanding, including negative financial or operational results, could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain the Nasdaq’s minimum bid price requirement.

 

Even if the reverse stock split increases the market price of our common stock and we meet the initial listing requirements of the Nasdaq, there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq.

 

Nasdaq requires that the trading price of its listed stocks remain above one dollar in order for the stock to remain listed. If a listed stock trades below one dollar for more than 30 consecutive trading days, then it is subject to delisting from Nasdaq. In addition, to maintain a listing on Nasdaq, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements. If we are unable to satisfy these requirements or standards, we could be subject to delisting, which would have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with the listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the minimum bid price requirement, or prevent future non-compliance with the listing requirements.

 

Even if we meet the initial listing requirements of Nasdaq, there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq.

 

Nasdaq has a number of continued listing standards that we will be required to comply with in order to maintain a listing of our common stock on Nasdaq. Even if we meet the initial listing requirements of Nasdaq, we cannot assure you that we will be able to comply with the other standards that we are required to meet in order to maintain a listing of our common stock on Nasdaq. If after listing we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum stockholder’s equity requirement, Nasdaq may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair our stockholders’ ability to sell or purchase our common stock when they wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any action taken by us would result in our common stock becoming listed again, or that any such action would stabilize the market price or improve the liquidity of our common stock.

 

 
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USE OF PROCEEDS

 

We estimate that the net proceeds to us from this offering will be approximately $13,549,600 after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We currently estimate that we will use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:

 

Proceeds:

 

 

 

Gross Proceeds

 

$15,330,000

 

Underwriting Discounts and Commissions (1)

 

 

(1,226,400 )

Estimated Fees and Expenses

 

 

(554,000 )

Net Proceeds

 

$13,549,600

 

 

 

 

 

 

Uses:

 

 

 

 

Marketing and Sales

 

 

2,500,000

 

Development costs

 

 

500,000

 

Repayment of debt(2 ) (3) (4)

 

 

2,162,850

 

Working Capital and other general corporate purposes

 

 

8,386,750

 

Total Uses

 

$13,549,600

 

 

(1)

Includes a non-accountable expense allowance to Aegis equal to 1.0% of the gross proceeds received in this offering

(2)

Includes repayment of promissory notes in the aggregate amount of $100,000, plus interest, to Mr. Reeve, our Board Chairman. See “Certain Relationships and Related Party Transactions.”

(3)

Includes repayment of four promissory notes in the aggregate of $1,268,858, plus interest, to Mast Hill Fund, L.P. and Talos Victory Fund, LLC. The promissory notes were entered into on November 3, 2021, February 15, 2022, April 12, 2022, and May 31, 2022. The funds from the associated loans were used to substantially enhance our marketing of CyberLabs’s Nodeware solution, in order to significantly increase its growth.

(4)

Includes repayment of two promissory notes in the aggregate of $415,000, plus interest, to two third-party creditors.

 

Our expected use of net proceeds from this offering and our existing cash and cash equivalents represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. As a result, we cannot predict with any certainty our use of the net proceeds from this offering or the amounts that we will actually spend on each area of use set forth above. Our management will retain broad discretion over the allocation of the net proceeds from this offering. Accordingly, we will have discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the proceeds of this offering.

 

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities. We anticipate that the proceeds from this offering will enable us to become cash flow from operations positive.

 

 
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CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2022:

 

 

·

on an actual basis adjusted for the reverse stock split of the outstanding common stock of the Company at a 75-to-1 ratio;

 

 

 

 

·

on a pro forma as adjusted basis, after giving effect to (1) the sale by us of 3,500,000 of common units in this offering at the assumed public offering price of $4.38 per common unit, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the receipt by us of the proceeds of such sale; and (2) the reduction of $1,676,521 of short term debt through the use of $2,162,850 of cash proceeds, and an effect to equity as a result of a write off of a debt discount of $486,329.

 

The as-adjusted information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should consider this table in conjunction with “Use of Proceeds” above as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company” and our financial statements and the notes to those financial statements for the year ended December 31, 2021 included elsewhere in this prospectus.

 

 

 

As of June 30, 2022

 

 

 

Historical

 

 

Proforma

As Adjusted

 

Cash and cash equivalents

 

$1,594

 

 

$11,388,344

 

Total Current Liabilities

 

 

5,314,974

 

 

 

3,638,453

 

Total Long-Term Liabilities

 

 

2,069,687

 

 

 

2,069,687

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

 

 

 

Common Stock, $0.001 par value; 60,000,000 authorized; 447,482 shares issued and outstanding as of June 30, 2022, and 3,947,482 issued and outstanding as adjusted

 

 

447

 

 

 

3,947

 

Additional paid-in capital

 

 

31,780,806

 

 

 

45,326,906

 

Accumulated deficit

 

 

(37,168,795 )

 

 

(37,655,124 )

Total Stockholders’ Equity (Deficit)

 

$(5,387,542 )

 

$7,675,729

 

     

A 50% increase (decrease) in the assumed public offering price of $4.38 per common unit would increase (decrease) cash and cash equivalents, working capital, total assets, and total stockholders’ (deficit) equity by approximately $7.1 million, assuming that the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions.

 

The above discussion and table are based on 3,947,482 shares outstanding as of June 30, 2022 after giving effect to our reverse stock split at a 75-to-1 ratio. The discussion and table do not include, as of that date:

 

 

·

140,034 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $5.925 per share;

 

·

40,636 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $12.375 per share

 

·

61,287 shares of our common stock that are reserved for equity awards that may be granted under our existing equity incentive plans; and

 

·

138,682 shares of our common stock issuable upon conversion of convertible notes.

 

 
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DETERMINATION OF OFFERING PRICE

 

The offering price of the common units has been negotiated between the underwriter and us considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business.

 

MARKET FOR OUR COMMON STOCK AND REDEEMABLE WARRANTS

 

Our common stock is presently traded on the over-the-counter market and quoted on the OTCQB market under the symbol “IMCI.” We have applied to list our common stock and redeemable warrants on the Nasdaq Capital Market under the symbols “IMCI” and “IMCIW,” respectively. No assurance can be given that our application will be approved. On October 13, 2022, the last reported sale price of our common stock was approximately $5.4225 per share, after giving effect to the 75-to-1 reverse stock split. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not complete this offering. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system.

 

Dividend Policy

 

We have never declared or paid a cash dividend on our common stock and we currently anticipate that we will retain future earnings for the development, operations and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. The payment of cash dividends in the future will be dependent upon our earnings and financial requirements and other factors deemed relevant by our Board.

 

Holders

 

At October 13, 2022, we had 207 record stockholders and estimate that we had approximately 1,200 beneficial stockholders.

 

 
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DILUTION

 

If you invest in our units in this offering, your interest will be diluted to the extent of the difference between the assumed public offering price per share of common stock that is part of the common unit (without assigning any value to the redeemable warrants, and assuming the exercise of any pre-funded warrants sold in this offering) and the as adjusted net tangible book value per share of common stock immediately after this offering.

 

Our net tangible book value is the amount of our total tangible assets less our total liabilities. Our net tangible book value as of June 30, 2022 was $(5,808,766), or $(12.98) per share of common stock.

 

As adjusted net tangible book value is our net tangible book value after taking into account the issuance and sale by us of 3,500,000 units in this offering (assuming the exercise of any pre-funded warrants sold in the offering, and without assigning any value to the redeemable warrants) at the assumed public offering price of $4.38 per unit, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the receipt by us of the proceeds of such sale. Our as adjusted net tangible book value as of June 30, 2022 would have been approximately $7,741,000 or $1.96 per share. This amount represents an immediate increase in as adjusted net tangible book value of approximately $14.94 per share to our existing stockholders, and an immediate dilution of $2.42 per share to new investors participating in this offering. Dilution per share to new investors is determined by subtracting as adjusted net tangible book value per share after this offering from the public offering price per share paid by new investors.

 

The following table illustrates this per share dilution:

 

Assumed public offering price per share (attributing no value to the redeemable warrants)

 

$4.38

 

Net tangible book value per share as of June 30, 2022

 

$(12.98 )

Increase in as adjusted net tangible book value per share after this offering

 

$14.94

 

As adjusted net tangible book value per share after giving effect to this offering

 

$1.96

 

Dilution in as adjusted net tangible book value per share to new investors

 

$2.42

 

 

A 50% increase (decrease) in the assumed public offering price of $4.38 per common unit would increase (decrease) the as adjusted net tangible book value per share by $16.73 ($13.16), and the dilution per share to new investors in this offering by $2.82 ($2.02), assuming the number of offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The information above assumes that the underwriter does not exercise its over-allotment option. If the underwriter exercises its over-allotment option in full, the as adjusted net tangible book value will increase to $2.20 per share, representing an immediate increase to existing stockholders of $15.18 per share and an immediate dilution of $2.18 per share to new investors.

 

The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding warrants having a per share exercise or conversion price less than the per share offering price to the public in this offering.

 

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

The above discussion and table are based on 447,482 shares outstanding as of June 30, 2022 after giving effect to our reverse stock split at a 75-to-1 ratio. The discussion and table do not include, as of that date:

 

 

·

140,034 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $5.925 per share;

 

·

40,636 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $12.375 per share

 

·

61,287 shares of our common stock that are reserved for equity awards that may be granted under our existing equity incentive plans; and

 

·

138,682 shares of our common stock issuable upon conversion of convertible notes.

 

 
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OUR BUSINESS

 

Overview of Infinite Group

 

Headquartered in Pittsford, New York, Infinite Group is a developer of cybersecurity software and related cybersecurity consulting, advisory, and managed information security services. We principally sell our software and services through indirect channels such as Managed Service Providers (“MSPs”), Managed Security Services Providers (“MSSPs”), agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.

 

We believe our ability to succeed depends on how successful we are in differentiating ourselves in the cybersecurity market at a time when competition and consolidation in these markets are on the rise. Our strategy to differentiate our cybersecurity software and services from our competitors is to combine customized software and professional services, and grow our business by designing, developing, and marketing cybersecurity software-as-a-service (“SaaS”) solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI CyberLabs (“CyberLabs”), to fill technology gaps we identify, and then we bring these software and services to market through our existing channel partner and customer relationships. Our software and services are designed to simplify and manage the security needs of our customers and channel partners in a variety of environments. We focus on the small and medium-sized enterprises market. We support our channel partners by providing recurring-revenue business models for both services and through our cybersecurity SaaS solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions.

 

As part of these software and service offerings we:

 

 

·

Internally developed and brought to market Nodeware®, a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware provides an economical solution for small and medium-sized enterprises as compared to more costly solutions focused on enterprise-sized customers, and is designed to accommodate the varying network needs of our end customers’ organizations and networks. Nodeware’s flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. We intend to continue to develop our intellectual property to serve as the core to our proprietary software and services. In addition to our proprietary software and services we also act as a master distributor for other cybersecurity software, principally Webroot, a cloud-based endpoint security platform solution, where we market to and provide support for over 225 small channel partners across North America. For the six months ended June 30, 2022, our software revenue was approximately $532,000, with approximately 29% of that being related to Nodeware. For the twelve months ended December 31, 2021, our software revenue was approximately $1,011,000, with approximately 17% of that being related to Nodeware;

 

·

Provide cybersecurity consulting and advisory services to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology. As part of our consulting and advisory services, we are contracted to support existing information technology and executive teams at both the customer and channel partner level, and provide security leadership and guidance. We validate overall corporate and infrastructure cybersecurity with the goal of maintaining and securing the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from threats and incidents. For the six months ended June 30, 2022, our cybersecurity consulting services revenue, excluding software sales, was approximately $627,000. For the twelve months ended December 31, 2021, our cybersecurity consulting services revenue, excluding software sales, was approximately $1,769,000; and

 

·

Provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, by providing in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment. For the six months ended June 30, 2022, our managed support services revenue was approximately $2,205,000. For the twelve months ended December 31, 2021, our managed support services revenue was approximately $4,325,000.

   

Sales and Marketing Strategy

 

During 2021, approximately 89% of our business comes from our channel sales and approximately 11% from direct sales to end customers. Managed support services accounts for approximately 60% of total sales, cybersecurity software and services accounts for approximate 38% of total sales and other consulting services accounts for approximately 2% of total sales.

 

Virtually all managed information security support services revenue is derived from one customer, a major independent agency of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments as a subcontractor through our channel partner, Peraton. We are working to expand our managed information security support services business with our channel partner Peraton, and to potentially grow the current federal enterprise customer and to expand to other Peraton customers.

 

 
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We sell our cybersecurity software and services, including Nodeware, through our channel partners, which include direct channel partners, Telarus, TD SYNNEX, and Staples, and through our direct cybersecurity services teams. Our cybersecurity services include Chief Information Security Team as a Service (CISOTaaS ™), PenLogic™ penetration testing services, security assessments, incident response and others, and are provided through our channel partners and direct to end customers as a cybersecurity solution to the technical services they provide. Our channel partners utilize our expertise in cybersecurity to bring additional services to their end customers that are beyond their normal scope of offerings, and building our network of channel partners allows us the ability to efficiently gain access to a greater number of customers. We continue to drive development of our cybersecurity business through channel and direct marketing, social media programs, and fostering our extensive cybersecurity industry relationships. We are not reliant on any one customer for our cybersecurity software and services sales given that we work with a number of channel partners and direct customers. In addition to our cybersecurity software and services, we provide from time to time other information technology consulting services to existing clients.

 

Recent Developments

 

During the six months ended June 30, 2022, we had sales of approximately $3,364,000 million, an operating loss of approximately $1,295,000 and a net loss of approximately $1,701,000. During the year ended December 31, 2021, we had sales of approximately $7.2 million, an operating loss of approximately $1.4 million and a net loss of approximately $1.6 million, These losses were due primarily to increased investment in sales and marketing for Nodeware and related services, together with increased costs associated with our preparations to list on Nasdaq and with assessing potential acquisition targets.

 

During the year ended December 31, 2021, we had sales of approximately $7.2 million, an operating loss of approximately $1.4 million and a net loss of approximately $1.6 million, due primarily to increased investment in sales and marketing for Nodeware and related services, together with increased costs associated with our preparations to list on Nasdaq and with assessing potential acquisition targets. As a result of growing demand and accelerated growth in the cybersecurity market, we continue to grow our team of cybersecurity sales and technical consultants internally and leverage contractors when needed to fill short term gaps. For the six months ended June 30, 2022, we added 3 new employees, primarily to the sales and marketing team. We added 12 new employees, primarily in the areas of sales, marketing, and technical consulting for cybersecurity services in 2021. We had full year sales of approximately $7.2 million in 2020 and $7.1 million in 2019, generating operating income of approximately $1,000 and $329,000 and net income of approximately $676,000 and $48,000, respectively.

 

On August 8, 2022, the Company, as borrower, entered into a financing arrangement (the “Loan Agreement”) with Celtic Bank (the “Lender”), a Utah corporation. Pursuant to the Loan Agreement, the Lender agreed to lend the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the Loan Agreement, payments are due beginning August 15, 2022, and shall consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher. Subsequent payments shall also consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher, with the final payment due on February 6, 2024. The Loan is subject to customary events of default.

 

On July 29, 2022, the Company and Andrew Hoyen (“Hoyen Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Hoyen Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Hoyen Lender (the “Hoyen Note”). The Hoyen Note and the Hoyen Modification was approved by the disinterested members of our Board of Directors. The Hoyen Modification extends the due date of the Hoyen Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Hoyen Modification, the Company agreed to repay to Lender $16,000 of the accrued interest on the Hoyen Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 5,333 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Note was $10,930 as of July 29, 2022. Except as set forth in the Hoyen Modification, the terms of the Hoyen Note remain the same.

 

On June 30, 2022, and September 6, 2022 the Company and Donald W. Reeve (“Reeve Lender”), a director of the company, entered into note modification agreements (each a “Reeve Modification” and collectively, the “Reeve Modifications”) with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The 2020 Note, the 2021 Note and the Reeve Modifications were each approved by the disinterested members of our Board of Directors.  The Reeve Modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note of $100,000 to January 1, 2023. The Reeve Modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616 will be due.  Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.

 

In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware Cloud security solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing channel partner relationships.

 

On November 3, 2021, we entered into a financing arrangement (the “Bridge Loan”) with Mast Hill Fund, L.P. (“Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, the Mast Hill agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 18,667 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On February 15, 2022, we entered into a second financing arrangement (the “Second Bridge Loan”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 12,334 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On April 12, 2022, we entered into a third financing arrangement (the “Third Bridge Loan”) with Talos Victory Fund, LLC (“Talos” and together with Mast Hill, the “Lenders”) on substantially the same terms as our financing arrangements with Mast Hill. In exchange for a promissory note, the Talos agreed to lend the Company $296,000, which bears interest at a rate of eight percent (8%) per annum, less $29,600 original issue discount. As additional consideration for the financing, the Company issued Talos a 5-year warrant to purchase 9,867 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On May 31, 2022, we entered into a fourth financing arrangement (the “Fourth Bridge Loan” and together with the Bridge Loan, Second Bridge Loan, and Third Bridge Loans, the “Loans”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 11,834 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on the one-year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lenders have the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. On April 29, 2022, Mast Hill exercised the warrant issued to them on November 3, 2021 in full on a cashless basis and acquired 11,470 shares of Common Stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for more information regarding the Loans.

  

As of October 19, 2022, Mast Hill holds warrants to purchase 13,516 shares of Common Stock and Talos holds warrants to purchase 9,867 shares of Common Stock issued in connection with the Loans (collectively, the “Loan Warrants”). The anti-dilution provisions of the Loan Warrants take effect if the Company’s common stock (or common stock equivalents, such as warrants) is sold or issued at a price lower than the initially stated $12.00 exercise price of the Loan Warrants. Accordingly, at the current assumed unit offering price of $4.38 (with warrants with an exercise price of $4.00 per share of common stock), the exercise price of the Loan Warrants would be reduced to $4.00 per share at the option of the holders thereof.  In addition, the conversion price of the Loans upon default or prepayment would be reduced from $7.50 to $4.00 per share.

 

On December 15, 2021, our Board approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock and recommended that the stockholders of the Company authorize the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On January 26, 2022, the company’s stockholders voted to authorize the reverse stock split. On October 17, 2022 our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio of 75-to-1, which became effective October 19, 2022. The reverse stock split did not impact the number of authorized shares of common stock which remains at 60,000,000 shares. Unless otherwise noted, the share and per share information in this prospectus reflects the effect of the reverse stock split.

 

 
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Business Strategy

 

We have a threefold business strategy composed of:

 

 

·

providing differentiated cybersecurity software and services to small to mid-sized enterprises who lack the internal resources to focus on cybersecurity related matters by combining customized software and professional services;

 

·

designing, developing, and marketing cybersecurity SaaS solutions, including our Nodeware solution; and

 

·

identifying other cybersecurity companies to acquire as part of a roll-up strategy.

   

We believe our ability to succeed depends on how successful we are in differentiating ourselves in the market at a time when competition and consolidation in these markets is on the rise. Our software and services are designed to simplify the security needs of our customers and channel partners, with a focus on the small to mid-sized enterprises, and we believe our ability to integrate our product and service offerings differentiates them from our competitors. In addition, we support our channel partners by providing recurring-revenue business models for both services and our cybersecurity SaaS solutions.

 

Cybersecurity is a constantly evolving field, so we devote significant efforts in developing proprietary software and services to meet our customer and channel partners’ evolving needs. These efforts have resulted in the development of our patented and patent-pending Nodeware solution. We expect to continue to make significant investments in developing other intellectual property to serve as the core to other proprietary software and services.

 

Historically, a significant portion of our revenues has been derived through our managed support services, however, we believe our cybersecurity SaaS solutions, including Nodeware, present an opportunity for significant growth. We believe that Nodeware’s ability to be deployed in an underserved market segment, across a wide variety of networks and the ability to integrate it into existing and new cybersecurity software and services, will allow us to significantly grow this segment of our business. Similarly, we believe Nodeware’s SaaS recurring revenue business model and its flexibility as a standalone or integrated solution makes it an attractive part of our channel partners’ portfolio of products. Accordingly, in 2021 and 2022, we made significant investments in Nodeware sales and marketing to grow our team of cybersecurity sales and technical consultants. As a result, we believe we are seeing the pipeline growth expected from focused efforts, which we anticipate will convert to revenue growth in 2022, 2023 and beyond.

 

We believe the market for cybersecurity services for small and medium-sized enterprises is fragmented and does not currently meet the needs of this customer base. The market is fragmented and is beginning to consolidate, which is why we are seeking to strategically acquire other cybersecurity technology and services companies.

 

The following sections define specific components of our business strategy.

 

Nodeware

 

Nodeware is a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware’s flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware assesses vulnerabilities in a computer network using proprietary scanning technology to capture a comprehensive view of the security exposure of a network infrastructure. Users receive alerts and view network information through a proprietary, web enabled dashboard. Continuous and automated internal scanning and external on demand scanning are components of this offering. As described below, Nodeware has one patent and one patent pending. We intend to develop other intellectual property that serve as the core to other proprietary software and services to market through a channel of domestic and international partners and distributors.

 

Nodeware provides an economical solution for small and medium-sized enterprises as compared to costly solutions focused on enterprise sized customers, and is designed to accommodate the varying network needs of our end customers’ organizations and networks. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. Nodeware creates an opportunity for our channel partners to sell and use a product that provides greater visibility into the network security of an end customer. Since 2018, we have continued to expand our portfolio of channel partners, which now includes Telarus, TD SYNNEX, Staples, and a growing list of MSPs, MSSPs, agents and distributors and government contractors.

 

 
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In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of Nodeware, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements across other current future subsidiaries as IGI’s roll up of cybersecurity companies comes to fruition. This also enhances our ability to bring new cloud and SaaS cybersecurity related solutions to market through our growing channel partner relationships.

 

Cybersecurity Services

 

In addition to Nodeware, we provide cybersecurity consulting services that include incident response, security awareness training, cybersecurity risk management, IT governance and compliance, security assessment services, (CISOTaaS ™) and PenLogic™ penetration testing services offerings to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology, in North America. Our cybersecurity consulting projects leverage different technology platforms and processes, such as Nodeware, to create documentation and processes that a customer can use to continually improve overall IT governance and corporate security. We validate overall network and infrastructure security with the goal of maintaining the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from cybersecurity threats and incidents. We continue to enhance our cybersecurity services based on feedback from customers and changes in the market.

 

Managed Support Services

 

We also provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, where we assume the responsibility for providing a defined set of cybersecurity services. These services typically include in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment.

 

Intellectual Property

 

We believe that our intellectual property is an asset that will contribute to the growth and profitability of our business. We rely on a combination of patented, patent-pending and confidentiality procedures, trademarks and contractual provisions to establish and protect our intellectual property rights in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks.

 

In May 2016, we filed a provisional patent application for our proprietary product, Nodeware, and launched it commercially in November 2016. In May 2017, we filed a utility patent application for Nodeware: U.S. Patent No. 10,999,307, was issued on May 4, 2021, for NETWORK ASSESSMENT SYSTEMS AND METHODS THEREOF U.S. Patent Application Serial No. 15/600,297, filed May 19, 2017, claiming priority of U.S. Provisional Patent Application Serial No. 62/338,904, filed May 19, 2016. The patent will remain in effect for four years from the date of issue and may be extended for up to twenty years from the filing date. Therefore, the expiration date of the subject patent, assuming all milestones to extend are met, is July 19, 2037.

 

In December 2019, we filed a second provisional patent application and in December 2020 we filed the subsequent action on the patent on Nodeware. In 2020 and 2021, we created updates and improvements to the platform in response to COVID-19 needs and impact such as a downloadable Windows executable version along with Windows, Mac, and Linux Agents that could be downloaded to a remote PC or server. A number of enhancements related to data management, threat intelligence, and user functionality were part of these updates.

 

The efforts we have taken to protect our intellectual property may not be sufficient or effective. As a result of this uncertainty and overall significance to the financial statements, these costs have been expensed.

 

The U.S. patent system permits the filing of provisional and non-provisional patent applications. A non-provisional patent application is examined by the United States Patent and Trademark Office and can mature into a patent once that office determines that the claimed invention meets the standards for patentability.

 

Our current patent and trademark portfolio consists of a patent for the Nodeware solution and process for scanning for vulnerabilities and a pending patent covering the methodologies associated with identifying and cataloging the assets on or across any physical or cloud network, together with a registered trademark for the “Nodeware” name and other trademarks and tradenames associated with our company and products. We intend to continue to work to enhance our intellectual property position on the Nodeware solution and in other appropriate cybersecurity technology we generate.

 

 
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Research and Development

 

Our research and development efforts are focused on ensuring our software and services continually adapt to ever-evolving cybersecurity threats, developing new and improved functionality to meet our customers’ needs, and to enable robust and efficient integration with other industry solutions. Our research and development team is responsible for the design, development, testing and quality of our software, including Nodeware, and works to ensure that our software is available, reliable and stable.

 

We believe the timely development of new features and the enhancement of our existing solution(s) that address continuously evolving cybersecurity risks is essential to maintaining our competitive position. Our research and development team works closely with our channel partners, customers, and internal teams to collect user feedback to enhance our development process to continually incorporate suggestions and feedback. We also believe our research and development teams’ focus on developing new products will help us expand our business and improve our market position. We invest substantial resources in research and development to ensure that the functionalities of Nodeware can be robustly and efficiently integrated with other industry solutions because we believe this is key to our ability to expand the presence of Nodeware and our other software and services in the cybersecurity market. We utilize an agile development process to deliver numerous releases, fixes and feature updates on a regular basis and capitalize qualifying costs of developing larger scale projects. Our research and development team is primarily based in Pittsford, New York, and we maintain additional research and development capabilities in certain other locations who supplement our core team.

 

In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing direct customer and channel partner relationships. We believe a continued focus on intellectual property development creates differentiation in the market for cybersecurity.

 

Costs incurred prior to reaching technological feasibility are expensed as incurred, and subsequently they are capitalized until product launch.

 

Certifications

 

We possess certifications with our business and technology partners and our technical support personnel maintain a number of relevant certifications and qualifications in certain software applications and in the cybersecurity space. We believe having these certifications and qualifications demonstrates to our channel partners and customers that we have the appropriate level of expertise to support their needs. These certifications are examples of our concerted effort to grow and expand our cybersecurity specialization, and include the following:

 

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 cybersecurity group have this certification.

 

GCIH - GIAC Certified Incident Handler. The GCIH certification is a credential for incident handlers who manage security incidents by understanding common attack techniques, vectors and tools as well as defending against and/or responding to such attacks when they occur. The GCIH certification focuses on detecting, responding, and resolving computer security incidents including:

 

 

·

the incident reporting process;

 

·

malicious applications and network activity;

 

·

common attack techniques that compromise hosts;

 

·

system and network vulnerabilities; and

 

·

continuous process improvement and the root causes of incidents.

   

Certain of our employees in our cybersecurity group have this certification.

 

CEH - Certified Ethical Hacker. CEH and CEH Master programs are 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 cybersecurity group have this certification.

 

 
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CISA - Cybersecurity and Infrastructure Agency leads the national effort to understand, manage, and reduce risk to our cyber and physical infrastructure.

CRISC - Certified in Information Systems and Risk Controls and is a certification in enterprise risk management.

CMMC-AB RP - Cybersecurity Maturity Model Certification is a unified standard for implementing cybersecurity across the defense industrial base, which includes over 300,000 companies in the supply chain.

OSCP - Offensive Security Certified Professional is a certification program that focuses on hands-on offensive information security skills.

GIAC - Global Information Assurance Certification is an information security certification entity that specializes in technical and practical certification for cybersecurity professionals.

Penetration Tester (GPEN)

Certified Intrusion Analyst (GCIA)

Certified Incident Handler (GCIH)

Certified Enterprise Defender (GCED)

Security Essentials (GSEC)

Python Coder (GPYC)

 

CompTIA Security+ (SEC+) is a global certification that validates the baseline skills in order to perform core security functions. 

 

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 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.

 

Regulations

 

We follow standard regulations and standards as part of our ongoing processes: NYS Shield Act, Sarbanes Oxley, National Institute of Standards and Technology Cybersecurity Framework, and Payment Card Industry (“PCI”) level 4 self-assessment.

 

Competition

 

We face competition from many companies in the evolving cybersecurity market. We compete with other MSPs and IT professional services firms who have cybersecurity offerings, MSSPs, and cybersecurity product and software developers operating in the North American market. We have competitors who are both publicly listed and private companies, and that are regional and national in coverage. Many of our larger competitors have substantially greater capital resources, research and development staff, sales, and marketing resources, facilities, and experience than we do. We obtain a portion of our business based on proposals submitted in response to requests from potential and current clients, who will typically also receive proposals from our competitors. Specifically, Nodeware faces direct competition from companies such as Rapid 7, Qualys, and Tenable in the vulnerability management market.

 

Facilities

 

Our principal offices are located at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534, where we lease approximately 7,181 square feet of office space under a lease that expires in 2029. Because approximately 85% of the workforce is remote, we felt it was prudent to reduce the size of our current facility. As a result, we entered into a new lease commencing June 1, 2022, for a smaller footprint than provided for under our previous lease.

 

We do not own or operate, and have no plans to establish, any manufacturing facilities.

 

Employees

  

As of October 13, 2022, we have 58 full-time employees, including 38 in information technology services, 4 in executive management, 4 in accounting, finance and administration, 2 in software development and 10 in marketing and sales. We are not subject to any collective bargaining agreements, and we believe that relations with our employees and independent contractors are good. We believe that we are currently staffed at an appropriate level to administratively implement and carry out our business plan for the next 12 months. However, we expect to add between 2 and 10 employees in sales, technical support, marketing and cybersecurity consulting to meet growing demands.

 

 
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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.

 

Company Information Available on the Internet

 

We maintain a website at https://igicybersecurity.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 prospectus and is not incorporated by reference into this prospectus.

 

General Information

 

We were incorporated under the laws of the state of Delaware on October 14, 1986. Our principal corporate headquarters are located at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534, and our phone number is (585) 385-0610. Our business is in the field of delivering cybersecurity services, licensing, and selling our cybersecurity solutions, including Nodeware, and distributing third party software licenses.

 

 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY

  

You should read the following discussion and analysis of our financial condition and results of operations together with our historical audited annual financial statements as of and for the years ended December 31, 2021 and 2020, and unaudited interim financial statements as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 and the related notes appearing elsewhere in this prospectus. Among other things, those historical financial statements include more detailed information regarding the basis of presentation for the financial data than are included in the following discussion. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. 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. See the “Cautionary Statement Regarding Forward-Looking Statements” above. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus. The following discussion and analysis of our financial condition and results of operations is presented after giving effect to the 75-to-1 reverse stock split.

 

Business Overview

 

Headquartered in Pittsford, New York, Infinite Group is a developer of cybersecurity software and related cybersecurity consulting, advisory and managed information security services. We principally sell our software and services through indirect channels such as MSPs, MSSPs, agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.

 

We believe our ability to succeed depends on how successful we are in differentiating ourselves in the cybersecurity market at a time when competition and consolidation in these markets are on the rise. Our strategy to differentiate our cybersecurity software and services from our competitors is to combine customized software and professional services, and grow our business by designing, developing, and marketing cybersecurity SaaS solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI CyberLabs, to fill technology gaps we identify, and then we bring these software and services to market through our existing channel partner and customer relationships. Our software and services are designed to simplify and manage the security needs of our customers and channel partners in a variety of environments. We focus on the small and medium-sized enterprises market. We support our channel partners by providing recurring-revenue business models for both services and through our cybersecurity SaaS solutions. Products may be sold as standalone solutions or integrated into existing environments to further automate the management of cybersecurity and related IT functions.

 

Business Strategy

 

We have a threefold business strategy composed of:

 

 

·

providing differentiated cybersecurity software and services to small to mid-sized enterprises who lack the internal resources to focus on cybersecurity related matters by combining customized software and professional services;

 

·

designing, developing, and marketing cybersecurity SaaS solutions, including our Nodeware solution; and

 

·

identifying other cybersecurity companies to acquire as part of a roll-up strategy.

 

We believe our ability to succeed depends on how successful we are in differentiating ourselves in the market at a time when competition and consolidation in these markets is on the rise.

 

Our software and services are designed to simplify the security needs of our customers and channel partners, with a focus on the small to mid-sized enterprises, and be believe our ability to integrate our product and service offerings differentiates them from our competitors. In addition, we support our channel partners by providing recurring -revenue business models for both services and our cybersecurity SaaS solutions.

 

Cybersecurity is a constantly evolving field, so we devote significant efforts in developing proprietary software and services to meet our customer and channel partners’ evolving needs. These efforts have resulted in the development of our patented and patent-pending Nodeware solution. We expect to continue to make significant investments in developing other intellectual property to serve as the core to other proprietary software and services.

 

Historically, a significant portion of our revenues has been derived through our managed support services, however, we believe our cybersecurity SaaS solutions, including Nodeware, present an opportunity for significant growth. We believe that Nodeware’s ability to be deployed across a wide variety of networks and the ability to integrate it into existing and new cybersecurity solutions, will allow us to significantly grow this segment of our business. Similarly, we believe Nodeware’s SaaS recurring revenue business model and its flexibility as a standalone or integrated solution makes it an attractive part of our channel partners’ portfolio of products. Accordingly, in 2021 and 2022, we made significant investments in IGI and CyberLabs sales and marketing to grow our team of cybersecurity sales and technical consultants. As a result, we believe we are seeing the pipeline growth expected from focused efforts, which we anticipate will convert to revenue growth in 2022, 2023 and beyond.

 

 
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We believe the market for cybersecurity services for small and medium-sized enterprises is fragmented and does not currently meet the needs of this customer base. The market is fragmented and is beginning to consolidate, which is why we are seeking to strategically acquire other cybersecurity technology and services companies.

 

Recent Developments

 

On August 8, 2022, the Company, as borrower, entered into a financing arrangement (the “Loan Agreement”) with Celtic Bank (the “Lender”), a Utah corporation. Pursuant to the Loan Agreement, the Lender agreed to lend the Company $139,400 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the Loan Agreement, payments are due beginning August 15, 2022, and shall consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty-day period, whichever is higher. Subsequent payments shall also consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728.00 over a sixty-day period, whichever is higher, with the final payment due on February 6, 2024. The Loan is subject to customary events of default.

  

On July 29, 2022, the Company and Andrew Hoyen (“Hoyen Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Hoyen Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Hoyen Lender (the “Hoyen Note”). The Hoyen Note and the Hoyen Modification was approved by the disinterested members of our Board of Directors. The Hoyen Modification extends the due date of the Hoyen Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Hoyen Modification, the Company agreed to repay to Lender $16,000 of the accrued interest on the Hoyen Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 5,333 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Note was $10,930 as of July 29, 2022. Except as set forth in the Hoyen Modification, the terms of the Hoyen Note remain the same.

 

On June 30, 2022, and September 6, 2022 the Company and Donald W. Reeve (“Reeve Lender”), a director of the company, entered into note modification agreements (each a “Reeve Modification” and collectively, the “Reeve Modifications”) with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The 2020 Note, the 2021 Note and the Reeve Modifications were each approved by the disinterested members of our Board of Directors.  The Reeve Modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note of $100,000 to January 1, 2023. The Reeve Modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616 will be due.  Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.

 

In June 2021, we created IGI CyberLabs, LLC, a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs’s overarching mission is to drive sales of our Nodeware Cloud security solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing channel partner relationships.

  

On November 3, 2021, we entered into a financing arrangement (the “Bridge Loan”) with Mast Hill Fund, L.P. ( “Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, the Mast Hill agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 18,667 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On February 15, 2022, we entered into a second financing arrangement (the “Second Bridge Loan”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 12,334 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On April 12, 2022, we entered into a third financing arrangement (the “Third Bridge Loan”) with Talos Victory Fund, LLC (“Talos” and together with Mast Hill, the “Lenders”) on substantially the same terms as our financing arrangements with Mast Hill. In exchange for a promissory note, the Talos agreed to lend the Company $296,000, which bears interest at a rate of eight percent (8%) per annum, less $29,600 original issue discount. As additional consideration for the financing, the Company issued Talos a 5-year warrant to purchase 9,867 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. On May 31, 2022, we entered into a fourth financing arrangement (the “Fourth Bridge Loan” and together with the Bridge Loan, Second Bridge Loan, and Third Bridge Loans, the “Loans”) with Mast Hill. In exchange for a promissory note, the Mast Hill agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. As additional consideration for the financing, the Company issued Mast Hill a 5-year warrant to purchase 11,834 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances below the exercise price of such warrants. Under the terms of the Loans, amortization payments are due beginning four months from the issue date, and each month thereafter with the final payment due on the one year anniversary of the Loans. Additionally, in the event of a default under the Loans or if the Company elects to pre-pay the Loans, the Lenders have the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. On April 29, 2022, Mast Hill exercised the warrant issued to them on November 3, 2021 in full on a cashless basis and acquired 11,470 shares of Common Stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for more information regarding the Loans.

 

As of October 19, 2022, Mast Hill holds warrants to purchase 13,516 shares of Common Stock and Talos holds warrants to purchase 9,867 shares of Common Stock issued in connection with the Loans (collectively, the “Loan Warrants”). The anti-dilution provisions of the Loan Warrants take effect if the Company’s common stock (or common stock equivalents, such as warrants) is sold or issued at a price lower than the initially stated $12.00 exercise price of the Loan Warrants. Accordingly, at the current assumed unit offering price of $4.38 (with warrants with an exercise price of $4.00 per share of common stock), the exercise price of the Loan Warrants would be reduced to $4.00 per share at the option of the holders thereof.  In addition, the conversion price of the Loans upon default or prepayment would be reduced from $7.50 to $4.00 per share.

 

 
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On December 15, 2021, our board of directors (the “Board”) approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock and recommended that the stockholders of the Company authorize the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On January 26, 2022, the company’s stockholders voted to authorize the reverse stock split. On October 17, 2022 our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio of 75-to-1, which became effective October 19, 2022. The reverse stock split did not impact the number of authorized shares of common stock which remains at 60,000,000 shares. Unless otherwise noted, the share and per share information in this prospectus reflects the effect of the reverse stock split.

 

Results of Operations

 

Comparison of the three and six months ended June 30, 2022 and 2021

 

The following discussion analyzes our results of operations for the years ended June 30, 2022 and 2021. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.

 

The following table compares our statements of operations data for the years ended June 30, 2022 and 2021. Certain trends suggested by this table are not indicative of future operating results

   

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022 vs 2021

 

 

 

 

 

 

 

 

 

As a % of

 

 

 

 

 

As a % of

 

 

Amount of

 

 

% Increase

 

 

 

2022

 

 

Sales

 

 

2021

 

 

Sales

 

 

Change

 

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$1,696,492

 

 

 

100.0%

 

$1,797,504

 

 

 

100.0%

 

$(101,012 )

 

 

(5.6 )%

Cost of sales

 

 

1,059,639

 

 

 

62.5

 

 

 

1,109,223

 

 

 

61.7

 

 

 

(49,584 )

 

 

(4.5 )

Gross profit

 

 

636,853

 

 

 

37.5

 

 

 

688,281

 

 

 

38.3%

 

 

(51,428 )

 

 

(7.5 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

613,317

 

 

 

36.2

 

 

 

541,711

 

 

 

30.1

 

 

 

71,606

 

 

 

13.2

 

Selling

 

 

612,957

 

 

 

36.1

 

 

 

507,042

 

 

 

28.2

 

 

 

105,915

 

 

 

20.9

 

Total cost and expenses

 

 

1,226,274

 

 

 

72.3

 

 

 

1,048,753

 

 

 

58.3

 

 

 

177,521

 

 

 

16.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(589,421 )

 

 

(34.7 )

 

 

(360,472 )

 

 

(20.1 )

 

 

(228,949 )

 

 

(63.5 )

Interest expense (net)

 

 

(243,779 )

 

 

(14.4 )

 

 

(56,031 )

 

 

(3.1 )

 

 

(187,748 )

 

 

(335.1 )

Net loss

 

$(833,200 )

 

 

(49.1 )%

 

$(416,503 )

 

 

(23.2 )%

 

$(416,697 )

 

 

(100.0 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$(1.88 )

 

 

 

 

 

$(1.07 )

 

 

 

 

 

$(0.81 )

 

 

 

 

      

 
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Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022 vs 2021

 

 

 

 

 

 

 

 

 

As a % of

 

 

 

 

 

As a % of

 

 

Amount of

 

 

% Increase

 

 

 

2022

 

 

Sales

 

 

2021

 

 

Sales

 

 

Change

 

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$3,363,562

 

 

 

100.0%

 

$3,621,846

 

 

 

100.0%

 

$(258,284 )

 

 

(7.1 )%

Cost of sales

 

 

2,180,879

 

 

 

64.8

 

 

 

2,182,138

 

 

 

60.2

 

 

 

(1,259 )

 

 

(0.1 )

Gross profit

 

 

1,182,683

 

 

 

35.2

 

 

 

1,439,708

 

 

 

39.8%

 

 

(257,025 )

 

 

(17.9 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

1,217,300

 

 

 

36.2

 

 

 

1,006,103

 

 

 

27.8

 

 

 

211,197

 

 

 

21.0

 

Selling

 

 

1,260,582

 

 

 

37.5

 

 

 

894,767

 

 

 

24.7

 

 

 

365,815

 

 

 

40.9

 

Total cost and expenses

 

 

2,477,882

 

 

 

73.7

 

 

 

1,900,870

 

 

 

52.5

 

 

 

577,012

 

 

 

30.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(1,295,199 )

 

 

(38.5 )

 

 

(461,162 )

 

 

(12.7 )

 

 

(834,037 )

 

 

(180.9 )

Interest expense (net)

 

 

(406,235 )

 

 

(12.1 )

 

 

(107,568 )

 

 

(3.0 )

 

 

(298,667 )

 

 

(277.7 )

Net loss

 

$(1,701,434 )

 

 

(50.6 )%

 

$(568,730 )

 

 

(15.7 )%

 

$(1,132,704 )

 

 

(199.2 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$(3.87 )

 

 

 

 

 

$(1.46 )

 

 

 

 

 

$(2.41 )

 

 

 

 

     

Sales

 

Our managed support service sales increased by 5.5% from $1,057,431 during the three months ended June 30, 2021 to $1,115,607 during the corresponding period of 2022. For the six month period ended June 30, managed support service sales increased 3.6% from $2,128,331 in 2021 to $2,204,614 for the same period in 2022.  Managed support service sales comprised approximately 66% of our sales in both the three and six months ended June 30, 2022, and approximately 59% for the same two periods in 2021.  The increase in our managed support service sales during the three and six months ended June 30, 2022 was due to additional projects requested by Perspecta, offset by the continued decline of virtualization subcontract projects assigned to us by VMWare due to projects coming to a conclusion in 2021. The decline in virtualization subcontract projects has been a trend occurring since 2015 that we expect to continue for the duration of 2022.

 

Our cybersecurity projects and software sales, primarily to SMEs, decreased by 15.7% to $580,885 during the three months ended June 30, 2022, from $689,073 during the corresponding period of 2021. These same sales decreased by 16.7% to $1,158,948 during the six months ended June 30, 2022, from $1,391,515 for the six-month period ended June 30, 2021, respectively.  The decrease is primarily due to a temporary decline in the number of cybersecurity projects, the mix of recurring versus one-time projects, and the completion of those projects for revenue recognition. This was offset primarily by the growth of 76% in Nodeware revenue for the six-month period ended June 30, 2022 over 2021. We expect the revenue to grow due to increased projects in the sales pipeline and completion of projects in the coming months.

 

Other IT consulting services sales declined during the three months ended June 30, 2022, decreasing by $51,000 from the same period in 2021. These same sales declined during the six months ended June 30, 2022 by $102,000 from the same period in 2021.  The decline in other IT consulting services sales for the three and six months ended June 30, 2022 was due to the termination of a consulting contract, which occurred during the second quarter of 2021.

 

 
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Cost of Sales and Gross Profit

 

Cost of sales principally represents compensation expense for our employees. Cost of sales decreased by 4.5% to $1,059,639 during the three months ended June 30, 2022 from $1,109,223 during the corresponding period of 2021. The decrease in cost of sales during the three months ended June 30, 2022 from 2021 was due to a reduction in headcount of marketing and sales personnel.  Cost of sales decreased slightly during the six months ended June 30, 2022 from the same period in 2021, by 0.1%, decreasing from $2,182,138 to $2,180,879.

 

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 of $613,317 for the three months ended June 30, 2022 increased 13% from $541,711 for the same quarter of 2021.  For the six months ended June 30, 2022, general and administrative costs were 21% higher than the same period in 2021, increasing to $1,217,300 from $1,006,103.  These were primarily due to the increases to professional fees for legal, accounting and consulting services of approximately $108,000, for the comparative three-month periods, and $198,000 for the comparative six month period.

 

Selling Expenses

 

Selling expenses of $612,957 for the three months ended June 30, 2022 increased 21% from $507,042 for the same quarter of 2021. The increase in selling expenses is due to the hiring of additional salespeople during 2021 to sell our cybersecurity services and software, and investments in consultants and partners to identify and sell more of our services and software. The increase in selling expenses from the hiring of new personnel was approximately $109,000 higher for the three months ended June 30, 2022 as compared to 2021 and spending on consulting partners was approximately $22,000 higher for the same respective periods.  For the six months ended June 30, 2022, Selling expenses of $1,260,582 increased 41% from $894,767 for the same period in 2021.   This increase is primarily related to the hiring of additional salespeople during 2021 as well as investment in consultants and partners.

 

Operating Income (Loss)

 

For the three months ended June 30, 2022 and 2021, operating loss was $589,421 and $360,472, respectively, for an increase in the loss by $228,949. For the six months ended June 30, 2022, the operating loss was $1,295,199, an increase in the loss by $834,037 from $461,162 in the same period of 2021. The increase in our operating loss from the previous year is principally attributable to the decrease in sales, growth of our sales team and the associated costs, and investment in the growth of our business as well as professional fees incurred for the six months ended June 30, 2022 as compared to 2021, as discussed above.

 

Interest Expense

Net interest expense of $243,779 for the three months ended June 30, 2022, increased 335% from expense of $56,031 for the same quarter of 2021.  Net interest expense of $406,235 for the six months ended June 30, 2022, increased 278% from expense of $107,571 for the same period of 2021.  The increase in interest expense is primarily attributable to the bridge loans taken in the last three quarters.

 

Net Loss

 

For the three months ended June 30, 2022 and 2021, net loss was $833,200 and $416,503, respectively, an increase in the loss by $416,696.  For the six months ended June 30, 2022 and 2021, net loss was $1,701,434 and $568,730, respectively.  The increase in both comparable periods is attributable primarily to the selling, general and administrative, and interest items discussed above. 

 

 
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Liquidity and Capital Resources

 

At June 30, 2022, we had cash of $1,594. At June 30, 2022, we had a working capital deficit of approximately $4,400,000 and a current ratio of 0.16.

 

During 2022, 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 June 30, 2022, based on eligible accounts receivable, we had $1,000 available under this arrangement. We expect sales during 2022 to generate additional accounts receivable eligible for factoring, that will support our operations. We pay fees based on the length of time that the invoice remains unpaid.

 

At June 30, 2022, we had current notes payable of $229,000 to related parties. $100,000 of this debt was extended from September 1, 2022 and is now due on January 1, 2023. The remaining $129,000 are in the form of demand notes with an interest rate of 6%.

 

At June 30, 2022, we had current notes payable of approximately $944,000 to third parties, which includes convertible notes payable of approximately $150,000. Also included is $12,500 in principal amount of a note payable due on June 30, 2016 but not paid by then. This note was issued in payment of software we purchased in February 2016 and secured by a security interest in the software. To date, the holder has not taken any action to collect the amount past due on this note or to enforce the security interest in the software.

 

Also included in the current notes payable are three Bridge Loans with Mast Hill Fund, L.P., which each bear interest at a rate of 8%. We plan to use the proceeds from the Bridge Loans to substantially enhance our marketing of CyberLab’s Nodeware solution, in order to significantly increase its growth. A total of approximately $658,000 was recorded as deferred note costs associated with these transactions. At June 30, 2022, the unamortized balance of the deferred notes costs was approximately $385,000. See Note 6 of the 2021 Audited Financial Statements for more information regarding the first Bridge Loan.  See our Form 8-K from February 15, 2022 for more information regarding the second Bridge Loan.  See our Form 8-K from May 31, 2022 for more information regarding the third Bridge Loan.  The gross notes payable to Mast Hill amount at June 30, 2022 was approximately $971,000.

 

Notes payable also includes a bridge loan from Talos Victory Fund, LLC., with an initial principal amount of $296,000, which bears interest at a rate of 8%.  A total of approximately $129,000 was recorded as deferred note costs associated with the loan.  As of June 30, 2022, the unamortized balance of the deferred note cost was approximately $101,000.  See our Form 8-K from April 12, 2022, for more information regarding this loan.  The gross note payable to Talos amount at June 30, 2022 was approximately $296,000.

 

We entered into unsecured lines of credit financing agreements (the “LOC Agreements”) with two related parties in previous years. The LOC Agreements provide for working capital of up to $100,000 through July 31, 2022 and $75,000 through January 2, 2023. At June 30, 2022, we had approximately $15,000 of availability under the LOC Agreements.

 

During the 2021, we issued demand notes to two board members for $55,000 in total. The demand notes bear a 6% interest rate. These were outstanding as of June 30, 2022.

 

At June 30, 2022, we had $765,000 of current maturities of long-term obligations to third parties. This is comprised of various notes including long-term notes to third parties of $265,000 due on January 1, 2018 (plus accrued interest of approximately $234,200), and approximately $500,000 due on December 31, 2021 which have not been renewed or amended.

 

 
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At June 30, 2022, we had $225,000 of current maturities of long-term obligations to related parties. $200,000 is due on January 1, 2023.  $25,000 is due on June 30, 2023. 

 

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 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 was $499,000 at June 30, 2022.

 

The following table sets forth our cash flow information for the periods presented:

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Net cash used by operating activities

 

$(636,906 )

 

$(12,380 )

Net cash used by investing activities

 

 

(111,347 )

 

 

(129,897 )

Net cash provided by financing activities

 

 

650,415

 

 

 

113,930

 

Net decrease in cash

 

$(97,838 )

 

$(28,347 )

 

Cash Flows 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. The cash impact of our net loss of $1,701,434 for the six months ended June 30, 2022, was offset in part by non-cash expenses and credits of $425,359. In addition, the cash impact of our net loss was further offset by a decrease in accounts receivable and other assets of $94,288, a decrease in accrued payroll, deferred revenue and other expenses payable of $4,784, and an increase in accounts payable of $549,665 resulting in cash used by operating activities of $636,906.

 

We have increased our marketing of Nodeware to our IT channel partners who resell to their customers. We have made investments in our cyber security team for penetration testing, CISOTaaS and other services. Due to the lengthy lead times typically needed to generate these new sales, we do not expect to realize a return from our sales and marketing personnel for one or more quarters. As a result, we may continue to experience 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, incremental borrowings and funds from the planned offering described above, as needed.

  

Cash Flows Used by Investing Activities

 

In the quarters ended June 30, 2022 and 2021, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The slight decrease from 2021 was primarily due to less development activities in 2022 that were capitalized. We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business. We do not anticipate our continued investment to be significant.

 

Cash Flows Provided by Financing Activities

 

During the six months ended June 30, 2022, we received $865,455 from various bridge loans from the Mast Hill Fund L.P. and Talos Victory Fund, LLC. This is comprised of gross proceeds of $1,021,000 less debt issuance costs of $155,545. We also paid principal of $215,040 of principal on the Mast Hill Fund L.P. bridge loan established in November 2021.

 

 
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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 June 30, 2022, we had financing availability, based on eligible accounts receivable, of approximately $1,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately $16,000 of available credit under various lines of credit as of June 30, 2022.

 

During May 2019, we originated a line of credit note payable for a $500,000 with a related party and borrowed $499,000 and have $1,000 available to borrow for working capital. This agreement matures in August 2026.

 

During 2017, we originated two lines of credit with related parties totaling $175,000. At June 30, 2021, we had $15,000 available under these financing agreements. The maturity date of the $75,000 line of credit is January 2023, whereas the maturity date of the $100,000 line of credit has been extended to July 2023.

 

We believe the capital resources available under our factoring line of credit, cash from additional related party loans and cash generated by improving the results of our operations will be sufficient to fund our ongoing operations for at least the next 12 months. The funds from the equity raise will allow us to support and accelerate the internal growth of our operations and offer additional opportunities if they arise.

 

We anticipate financing growth from acquisitions of other businesses, if any, and our longer-term internal growth through one or more of the following sources: issuance of equity; cash from collections of accounts receivable; additional borrowing from related and third parties; use of our existing accounts receivable credit facility; or a refinancing of our accounts receivable credit facility. 

 

Comparison of the years ended December 31, 2021 and 2020

 

The following discussion analyzes our results of operations for the years ended December 31, 2021 and 2020. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.

 

The following table compares our statements of operations data for the years ended December 31, 2021 and 2020. Certain trends suggested by this table are not indicative of future operating results.

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

2021 vs. 2020

 

 

 

 

 

As a % of

 

 

 

 

 

As a % of

 

 

Amount of

 

 

% Increase

 

 

 

2021

 

 

Sales

 

 

2020

 

 

Sales

 

 

Change

 

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$7,224,242

 

 

 

100.0%

 

$7,219,446

 

 

 

100.0%

 

$4,796

 

 

 

0.1%

Cost of sales

 

 

4,489,306

 

 

 

62.1

 

 

 

4,177,268

 

 

 

57.9

 

 

 

312,038

 

 

 

7.5

 

Gross profit

 

 

2,734,936

 

 

 

37.9

 

 

 

3,042,178

 

 

 

42.1

 

 

 

(307,242 )

 

 

(10.1 )

General and administrative

 

 

2,159,378

 

 

 

29.9

 

 

 

1,696,415

 

 

 

23.5

 

 

 

462,963

 

 

 

27.3

 

Selling

 

 

1,983,127

 

 

 

27.5

 

 

 

1,344,472

 

 

 

18.6

 

 

 

638,655

 

 

 

47.5

 

Total operating expenses

 

 

4,142,505

 

 

 

57.3

 

 

 

3,040,887

 

 

 

42.1

 

 

 

1,101,618

 

 

 

36.2

 

Operating income (loss)

 

 

(1,407,569 )

 

 

(19.5 )

 

 

1,291

 

 

 

0.0

 

 

 

(1,408,860 )

 

 

(109,129.4 )

Other income

 

 

120,505

 

 

 

1.7

 

 

 

967,007

 

 

 

13.4

 

 

 

(846,502 )

 

 

(87.5 )

Interest expense, net

 

 

(281,749 )

 

 

(3.9 )

 

 

(292,302 )

 

 

(4.0 )

 

 

10,553

 

 

 

(3.6 )

Net income (loss)

 

$(1,568,813 )

 

 

(21.7 )%

 

$675,996

 

 

 

9.4%

 

$(2,244,809 )

 

 

(332.1 )%

Net income (loss) per share - basic

 

$(3.91 )

 

 

 

 

 

$1.74

 

 

 

 

 

 

$(5.65 )

 

 

 

 

Net income (loss) per share diluted

 

$(3.91 )

 

 

 

 

 

$1.17

 

 

 

 

 

 

$(5.08 )

 

 

 

 

     

 
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Our managed support service sales decreased by 7.4% from $4,669,570 during the twelve months ended December 31, 2020 to $4,325,067 during the corresponding period of 2021. VMWare represented a decrease of approximately $232,000 and Managed Information Security Services decreased by approximately $113,000. Managed support service sales accounted for approximately 60% of our sales in 2021 and approximately 65% for the same period in 2020. The decline in our managed support service sales during 2021 was due to the continued declines of virtualization subcontract projects assigned to us by VMWare and existing projects coming to a conclusion. The decline in virtualization subcontracting projects has been a trend occurring since 2015 and we discontinued the business in 2021. We expect our Managed Information Security Services sales to remain steady in 2022.

 

Our cybersecurity software and services sales, primarily to SMEs, increased by 22.2% to $2,793,057 during the twelve months ended December 31, 2021 from $2,285,876 during the corresponding period of 2020. The increase in cybersecurity software and services sales during 2021 was attributable to increased sales efforts of our sales team in finding new customers. We expect our cybersecurity software and services business to continue to grow due to our expanding salesforce, channel and marketing programs.

 

Other IT consulting services sales decreased by $145,000 or 54.9% during the twelve months ended December 31, 2021 as compared to 2020. The decline in other IT consulting services sales was due to the termination of a consulting contract, which occurred during the first half of 2021.

 

Cost of Sales and Gross Profit

 

Cost of sales principally represents the compensation expense for our employees (primarily the cost of our IT services group). In smaller amounts, we also incurred cost of sales for third party software licenses for our commercial SME partners. Cost of sales increased by 7.5% to $4,489,306 during the twelve months ended December 31, 2021 from $4,177,268 during the corresponding period of 2020. The increase in cost of sales during the twelve months ended December 31, 2021 from 2020 was due to an increase in salaried employees amounting to an increase of approximately $368,000 to support our cybersecurity software and services team, partially offset by a reduction in headcount of hourly employees in supporting our managed support services (approximately $73,000).

 

Gross profit decreased by 10.1% to approximately $2,734,936 for 2021. The primary driver of the reduction in gross profit was the increase in cost of sales in 2021 from 2020 due to the cost of the three new salaried employees to support our cybersecurity software and services team.

 

General and Administrative Expenses

 

General and administrative expenses include corporate overhead such as compensation and benefits for executive, administrative and finance personnel, rent, insurance, professional fees, travel, and office expenses. General and administrative expenses increased by $462,963 in 2021 due primarily to increases in salaries and benefits of approximately $165,000, consulting expenses of approximately $137,000, and legal fees of approximately $161,000. Corporate marketing expenses decreased by approximately $54,000.

 

Selling Expenses

 

The increase of $638,655 in selling expenses to $1,983,127 in 2021 was principally due to the increase of employee salaries, commissions and benefits totaling approximately $403,000 due primarily to the growth to the cyber security and CyberLabs leadership and sales teams. The remaining increase is attributable to several smaller items including amortization of development labor, marketing and consulting fees.

 

Operating Income (Loss)

 

The decrease of approximately $1,408,860 in our operating income for 2021 was attributable to a decrease in gross profit of $307,242, an increase in our general and administrative expenses of $462,963 and our selling expenses of $638,655. 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 consulting and legal fees incurred for the twelve months ended December 31, 2021 as compared to 2020.

 

Other Income

 

In 2021, we settled the long-term debt agreement with the Pension Benefit Guaranty Corporation (“PBGC”) for $200,000 on the outstanding principal of $246,000 and accrued interest of approximately $74,500. We recorded a gain of approximately $120,500 at that time of forgiveness. In 2020, we received a Paycheck Protection Plan (“PPP”) loan which was subsequently forgiven in the 4th quarter of 2020. We recorded $963,516 of other income at that time of forgiveness. These events are non-recurring.

 

 
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Interest Expense, net

 

Interest expense decreased by approximately $10,553 and includes interest on indebtedness, amortization of loan fees, cost of stock options as part of debt agreements and fees for financing accounts receivable invoices. The decrease in interest expense is principally attributable to stock option costs from 2020 which did not occur in 2021. The decrease in interest expense is primarily attributable to the non-cash options expense issued for loan financing consideration of approximately $69,300 during 2020 offset by the associated interest of approximately $54,000 from the Mast Hill Bridge Loan in 2021.

 

Net Income (loss)

 

The decrease in net income (loss) is attributable primarily to the selling, general and administrative items discussed above for 2021 as compared to 2020 due to our focus on growing and developing the Cybersecurity Services and CyberLabs segments.

 

Liquidity and Capital Resources

 

At December 31, 2021, we had cash of $99,432 available for working capital needs and planned capital asset expenditures and a working capital deficit of approximately $3,062,000 with a current ratio of 0.25.

 

During 2021, 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 December 31, 2021, based on eligible accounts receivable, we had $66,000 available under this arrangement. We expect sales during 2022 to generate additional accounts receivable eligible for factoring, that will support our operations. We pay fees based on the length of time that the invoice remains unpaid.

 

At December 31, 2021, we had current notes payable of $229,000 to related parties. $100,000 of this debt is due on June 1, 2022. The remaining $129,000 are in the form of demand notes with an interest rate of 6%.

 

At December 31, 2021, we have current notes payable of approximately $384,000 to third parties, which includes convertible notes payable of approximately $150,000. Also included is $12,500 in principal amount of a note payable due on June 30, 2016 but not paid by then. This note was issued in payment of software we purchased in February 2016 and secured by a security interest in the software. To date, the holder has not taken any action to collect the amount past due on this note or to enforce the security interest in the software.

 

Also included in the current notes payable is the Bridge Loan with Mast Hill Fund, L.P., which bears interest at a rate of 8%. We plan to use the proceeds from the Bridge Loan to substantially enhance our marketing of CyberLabs’s Nodeware solution, in order to significantly increase its growth. A total of approximately $272,000 was recorded as deferred note costs associated with this transaction. At December 31, 2021, the unamortized balance of the deferred note costs was approximately $227,000. See Note 6 of the 2021 Audited Financial Statements for more information.

 

At December 31, 2021, we also have an accrued liability for the voluntary match portion of a former simple IRA plan, including interest, of approximately $275,000. We do not anticipate distributing this liability in the next year or two. Interest will continue to accrue.

 

We have $765,000 of current maturities of long-term obligations to third parties. This is composed of two notes including long-term notes to third parties of $265,000 due on January 1, 2018, which has not been renewed or amended, and $500,000 due on December 31, 2021. The accrued interest on these notes and current maturities is approximately $281,000 at December 31, 2021. These notes have not been paid. We plan to renegotiate the terms of the notes payable, offset with amounts owed to us, seek funds to repay the notes or use a combination of the alternatives.

 

We have $190,000 of current maturities of long-term obligations to related parties. This is composed of the scheduled payment of $100,000 to an officer of the company on June 1, 2022 and a scheduled payment of $90,000 on July 1, 2022. The accrued interest of these notes is approximately $33,700 at December 31, 2021.

 

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.

 

Our ability to raise the additional capital is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of development and business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price that is favorable to us. In addition, our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the recent or future disruptions to and volatility in the financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic or otherwise. With regards to our existing debt, if the equity raise is not successful, we plan to restructure the debt, convert debt to equity or pay down appropriate debt. We may also increase ownership via exercising of stock options and the potential sale of restricted stock. If adequate funds are not available when needed, we may need to significantly reduce our operations while we seek strategic alternatives, which could have an adverse impact on our ability to achieve our intended business objectives including new software initiatives.

 

We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.

 

 
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Cash Flows

 

The following table summarizes our cash flow information for the years presented, described below, and should be read in conjunction with our financial statements appearing at Item 15, Page F-1, et seq., of this report.

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Net cash used in operating activities

 

$(544,817 )

 

$(413,755 )

Net cash used in investing activities

 

 

(243,034 )

 

 

(303,540 )

Net cash provided by financing activities

 

 

854,970

 

 

 

743,210

 

Net increase in cash

 

$67,119

 

 

$25,915

 

 

Cash Flows Used in Operating Activities

 

Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. We bill our clients weekly or monthly after services are performed, depending on the contract terms. Our net loss of $1,568,813 for 2021 was increased by non-cash expenses for depreciation, amortization, bad debt expense, amortization of debt discount and stock-based compensation of $364,857 and decreased for non-cash adjustments for forgiveness of debt of $120,505. In addition, an increase in accounts payable and accrued expenses of $626,328 was offset by increases in accounts receivable and other assets of $153,316 resulted in net cash used in operating activities of $544,817.

 

We are increasing our marketing of Nodeware to our IT channel partners who resell to their customers. We are making investments in our cyber security team for penetration testing, CISOTaaS and other services. Due to the lengthy lead times typically needed to generate these new sales, we do not expect to realize a return from our sales and marketing personnel for one or more quarters. As a result, we may continue to experience small operating income or operating losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows, the equity raise and incremental borrowings, as needed.

 

Cash Flows Used in Investing Activities

 

In 2020 and 2021, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The slight decrease from 2020 was primarily due to less development activities in 2021 that were capitalized. We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business. We do not anticipate our continued investment to be significant.

 

Cash Flows Provided by Financing Activities

 

During 2021, we received $378,040 from a bridge loan from the Mast Hill Fund L.P. We borrowed $249,000 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 2019 and 2020, we borrowed $250,000 from the $500,000 credit note. We also borrowed $329,000 from other related parties during 2021, of which $100,000 was extinguished with common stock. During 2021, we paid $200,000 to the PBGC to settle all outstanding indebtedness and terminate all commitments and obligations under its original promissory note dated October 17, 2011, and the First Amended Agreement dated March 15, 2015. The Company recorded a gain of $120,505 as part of the transaction. We also received $98,930 from the exercising of stock options during 2021.

 

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. If the equity raise is successful, we plan to pay down a portion of the debt.

 

 
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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, 2021, we had financing availability, based on eligible accounts receivable, of approximately $66,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately $16,000 of available credit under various lines of credit as of December 31, 2021.

 

During May 2019, we originated a line of credit note payable for a $500,000 with a related party and borrowed $499,000 and have $1,000 available to borrow for working capital. This agreement matures in August 2026.

 

During 2017, we originated two lines of credit with related parties totaling $175,000. At December 31, 2021, we had $15,000 available under these financing agreements which mature in July 2022 and January 2023, respectively.

 

We believe the capital resources available under our factoring line of credit, cash from additional related party loans and cash generated by improving the results of our operations will be sufficient to fund our ongoing operations for at least the next 12 months. The funds from the equity raise will allow us to support and accelerate the internal growth of our operations and offer additional opportunities if they arise.

 

We anticipate financing growth from acquisitions of other businesses, if any, and our longer-term internal growth through one or more of the following sources: issuance of equity: cash from collections of accounts receivable; additional borrowing from related and third parties; use of our existing accounts receivable credit facility; 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 including Capitalization of Software for Resale and management’s assessment of going concern.

 

 
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MANAGEMENT AND BOARD OF DIRECTORS

 

Executive Officers and Directors

 

The following table sets forth certain information about our executive officers and directors as of October 13, 2022:

 

Name

 

Age

 

Position(s)

Executive Officers:

 

 

 

 

James A. Villa

 

65

 

Chief Executive Officer and Director

Andrew T. Hoyen

 

51

 

President, Chief Operating Officer and Director

Richard W. Glickman

 

60

 

Vice President of Finance and Chief Accounting Officer

Non-Employee Directors:

 

 

 

 

Donald W. Reeve

 

76

 

Chairman of the Board

Kenneth Edwards

 

64

 

Director Nominee*

Teresa Bair

 

50

 

Director Nominee*

 

*This individual has indicated his or her assent to occupy such position on the effective date of the registration statement, of which this prospectus is a part.

 

Executive Officers

 

James A. Villa is our Chief Executive Officer and a director. He became a director on July 1, 2008, our President on February 25, 2010, and our Chief Executive Officer on January 21, 2014. Previously, Mr. Villa served as our Acting Chief Executive Officer from December 31, 2010 to January 21, 2014. Mr. Villa brings to the Board his experience with us since 2003 as well as professional experience gained from his services to a variety of public and privately held middle market businesses. Mr. Villa holds a bachelor’s degree in electrical engineering from Clarkson University, where he studied computer science and power transmission and distribution. Mr. Villa also has software and technology experience having acted as an IT and business consultant.

 

Andrew T. Hoyen is our President, Chief Operating Officer and a director. He was initially appointed Chief Administrative Officer and Senior Vice President of Business Development on October 1, 2014. In January 2016, he was appointed Chief Operating Officer. On July 18, 2017, he was elected to the Board, In September 2020, he was named President in addition to his role as Chief Operating Officer. Mr. Hoyen is responsible for developing and implementing our strategic direction through improved operations, M&A, sales and marketing, product development, and overall collaboration across the enterprise. Previously, he has served in a variety of executive roles at Toyota Material Handling North America, Eastman Kodak Company, and their spin-off, Carestream Health that have enabled him to fit the roles he has played at IGI. He holds a Bachelor of Science degree in Biotechnology from Worcester Polytechnic Institute, a Master of Public Health degree from State University of New York at Albany and a Master of Business Administration degree from Rochester Institute of Technology.

 

Richard W. Glickman is our Vice President of Finance and Chief Accounting Officer. He became Vice President of Finance and Chief Accounting Officer in February 2019. Mr. Glickman is responsible for accounting, financial reporting, financial analyses, and various special projects. Previously, since 2015, he was Chief Financial Officer for American Rock Salt Company. Prior to that, from 2013 to 2015, he was Chief Financial Officer for HCR Home Care. Prior to that, from 2001 to 2013, he served in various roles in accounting, financial operations, and strategic projects for Time Warner Cable. He holds a Bachelor of Science in accounting from State University of New York at Buffalo and a Master of Business Administration degree from University of Rochester.

 

Non-Employee Directors

 

Donald W. Reeve became a director on December 31, 2013. He became Chairman of the Board on August 20, 2019. Since January 2013, he has been the principal partner at ReTech Services, LLC, a management consulting practice. Since August 2013, Mr. Reeve has been providing consulting services to us on a part time basis without cash compensation. Previously, Mr. Reeve was Senior Vice President and Chief Information Officer for Wegmans Food Markets, Inc. (Wegmans) from May 1986 until his retirement in August 2012. In that position, he managed an information technology staff of approximately 300 professionals with responsibilities for development, application and support services of computer technology. Prior to May 1986 and since 1970, he held various positions of increasing responsibility for Wegmans. Mr. Reeve serves on the Board of Directors of ESL Federal Credit Union, a full-service financial institution. He also serves on the Board of Directors of Veterans Outreach Center of Rochester, a non-profit organization dedicated to advocating for and serving veterans. He attended Monroe Community College and SUNY Empire State College, earned an associate’s degree at Rochester Business Institute and is a veteran of the U.S. Army. Mr. Reeve brings to the Board the experience of managing the IT requirements for a growing company in a competitive environment. Mr. Reeve provides strategic guidance to the Board and our management as we continue to enter various commercial IT markets.

 

 
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Director Nominees

 

Kenneth Edwards is a nominee for director. Since 2016, he has been Chief Financial Officer of EdisonLearning, Inc., an education management company. Previously, from July 2016 until September 2017, Mr. Edwards served as Managing Director for CFO Strategies, LLC, an outsourced chief financial officer and controller services company. From 2007 to July 2016, he served as Audit Partner of Cohn Reznick, a public accounting firm, and from 2002 to 2007, he was an owner of Edwards & Company CPA, PC, a public accounting firm. From 1986 to 1993 and again from 2000 to 2002, he held various positions with BDO Seidman, a public accounting firm. From 1997 to 2000, he served as Chief Financial Officer of Menu Direct, Inc., a specialty food manufacturer, and from 1993 to 1997 he held finance-related roles with Home State Holdings, Inc., an insurance holding company that focused on property and casualty insurance. Prior to that, he served as Audit Manager for Coopers & Lybrand, a public accounting firm. Mr. Edwards serves on the Board of Directors of SilverSun Technologies, Inc. (Nasdaq: SSNT), a provider of transformational business technology solutions and services. Mr. Edwards holds a Bachelor of Arts degree in accounting and finance from Goshen College. He is a certified public accountant. Mr. Edwards brings to the board over 40 years of experience in the accounting and finance industry.

 

The Board believes that Mr. Edwards’s extensive experience as a CPA makes him well-qualified to help guide the Audit Committee of the Board. The Board has determined that Mr. Edwards meets the current independence and experience requirements contained in the listing standards of The Nasdaq Capital Markets and is an audit committee financial expert as defined in Securities and Exchange Commission regulations.

 

Teresa Bair is a nominee for director. Since October 2021, she has been Chief Legal Officer, Chief Compliance Officer and Corporate Secretary of Kura Oncology, Inc. (Nasdaq: KURA), an oncology-focused biotechnology company. Previously, from June 2015 until October 2021, Ms. Bair held various legal positions with Athenex, Inc. (Nasdaq: ATNX), an oncology-focused biotechnology company. At Athenex, she served as General Counsel and Corporate Secretary from June 2020 until October 2020, Senior Vice President, Administration and Legal Affairs and Corporate Secretary from December 2018 until June 2020, and Vice President, Corporate Development and Legal Affairs and Corporate Secretary from June 2015 until December 2018. Prior to that, she was as a Partner with Harris Beach, PLLC, a full-service law firm, advising business clients, including Fortune 500 companies, across diverse industries on commercial litigation matters. Ms. Bair serves on the Board of Directors of BirchBioMed Inc., a clinical-stage anti-scarring biomedical company. Ms. Bair holds a Bachelor of Science degree in business administration from Bowling Green State University and a Juris Doctor degree from State University of New York at Buffalo School of Law. Ms. Bair brings to the board over 25 years of in-house and law firm experience, including significant experience in public company compliance and corporate governance.

 

The Board believes that Ms. Bair’s extensive experience as an attorney makes her well-qualified to help guide the Nominating and Corporate Governance Committee of the Board. The Board has determined that Ms. Bair meets the current independence and experience requirements contained in the listing standards of The Nasdaq Capital Markets.

 

 
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CORPORATE GOVERNANCE

 

Composition of our Board of Directors; Independence

 

Our current Board of Directors consists of Donald W. Reeve, James Villa, and Andrew Hoyen. Mr. Villa and Mr. Hoyen are not considered independent based on the listing standards of Nasdaq. We are not currently listed on a national securities exchange or in an inter-dealer quotation system that requires a majority of the Board be independent. We have nominated Kenneth Edwards and Teresa Bair, each of whom is considered independent under the Nasdaq listing standards, for appointment to the Board. We expect that these nominees will commence service on the Board at the time of effectiveness of the registration statement of which this prospectus forms a part. As required under applicable Nasdaq rules, we anticipate that our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.

 

Committees

 

Our Board intends to have three standing committees upon the effectiveness of this registration statement: Audit Committee; Compensation Committee; and a Nominating and Corporate Governance Committee. Each of these committees will consist solely of independent directors including Mr. Reeve and our two director nominees who will join the Board and these committees upon the effectiveness of this registration statement. We will adopt written charters for each of these committees that will be available on our website. Our Board may establish other committees as it deems necessary or appropriate from time to time.

 

Audit Committee

 

The Audit Committee will be responsible for, among other matters:

 

 

·

appointing, compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm;

 

·

discussing with our independent registered public accounting firm the independence of its members from its management;

 

·

reviewing with our independent registered public accounting firm the scope and results of their audit;

 

·

approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm;

 

·

overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC;

 

·

reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal and regulatory requirements;

 

·

coordinating the oversight by our board of directors of our code of ethics and our disclosure controls and procedures;

 

·

establishing procedures for the confidential and/or anonymous submission of concerns regarding accounting, internal controls or auditing matters; and

 

·

reviewing and approving related-person transactions.

   

Nasdaq rules require us to have one independent Audit Committee member upon the listing of our common stock, a majority of independent directors within 90 days of the date of this prospectus and all independent Audit Committee members within one year of the date of this prospectus. Upon the effectiveness of this registration statement, Kenneth Edwards (Chair), Donald W. Reeve, and Teressa Bair will serve on the Audit Committee and meet the definition of “independent director” for purposes of serving on our Audit Committee under Rule 10A-3 under the Exchange Act and Nasdaq rules. Kenneth Edwards qualifies as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K.

 

Compensation Committee

 

The Compensation Committee will be responsible for, among other matters:

 

 

·

reviewing key employee compensation goals, policies, plans and programs;

 

·

reviewing and approving the compensation of our directors and executive officers;

 

·

reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and

 

·

appointing and overseeing any compensation consultants or advisors.

   

Upon the effectiveness of this registration statement, Donald W. Reeve (Chair), Kenneth Edwards, and Teresa Bair will serve on the Compensation Committee and meet the definition of “independent director” for purposes of serving on our Compensation Committee under Nasdaq rules.

 

 
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Compensation Committee Interlocks and Insider Participation

 

None of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more officers serving as a member of our board of directors.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee will be responsible for assisting the Board in identifying qualified individuals to become directors, in determining the composition of the Board, in monitoring compliance with our Code of Ethics and in monitoring the process to assess Board effectiveness. Upon the effectiveness of this registration statement, Teresa Bair (Chair), Kenneth Edwards, and Donald W. Reeve will serve on the Nominating and Corporate Governance Committee.

 

Board Diversity

 

While we do not have a formal policy on diversity, the Board considers diversity to include the skill set, background, reputation, type and length of business experience of the Board members as well as a particular nominee’s contributions to that mix. The Board believes that diversity brings a variety of ideas, judgments and considerations that benefit the Company and its stockholders. Although there are many other factors, the Board seeks individuals with experience on operating and growing businesses. Additionally, we plan on fully complying with Nasdaq’s Board Diversity Rules, as described in Nasdaq rules 5605(f) and 5606.

 

Board Leadership Structure

 

Donald W. Reeve serves as the Chairman of the Board and actively interfaces with management, the Board and counsel regularly. We believe that separating the roles of Chairman and Chief Executive Officer is in the best interests of the Company and its stockholders at this time because it allows the Chief Executive Officer to focus on generating sales, overseeing sales and marketing, and managing the Company while leveraging the experience and perspectives of the Chairman, and it offers an additional channel of communication for other directors, investors and employees.

 

Board Risk Oversight

 

The Company’s risk management function is overseen by the Board. The Company’s management keeps the Board apprised of material risks and provides its directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us, and how management addresses those risks. If an identified risk poses an actual or potential conflict with management, the Company’s independent directors may conduct the assessment and investigate it accordingly.

 

Code of Ethics

 

We have adopted a code of business conduct and ethics that applies to our principal executive officer, principal financial officer and other persons performing similar functions, as well as all employees and directors. This code of business conduct and ethics is posted on our website at www.igicybersecurity.com under Business Conduct Guidelines. Upon effectiveness of this registration statement, the Board intends to adopt a revised Code of Business Conduct and Ethics consistent with Nasdaq listing requirements and that applies to our directors, officers and employees. A copy of this code will be available on our website. We intend to disclose on our website any amendments to the Code of Business Conduct and Ethics and any waivers of the Code of Business Conduct and Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions.

 

Director and Officer Indemnification Agreements

 

Upon effectiveness of this registration statement, we intend to enter into new indemnification agreements with all of our directors and executive officers. In general, these agreements provide that we will indemnify the executive officer or director to the fullest extent permitted by law for claims arising in his or her capacity as an executive officer or director of our company or in connection with his or her service at our request for another corporation or entity. The indemnification agreements also provide for procedures that will apply in the event that an executive officer or director makes a claim for indemnification and establish certain presumptions that are favorable to the executive officer or director.

 

 
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EXECUTIVE AND DIRECTOR COMPENSATION

 

2021 Summary Compensation Table

 

The Summary Compensation Table below includes, for each of the years ended December 31, 2021 and 2020, 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, 2021 (together, the “Named Executive Officers”).

 

Name and Principal Position

 

Year

 

Salary

 

 

Option

Awards (1)

 

 

All Other

Compensation

 

 

Total

 

James Villa

 

2021

 

$240,475

 

 

$0

 

 

 

0

 

 

$240,475

 

Chief Executive Officer

 

2020

 

$237,560

 

 

$0

 

 

 

0

 

 

$237,560

 

Andrew Hoyen

 

2021

 

$227,163

 

 

$0

 

 

 

0

 

 

$227,163

 

President and Chief Operating Officer

 

2020

 

$213,765

 

 

$0

 

 

 

0

 

 

$213,765

 

Richard Glickman

 

2021

 

$110,652

 

 

$1,240(1)

 

 

0

 

 

$111,892

 

VP Finance and Chief Accounting Officer

 

2020

 

$103,948

 

 

$1,783(1)

 

 

0

 

 

$105,731

 

_________________

1. The amounts in this column do not reflect option awards actually received by our Named Executive Officers, but instead reflect the aggregate grant date fair value for stock option awards computed in accordance with FASB ASC 718. The fair value of the stock option awards was determined using the Black-Scholes option pricing model. See Note 3 to the financial statements in this report regarding assumptions underlying valuation of equity awards.

 

Outstanding Equity Awards at December 31, 2021

 

The following table provides information with respect to the value of all unexercised options previously awarded to our Named Executive Officers as of December 31, 2021.

 

Option Awards

 

Name

 

Number of

Securities

Underlying

Unexercised

Options

- Exercisable

 

 

Number of

Securities

Underlying

Unexercised

Options - Unexercisable

 

 

Option

Exercise

Price

 

 

Option

Expiration

Date

 

James Villa

 

 

6,667

 

 

 

-

 

 

$

8.63

 

 

1/20/2024

 

 

 

 

3,334

 

 

 

-

 

 

$

3.75

 

 

12/22/2024

 

 

 

 

3,334

 

 

 

-

 

 

$

9.00

 

 

11/16/2025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Andrew Hoyen

 

 

5,334

 

 

 

-

 

 

$

3.00

 

 

7/31/2022

 

 

 

 

1,334

 

 

 

-

 

 

$

3.00

 

 

7/17/2022

 

 

 

 

2,667

 

 

 

-

 

 

$

3.00

 

 

12/09/2024

 

 

 

 

3,334

 

 

 

-

 

 

$

3.75

 

 

12/22/2024

 

 

 

 

3,334

 

 

 

-

 

 

$

1.50

 

 

6/1/2026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Richard Glickman

 

 

2,667

 

 

 

-

 

 

$

1.50

 

 

7/23/2024

 

 

 

 

667

 

 

 

-

 

 

$

3.00

 

 

12/9/2024

 

 

 

 

334

 

 

 

-

 

 

$

9.00

 

 

7/12/2025

 

 

 

 

334

 

 

 

-

 

 

$

6.75

 

 

1/3/2026

 

 

Employment Agreements

 

We do not have any employment agreements with any of the Named Executive Officers.

 

 
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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.

 

Director Compensation Fiscal Year Ending December 31, 2021

Name

 

Fees earned or paid in cash

 

 

Stock Award

 

 

Option

Award

 

 

Non-Equity Incentive Plan Compensation

 

 

Change in Pension Value and Nonqualified Deferred Compensation Earnings

 

 

All Other Compensation

 

 

Total

 

Donald W. Reeve

 

$12,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

$12,000

 

 

At December 31, 2021, Donald W. Reeve held exercisable options for:

 

 

·

8,000 shares of our common stock at an exercise price of $3.75 per share which expires on November 30, 2024;

 

·

6,667 shares of common stock at an exercise price of 11.25 per share which expires on September 4, 2023; and

 

·

3,334 shares of common stock at an exercise price of $3.75 per share which expires on December 22, 2024.

 

Equity compensation plan information as of December 31, 2021

 

The Company’s Board and stockholders approved a stock option plan adopted in 2005. Since this plan has expired, no additional options may be granted under this plan. At December 31, 2021, there are options for 13,200 common shares outstanding under this plan.

 

The 2009 Stock Option Plan (“2009 Plan”) was established in February 2009 to align the interests of our employees, consultants, agents, and affiliates with those of our stockholders to incent them to increase their efforts on our behalf and to promote the success of our business. The 2009 Plan expired on February 3, 2019, and as of December 31, 2021, there were outstanding options to acquire 16,267 shares of common stock under the 2009 Plan. Generally, the 2009 Plan is administered by the compensation committee of the Board and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. Since this plan has expired, no additional options may be granted under this plan.

 

The 2019 Stock Option Plan (“2019 Plan”) Plan was established in August 2019 to align the interests of our employees, consultants, agents and affiliates with those of our stockholders to incent them to increase their efforts on our behalf and to promote the success of our business. Under the 2019 Plan up to 20,000 shares of common stock were authorized for option grants. Generally, the 2019 Plan is administered by the compensation committee of the Board and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. As of December 31, 2021, there were outstanding options to acquire 18,314 shares under the 2019 Plan and 1,687 shares were available under our 2019 Plan. The 2019 Plan was replaced by our 2021 Plan (defined below) upon approval by our stockholders at our Annual Meeting on January 26, 2022, as described below.

 

The 2020 stock option plan (“2020 Plan”) was established in April 2020 to align the interests of our employees, consultants, agents and affiliates with those of our stockholders to incent them to increase their efforts on our behalf and to promote the success of our business. Under the 2020 Plan up to 20,000 shares of common stock were authorized for option grants. Generally, the 2020 Plan is administered by the compensation committee of the Board and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. As of December 31, 2021, there were outstanding options to acquire 19,267 shares under the 2020 Plan and 733 shares were available under our 2020 Plan. The 2020 Plan was replaced by our 2021 Plan upon approval by our stockholders at our Annual Meeting on January 26, 2022, as described below.

 

 
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The Infinite Group, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) was approved and adopted by our Board on December 15, 2021, subject to stockholder approval. The 2021 Plan was submitted to our stockholders for their approval at our 2021 Annual Meeting on January 26, 2022, and our stockholder approved the plan at the Annual Meeting. The 2021 Plan became effective upon stockholder approval, and no awards may be granted under the 2021 Plan after the date the 2021 Plan was approved by our stockholders. The 2021 Plan replaces the 2019 Plan and the 2020 Plan (the “Prior Plans”), and no further awards may be granted under the Prior Plans. The purpose of the 2021 Plan is to promote stockholder value and our future success by providing appropriate retention and performance incentives to employees and non-employee directors of the Company or its affiliates, and any other individuals who perform services for the Company or its affiliates. Generally, the 2021 Plan is administered by the compensation committee of the Board and provides that the maximum number of shares of Common Stock available for grant and issuance under the 2021 Plan is (a) 60,000, plus (b) any shares of Common Stock that are subject to options granted under the Prior Plans that expire, are forfeited or canceled or terminate for any other reason without the issuance of shares under the Prior Plans on or after January 26, 2022, plus (c) any shares of Common Stock that are subject to options granted under the Prior Plans that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any option under the Prior Plans on or after January 26, 2022.

 

The following table summarizes, as of December 31, 2021, 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))

 

 

 

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans previously approved by security holders (1)

 

 

13,200

 

 

$

7.50

 

 

 

-

 

Equity compensation plans not previously approved by security holders (2)

 

 

53,847

 

 

$

6.75

 

 

 

2,420

 

Individual option grants that have not been approved by security holders (3)

 

 

76,354

 

 

$

6.00

 

 

 

-

 

Total

 

 

143,401

 

 

$

6.42

 

 

 

2,420

 

 

(1)

Consists of grants under our 2005 Stock Option Plans of which all are exercisable at December 31, 2021.

 

 

(2)

Consists of grants under our 2009 Plan, 2019 Plan and 2020 Plan of which 53,514 are exercisable at December 31, 2021.

 

 

(3)

Consists of individual option grants approved by the Board of which 66,354 were exercisable at December 31, 2021.

 

 
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The following is a summary of transactions since January 1, 2021, to which we have been a party in which any of our executive officers, directors, director nominees or beneficial holders of more than five percent of our capital stock had or will have a direct or indirect material interest.

 

 

During 2021, the Company borrowed $249,000 on a 2019 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 at December 31, 2021 was $499,000.

 

On May 25, 2021, the Company issued a short-term note payable to a board member for $100,000. The note bears a 6% interest rate and was originally due on June 1, 2022. The Company also issued two demand notes on September 16, 2021, payable to two board members with $30,000 payable to Donald Reeve, and $25,000 payable to Andrew Hoyen, totaling $55,000. The demand notes bear a 6% interest rate.

 

On October 14, 2021, the Company entered into two demand notes of $12,000 and on October 15, 2021, a third for $12,000 each with James Villa, Andrew Hoyen and Donald Reeve, respectively. Subsequently Mr. Reeve was paid back the $12,000 on November 16, 2021.

 

On October 28, 2021, the Company entered into a demand note of $150,000 with its Vice President of Business Development, Richard Popper. The interest rate for this note is 6%. On November 2, 2021, the Company entered into a subscription agreement with its Vice President of Business Development, Richard Popper. Pursuant to the subscription agreement, Mr. Popper agreed to purchase an aggregate amount of 13,334 shares of the Company’s common stock, par value $0.001 per share, at $7.50 per share, in exchange for the conversion and cancellation of an aggregate of $100,000 principal amount of the demand note. The closing of the subscription agreement occurred concurrently with the execution of the subscription agreement. The closing price of the Company common stock on November 2, 2021, was $12.75 per share.

 

On June 30, 2022, and September 6, 2022 the Company and Donald W. Reeve, a director of the Company, entered into note modification agreements with respect to the Promissory Note originally dated December 30, 2020 (“2020 Note”) and the Promissory Note originally dated May 25, 2021 (“2021 Note”). The modification of the 2020 Note extended the due date of the first balloon payment under the 2020 Note of $100,000 to January 1, 2023.  The modification of the 2021 Note extended the maturity date of the 2021 Note to January 1, 2023, on which date the principal balance of $100,000 and accrued interest of $9,616 will be due.  Except as set forth above, the terms of the 2020 Note and the 2021 Note remain the same.

 

On July 29, 2022, the Company and Andrew Hoyen, a director and executive officer of the Company, entered into a note modification agreement (the “Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Lender (the “Note”). The Note and the Modification Agreement was approved by the disinterested members of our Board of Directors. The Modification Agreement extends the due date of the Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Modification Agreement, the Company agreed to repay to Lender $16,000 of the accrued interest on the Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 5,334 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Note was $10,930 as of July 29, 2022. Except as set forth in the Modification Agreement, the terms of the Note remain the same.

 

 
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information regarding the beneficial ownership of our common stock, our only class of voting securities, as of the record date by 1) each person known to us to be the beneficial owner of more than 5% of our outstanding shares; 2) each director; 3) each Named Executive Officer named in the Summary Compensation Table above; and 4) all directors and executive officers as a group. The percentages shown in the table are based on 453,149 shares of common stock issued and outstanding as of October 13, 2022.

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of the Record Date, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.

 

Beneficial ownership as set forth below is based on our review of our record stockholders list and public ownership reports filed by certain stockholders of the Company and may not include certain securities held in brokerage accounts or beneficially owned by the stockholders described below.

 

 

We believe that, except as otherwise noted and subject to applicable community property laws, each person named in the following table has sole investment and voting power with respect to the shares of common stock shown as beneficially owned by such person. Unless otherwise indicated, the address for each of the individuals listed in the table 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)

 

 

Percentage of Ownership

 

Richard Glickman

 

 

4,534

(1)

 

 

1.0

%

Andrew Hoyen

 

 

27,157

(2)

 

 

5.8

%

Donald W. Reeve

 

 

39,753

(3)

 

 

8.4

%

James Villa

 

 

99,621

(4)

 

 

18.6

%

All Directors and Officers (4 persons) as a group

 

 

171,065

(5)

 

 

30.0

%

 

 

 

 

 

 

 

 

 

5% Stockholders:

 

 

 

 

 

 

 

 

Paul J. Delmore

 

 

33,936

(6)

 

 

7.5

%

One America Place

 

 

 

 

 

 

 

 

600 West Broadway, 28th Floor

 

 

 

 

 

 

 

 

San Diego, CA 92101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harry A. Hoyen

 

 

38,667

(7)

 

 

7.9

%

Marblehead, OH 43440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

James Leonardo

 

 

33,334

 

 

 

7.4

%

Rochester, NY 14608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Richard Popper

 

 

23,833

(8)

 

 

5.2

%

 

(1)

Includes 4,000 shares subject to currently exercisable options.

 

 

(2)

Includes 3,334 shares, which are issuable upon the conversion of a note in the principal amount of $25,000 through September 6, 2022; and 9,334 shares subject to currently exercisable options.

 

 

(3)

Includes 18,000 shares subject to currently exercisable options.

 

 

(4)

Includes 68,794 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 $111,676 through October 13, 2022; and 13,334 shares subject to currently exercisable options.

 

 

(5)

Assumes that all currently exercisable options, which total 44,667 shares, and convertible securities, which total 72,115 shares, owned by members of the group have been exercised.

 

 

(6)

31,467 shares owned of record by Upstate Holding Group, LLC, an entity wholly-owned by Mr. Delmore.

 

 

(7)

Consists of 38,667 shares subject to currently exercisable options.

 

 

(8)

Includes 1,000 shares subject to currently exercisable options.

 

 
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DESCRIPTION OF SECURITIES

 

We are offering units in this offering at an assumed initial offering price of $4.38 per unit. Units consist of common units and pre-funded units. We are also offering to purchasers whose purchase of units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded units in lieu of common units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock. The purchase price of each pre-funded unit is equal to the price per common unit being sold to the public in this offering, minus $0.001.

 

We are also registering the shares of common stock issuable upon exercise of the pre-funded warrants and the redeemable warrants. These securities are being issued pursuant to an underwriting agreement between us and the underwriter. You should review the underwriting agreement and the forms of pre-funded warrant and redeemable warrant, each filed as exhibits to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the pre-funded warrants and redeemable warrants.

 

General

  

Our authorized capital stock consists of 60,000,000 shares of common stock, $0.001 par value per share, and 1,000,000 shares of preferred stock, $0.01 par value per share. As of October 13, 2022, there are 453,149 shares of common stock outstanding, and zero shares of preferred stock outstanding. In addition, as of October 13, 2022, there were outstanding options to purchase 132,034 shares of common stock, outstanding warrants to purchase 40,636 shares of common stock, and notes convertible into 139,397 shares of common stock after giving effect to our reverse stock split at a 75-to-1 ratio.

 

This description is intended as a summary and is qualified in its entirety by reference to our Certificate of Incorporation, as amended, and Amended and Restated Bylaws, which are filed, or incorporated by reference, as exhibits to the registration statement of which this prospectus forms a part.

 

Common Units

 

Each common unit consists of one share of our common stock and three redeemable warrants. Our common units will not be certificated, and the shares of our common stock and the redeemable warrants part of such common units are immediately separable and will be issued separately in this offering.

  

Pre-funded Units

 

Each pre-funded unit will consist of one pre-funded warrant and three redeemable warrants. Our pre-funded units will not be certificated, and the pre-funded warrant and the redeemable warrants part of such pre-funded units are immediately separable and will be issued separately in this offering.

 

Common Stock

 

Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, and do not have cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for dividend payments. All outstanding, shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. The holders of common stock have no preferences or rights of cumulative voting, conversion, or pre-emptive or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. In the event of any liquidation, dissolution or winding-up of our affairs, holders of common stock will be entitled to share ratably in any of our assets remaining after payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding shares of preferred stock, if any.

 

 
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Redeemable Warrants

 

Overview. The following summary of certain terms and provisions of the redeemable warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us the Warrant Agent, and the form of redeemable warrant, both of which are filed as exhibits to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the warrant agent agreement, including the annexes thereto, and the form of redeemable warrant.

 

The redeemable warrants issued in this offering entitle the registered holder to purchase one share of our common stock at a price equal to $4.00 per share, subject to adjustment as discussed below, immediately following the issuance of such redeemable warrant and terminating at 5:00 p.m., New York City time, five years after the closing of this offering or when redeemed.

 

The exercise price and number of shares of common stock issuable upon exercise of the redeemable warrants may be adjusted in certain circumstances within the two (2) years from issuance, including in the event of a stock dividend or recapitalization, reorganization, merger, or consolidation. In addition, the redeemable warrants will be adjusted for issuances of common stock at prices below its exercise price under certain circumstances, provided however that in no event will the exercise price be adjusted to a price below $2.00 per share (equal to 50% of the initial exercise price of $4.00). As described in this prospectus, we intend to apply to list the warrants on the Nasdaq Capital Market under the symbol “IMCIW.”

 

Additionally, on the date that is 90 calendar days immediately following the initial issuance date of the redeemable warrants, the exercise price of the redeemable warrants will be reduced to the reset price, provided that such value is less than the exercise price in effect on that date. The reset price is equal to the greater of (a) 50% of the initial exercise price or (b) 100% of the lowest daily volume weighted average price per share of common stock occurring during the 90 calendar days following the issuance date of the redeemable warrants. The lowest reset price is $2.00 per share (equal to 50% of the initial exercise price of $4.00).

 

Exercisability. The redeemable warrants are exercisable at any time after their original issuance and at any time up to the date that is five (5) years after their original issuance or until redeemed. The redeemable warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the Company or its designee, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. Under the terms of the Warrant Agreement, we must use our best efforts to maintain the effectiveness of the registration statement and current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. If we fail to maintain the effectiveness of the registration statement and current prospectus relating to the common stock issuable upon exercise of the redeemable warrants, the holders of the warrants shall have the right to exercise the redeemable warrants solely via a cashless exercise feature provided for in the warrants, until such time as there is an effective registration statement and current prospectus.

 

 
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Exercise Limitation. A holder may not exercise any portion of a redeemable warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of the outstanding common stock after exercise, as such percentage ownership is determined in accordance with the terms of the redeemable warrant, except that upon prior notice from the holder to us, the holder may waive such limitation up to a percentage not in excess of 9.99%.

  

Exercise Price. The exercise price per whole share of common stock purchasable upon exercise of the redeemable warrants is $4.00 per share. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders and in the event that the volume weighted average price of the Company’s common stock trades below the exercise price during the 90-day period following this offering, provided however that in no event will the exercise price be adjusted to a price below $2.00 per share (equal to 50% of the initial exercise price of $4.00).

 

Redemption.  We may redeem the outstanding warrants at a price of $0.01 per warrant share upon certain conditions where the price of our common stock has equaled or exceeded $[   ] per share (as adjusted for share splits, share dividends, recapitalizations and similar events) for a 30 consecutive trading day period.  We must give notice of our intent for redemption at least 30 days prior to the date of redemption.  Upon our notice to warrant holders of our intent to call the warrants for redemption, each holder will have five trading days during which it may exercise its warrant prior to the planned redemption date; if such holder does not exercise prior to the redemption date, the warrants held by such holder will be redeemed and the warrantholder will have no other rights other than the right to receive the nominal redemption price of $0.01 per warrant share upon surrender of the warrant. 

 

Fractional Shares. No fractional shares of common stock will be issued upon exercise of the redeemable warrants. If, upon exercise of a redeemable warrant, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, pay a cash adjustment in respect of such fraction in an amount equal to such fraction multiplied by the exercise price. If multiple redeemable warrants are exercised by the holder at the same time, we shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.

 

Transferability. Subject to applicable laws, the redeemable warrants may be offered for sale, sold, transferred or assigned without our consent.

 

Exchange Listing. We intend to apply to list our warrants on the Nasdaq Capital Market under the symbol “IMCIW.” No assurance can be given that our listing application will be approved.

 

Warrant Agent; Global Certificate. The warrants will be issued in registered form under a warrant agent agreement between the Warrant Agent and us. The warrants shall initially be represented only by one or more global warrants deposited with the Warrant Agent, as custodian on behalf of The Depository Trust Company (DTC) and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.

 

Fundamental Transactions. In the event of a fundamental transaction, as described in the redeemable warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation, a tender offer approved or recommended by our board, or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the redeemable warrants will be entitled to receive the kind and amount of securities, cash or other property that the holders would have received had they exercised the redeemable warrants immediately prior to such fundamental transaction. Notwithstanding the foregoing, in the event of a fundamental transaction, the holders of the redeemable warrants have the right to require us or a successor entity to redeem the redeemable warrants for cash in the amount of the Black-Scholes Value (as defined in each redeemable warrant) of the unexercised portion of the redeemable warrants concurrently with or within 30 days following the consummation of a fundamental transaction.

 

 
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Rights as a Stockholder. The warrant holders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their redeemable warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the redeemable warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.

  

Governing Law. The redeemable warrants are governed by New York law.

  

Underwriter’s Warrants. The registration statement of which this prospectus is a part also registers for sale the Underwriter’s Warrants, as a portion of the underwriting compensation payable to the underwriter in connection with this offering. The Underwriter’s Warrants will be exercisable beginning on a date which is six months from the commencement of sales under the registration statement of which this prospectus is a part at an exercise price of $5.48 (125% of the assumed public offering price of the units) and will expire five years from the date of such commencement of sales. Please see “Underwriting-Underwriter’s Warrants” for a description of the warrants we have agreed to issue to the underwriter in this offering, subject to the completion of the offering.

 

Pre-funded Warrants

 

Overview. The following summary of certain terms and provisions of the pre-funded warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us the Warrant Agent, and the form of pre-funded warrant, both of which is filed as an exhibit to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the pre-funded warrant.

 

The term “pre-funded” refers to the fact that the purchase price of our common stock in this offering includes almost the entire exercise price that will be paid under the pre-funded warrants, except for a nominal remaining exercise price of $0.001. The purpose of the pre-funded warrants is to enable investors that may have restrictions on their ability to beneficially own more than 4.99% (or, upon election of the holder, 9.99%) of our outstanding shares of common stock following the consummation of this offering the opportunity to make an investment in the Company without triggering their ownership restrictions, by receiving pre-funded warrants in lieu of our common stock which would result in such ownership of more than 4.99% (or 9.99%), and receive the ability to exercise their option to purchase the shares underlying the pre-funded warrants at such nominal price at a later date.

 

Duration. The pre-funded warrants offered hereby will entitle the holders thereof to purchase our shares of common stock at a nominal exercise price of $0.001 per share, commencing immediately on the date of issuance. There is no expiration date for the pre-funded warrants.

 

Exercise Limitation. A holder may not exercise any portion of a pre-funded warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of the outstanding common stock after exercise, as such percentage ownership is determined in accordance with the terms of the pre-funded warrant, except that upon prior notice from the holder to us, the holder may waive such limitation up to a percentage not in excess of 9.99%.

 

Exercise Price. The exercise price per whole share of common stock purchasable upon exercise of the pre-funded warrants is $0.001 per share. The exercise price and number of shares the pre-funded warrant is exercisable into are subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.

 

Fractional Shares. No fractional shares of common stock will be issued upon exercise of the pre-funded warrants. If, upon exercise of a pre-funded warrant, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, pay a cash adjustment in respect of such fraction in an amount equal to such fraction multiplied by the exercise price. If multiple pre-funded warrants are exercised by the holder at the same time, we shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.

 

 
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Transferability. Subject to applicable laws, the pre-funded warrants may be offered for sale, sold, transferred or assigned without our consent.

 

Absence of Trading Market. There is no established trading market for the pre-funded warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the pre-funded warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the pre-funded warrants will be limited.

 

Fundamental Transactions. In the event of a fundamental transaction, as described in the pre-funded warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the pre-funded warrants will be entitled to receive the kind and amount of securities, cash or other property that the holders would have received had they exercised the pre-funded warrants immediately prior to such fundamental transaction.

 

Rights as a Stockholder. The warrant holders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their pre-funded warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the pore-funded warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.

 

Governing Law. The pre-funded warrants are governed by New York law.

 

Preferred Stock

  

Our Certificate of Incorporation, as amended, authorizes our board, without further stockholder authorization, to issue up to 1,000,000 shares of preferred stock. The stock is issuable in series that may vary as to certain rights and preferences, as determined upon issuance, and has a par value of $.01 per share. As of October 13, 2022, there were no preferred shares issued or outstanding. Although we have no present plans to issue additional shares of preferred stock, the issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could decrease the amount of earnings and assets available for distribution to the holders of common stock, could adversely affect the rights and powers, including voting rights, of the common stock, and could have the effect of delaying, deterring or preventing a change of control of us or an unsolicited acquisition proposal.

 

Anti-Takeover Provisions of Delaware Law, our Certificate of Incorporation, as amended, and our Amended and Restated Bylaws

 

Delaware Law

 

We are governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly traded Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A business combination includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. An interested stockholder is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation’s voting stock, subject to certain exceptions. The statute could have the effect of delaying, deferring or preventing a change in control of our Company.

 

Board of Directors Vacancies

 

Our Certificate of Incorporation, as amended, and Amended and Restated Bylaws authorize our board of directors to fill vacant directorships in the interim between annual and special meetings of stockholders. In addition, the number of directors constituting our board of directors may be set by resolution of the majority of the incumbent directors in the interim between annual and special meetings of stockholders.

 

Stockholder Action; Special Meeting of Stockholders

 

Our Certificate of Incorporation, as amended, and Amended and Restated Bylaws provide that our stockholders may take action by written consent. Our Certificate of Incorporation, as amended, and Amended and Restated Bylaws further provide that special meetings of our stockholders may be called by a majority of the board of directors.

 

Authorized but Unissued Shares

 

Our authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval and may be used for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. If we issue such shares without stockholder approval and in violation of limitations imposed by The Nasdaq Capital Market or any stock exchange on which our stock may then be trading, our stock could be delisted.

 

 
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Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is Issuer Direct.

 

Reverse Stock Split

  

On December 15, 2021, our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1 of our outstanding shares of common stock. At our annual meeting on January 26, 2022, our stockholders approved the reverse stock split and authorized the Board, in its discretion, for one year, to determine the final ratio, effective date, and date of filing of the certificate of amendment to our Certificate of Incorporation, as amended, in connection with the reverse stock split. On October 17, 2022 our board of directors approved a reverse stock split of our outstanding shares of common stock by a ratio of 75-to-1, which became effective October 19, 2022. The reverse stock split did not impact the number of authorized shares of common stock which remains at 60,000,000 shares. Unless otherwise noted, the share and per share information in this prospectus reflects the effect of the reverse stock split.

 

 
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

The following is a summary of the material U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common units, common stock and redeemable warrants purchased in this offering, which we refer to collectively as our securities, but is for general information purposes only and does not purport to be a complete analysis of all the potential tax considerations. The holder of a common unit generally should be treated, for U.S. federal income tax purposes, as the owner of the underlying one share of common stock and three redeemable warrants each to purchase one share of common stock that underlie the common unit. As a result, the discussion below with respect to actual holders of common stock and redeemable warrants should also apply to holders of common units (as the deemed owners of the underlying common stock and redeemable warrants that comprise the units). This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income and estate tax consequences different from those set forth below. There can be no assurance that the Internal Revenue Service (the “IRS”) will not challenge one or more of the tax consequences described herein, and we have not obtained, and do not intend to obtain, an opinion of counsel or ruling from the IRS with respect to the U.S. federal income tax considerations relating to the purchase, ownership or disposition of our securities.

 

This summary does not address any alternative minimum tax considerations, any considerations regarding the tax on net investment income, or the tax considerations arising under the laws of any state, local or non-U.S. jurisdiction, or under any non-income tax laws, including U.S. federal gift and estate tax laws, except to the limited extent set forth below. In addition, this summary does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:

 

 

·

banks, insurance companies or other financial institutions;

 

·

tax-exempt organizations or governmental organizations;

 

·

regulated investment companies and real estate investment trusts;

 

·

controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid U.S. federal income tax;

 

·

brokers or dealers in securities or currencies;

 

·

traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

 

·

persons that own, or are deemed to own, more than five percent of our capital stock (except to the extent specifically set forth below);

 

·

tax-qualified retirement plans;

 

·

certain former citizens or long-term residents of the United States;

 

·

partnerships or entities or arrangements classified as partnerships for U.S. federal income tax purposes and other pass-through entities (and investors therein);

 

·

persons who hold our securities as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction or integrated investment;

 

·

persons who do not hold our securities as a capital asset within the meaning of Section 1221 of the Code; or

 

·

persons deemed to sell our securities under the constructive sale provisions of the Code.

   

In addition, if a partnership (or entity or arrangement classified as a partnership for U.S. federal income tax purposes) holds our securities, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold our securities, and partners in such partnerships, should consult their tax advisors.

 

You are urged to consult your own tax advisors with respect to the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership and disposition of our securities arising under the U.S. federal estate or gift tax laws or under the laws of any state, local, non-U.S., or other taxing jurisdiction or under any applicable tax treaty.

 

Allocation of Purchase Price and Characterization of a Unit

 

No statutory, administrative or judicial authority directly addresses the treatment of a unit or instruments similar to a unit for U.S. federal income tax purposes and, therefore, that treatment is not entirely clear. The acquisition of a unit should be treated for U.S. federal income tax purposes as the acquisition of one share of common stock and three redeemable warrants each to purchase one share of common stock. For U.S. federal income tax purposes, each holder of a unit must allocate the purchase price paid by such holder for such unit between such one share of common stock and three redeemable warrants each to purchase one share of common stock based on their relative fair market values at the time of issuance. Under U.S. federal income tax law, each investor must make his or her own determination of such value based on all the relevant facts and circumstances. Therefore, we strongly urge each investor to consult his or her tax adviser regarding the determination of value for these purposes. The price allocated to each share of common stock and each redeemable warrant should be the stockholder’s tax basis in such share or redeemable warrant, as the case may be. Any disposition of a unit should be treated for U.S. federal income tax purposes as a disposition of the one share of common stock and three redeemable warrants each to purchase one share of common stock comprising the unit, and the amount realized on the disposition should be allocated between the one share of common stock and three redeemable warrants each to purchase one share of common stock based on their respective relative fair market values (as determined by each such unit holder on all the relevant facts and circumstances) at the time of disposition. The separation of the common stock and redeemable warrants comprising units should not be a taxable event for U.S. federal income tax purposes.

 

 
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The foregoing treatment of the common stock and redeemable warrants and a holder’s purchase price allocation are not binding on the IRS or the courts. Because there are no authorities that directly address instruments that are similar to the units, no assurance can be given that the IRS or the courts will agree with the characterization described above or the discussion below. Accordingly, each prospective investor is urged to consult its own tax advisors regarding the tax consequences of an investment in a unit (including alternative characterizations of a unit). The balance of this discussion assumes that the characterization of the units described above is respected for U.S. federal income tax purposes.

 

Consequences to U.S. Holders

 

The following is a summary of the U.S. federal income tax consequences that will apply to a U.S. holder of our securities. For purposes of this discussion, you are a U.S. holder if, for U.S. federal income tax purposes, you are a beneficial owner of our securities, other than a partnership, that is:

 

 

·

an individual citizen or resident of the United States;

 

·

a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United States, any State thereof or the District of Columbia;

 

·

an estate whose income is subject to U.S. federal income tax regardless of its source; or

 

·

a trust (x) whose administration is subject to the primary supervision of a U.S. court and which has one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) who have the authority to control all substantial decisions of the trust or (y) which has made a valid election to be treated as a “United States person.”

   

Distributions

 

As described in the section titled “Market for Our Common Stock-Dividend Policy,” we have never declared or paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future. However, if we do make distributions on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, the excess will constitute a return of capital and will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of stock as described below under “Sale, Exchange or Other Taxable Disposition of Common Stock.”

 

Dividend income may be taxed to an individual U.S. holder at rates applicable to long-term capital gains, provided that a minimum holding period and other limitations and requirements are satisfied. Any dividends that we pay to a U.S. holder that is a corporation will qualify for a deduction allowed to U.S. corporations in respect of dividends received from other U.S. corporations equal to a portion of any dividends received, subject to generally applicable limitations on that deduction. U.S. holders should consult their own tax advisors regarding the holding period and other requirements that must be satisfied in order to qualify for the reduced tax rate on dividends or the dividends-received deduction.

 

Constructive Distributions

 

The terms of the redeemable warrants allow for changes in the exercise price of the warrants under certain circumstances. A change in exercise price of a redeemable warrant that allows holders to receive more shares of common stock on exercise may increase a holder’s proportionate interest in our earnings and profits or assets. In that case, such holder may be treated as though it received a taxable distribution in the form of our common stock. A taxable constructive stock distribution would generally result, for example, if the exercise price is adjusted to compensate holders for distributions of cash or property to our stockholders.

 

Not all changes in the exercise price that result in a holder’s receiving more common stock on exercise, however, would be considered as increasing a holder’s proportionate interest in our earnings and profits or assets. For instance, a change in exercise price could simply prevent the dilution of a holder’s interest upon a stock split or other change in capital structure. Changes of this type, if made pursuant to bona fide reasonable adjustment formula, are not treated as constructive stock distributions for these purposes. Conversely, if an event occurs that dilutes a holder’s interest and the exercise price is not adjusted, the resulting increase in the proportionate interests of our stockholders could be treated as a taxable stock distribution to our stockholders

 

 
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Any taxable constructive stock distributions resulting from a change to, or a failure to change, the exercise price of the redeemable warrants that is treated as a distribution of common stock would be treated for U.S. federal income tax purposes in the same manner as distributions on our common stock paid in cash or other property, resulting in a taxable dividend to the recipient to the extent of our current or accumulated earnings and profits (with the recipient’s tax basis in its common stock or redeemable warrants, as applicable, being increased by the amount of such dividend), and with any excess treated as a return of capital or as capital gain. U.S. holders should consult their own tax advisors regarding whether any taxable constructive stock dividend would be eligible for tax rates applicable to long-term capital gains or the dividends-received deduction described below under “Consequences to U.S. Holders-Distributions,” as the requisite applicable holding period requirements might not be considered to be satisfied.

 

Sale, Exchange or Other Taxable Disposition of Common Stock 

 

A U.S. holder will generally recognize capital gain or loss on the sale, exchange, or other taxable disposition of our common stock. The amount of gain or loss will equal the difference between the amount realized on the sale and such U.S. holder’s tax basis in such common stock. The amount realized will include the amount of any cash and the fair market value of any other property received in exchange for such common stock. Gain or loss will be long-term capital gain or loss if the U.S. holder has held the common stock for more than one year. Long-term capital gains of non-corporate U.S. holders are generally taxed at preferential rates. The deductibility of capital losses is subject to certain limitations.

 

Sale, Exchange, Redemption, Lapse or Other Taxable Disposition of a redeemable Warrant 

 

Upon a sale, exchange, redemption, lapse or other taxable disposition of a redeemable warrant, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized (if any) on the disposition and such U.S. holder’s tax basis in the warrant. The amount realized will include the amount of any cash and the fair market value of any other property received in exchange for the redeemable warrant. The U.S. holder’s tax basis in the redeemable warrant generally will equal the amount the holder paid for the warrant. Gain or loss will be long-term capital gain or loss if the U.S. holder has held the redeemable warrant for more than one year. Long-term capital gains of non-corporate U.S. holders are generally taxed at preferential rates. The deductibility of capital losses is subject to certain limitations.

 

Exercise of a redeemable Warrant 

 

The exercise of a redeemable warrant for shares of common stock generally will not be a taxable event for the exercising U.S. holder, except with respect to cash, if any, received in lieu of a fractional share. A U.S. holder will have a tax basis in the shares of common stock received on exercise of a warrant equal to the sum of the U.S. holder’s tax basis in the redeemable warrant surrendered, reduced by any portion of the basis allocable to a fractional share, plus the exercise price of the warrant. A U.S. holder generally will have a holding period in shares of common stock acquired on exercise of a redeemable warrant that commences on the date of exercise of the warrant.

 

Consequences to Non-U.S. Holders

 

The following is a summary of the U.S. federal income tax consequences that will apply to a non-U.S. holder of our securities. A “non-U.S. holder” is a beneficial owner of our securities (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that, for U.S. federal income tax purposes, is not a U.S. holder.

 

 Distributions

 

Subject to the discussion below regarding effectively connected income, any dividend, including any taxable constructive stock dividend resulting from certain adjustments, or failure to make adjustments, to the exercise price of a redeemable warrant (as described above under “Consequences to U.S. Holders-Constructive Distributions”), paid to a non-U.S. holder generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. In order to receive a reduced treaty rate, a non-U.S. holder must provide us with an IRS Form W-8BEN, IRS Form W-8BEN-E or other applicable IRS Form W-8 properly certifying qualification for the reduced rate. These forms must be updated periodically. A non-U.S. holder eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. If a non-U.S. holder holds our securities through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then may be required to provide certification to us or our paying agent, either directly or through other intermediaries.

 

 
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Dividends received by a non-U.S. holder that are effectively connected with its conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States) are generally exempt from such withholding tax if the non-U.S. holder satisfies certain certification and disclosure requirements. In order to obtain this exemption, the non-U.S. holder must provide us with an IRS Form W-8ECI or other applicable IRS Form W-8 properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated U.S. federal income tax rates applicable to U.S. holders, net of certain deductions and credits. In addition, dividends received by a corporate non-U.S. holder that are effectively connected with its conduct of a U.S. trade or business may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. Non-U.S. holders should consult their own tax advisors regarding any applicable tax treaties that may provide for different rules.

 

Gain on Sale, Exchange or Other Taxable Disposition of Common Stock or redeemable Warrants

 

Subject to the discussion below regarding backup withholding and foreign accounts, a non-U.S. holder generally will not be required to pay U.S. federal income tax on any gain realized upon the sale, exchange or other taxable disposition of our common stock or a redeemable warrant unless:

 

 

·

the gain is effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, the gain is attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States);

 

·

the non-U.S. holder is a non-resident alien individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or

 

·

shares of our common stock or our redeemable warrants, as applicable, constitute U.S. real property interests by reason of our status as a “United States real property holding corporation” (a USRPHC) for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the non-U.S. holder’s disposition of, or the non- U.S. holder’s holding period for, our common stock or redeemable warrants, as applicable.

   

We believe that we are not currently and will not become a USRPHC for U.S. federal income tax purposes, and the remainder of this discussion so assumes. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if the non-U.S. holder actually or constructively hold more than five percent of such regularly traded common stock at any time during the shorter of the five-year period preceding the non-U.S. holder’s disposition of, or the non-U.S. holder’s holding period for, our common stock. In addition, provided that our common stock is regularly traded on an established securities market, a redeemable warrant will not be treated as a U.S. real property interest with respect to a non-U.S. holder if such holder did not own, actually or constructively, warrants whose total fair market value on the date they were acquired (and on the date or dates any additional warrants were acquired) exceeded the fair market value on that date (and on the date or dates any additional warrants were acquired) of 5% of all our common stock.

 

If the non-U.S. holder is described in the first bullet above, it will be required to pay tax on the net gain derived from the sale, exchange or other taxable disposition under regular graduated U.S. federal income tax rates, and a corporate non-U.S. holder described in the first bullet above also may be subject to the branch profits tax at a rate of 30%, or such lower rate as may be specified by an applicable income tax treaty. An individual non-U.S. holder described in the second bullet above will be required to pay a flat 30% tax (or such lower rate specified by an applicable income tax treaty) on the gain derived from the sale, exchange, or other taxable disposition, which gain may be offset by U.S. source capital losses for the year (provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses). Non-U.S. holders should consult their own tax advisors regarding any applicable income tax or other treaties that may provide for different rules.

 

Federal Estate Tax

 

Common stock or redeemable warrants beneficially owned by an individual who is not a citizen or resident of the United States (as defined for U.S. federal estate tax purposes) at the time of their death will generally be includable in the decedent’s gross estate for U.S. federal estate tax purposes. Such shares, therefore, may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise.

 

Backup Withholding and Information Reporting

 

Generally, we must report annually to the IRS the amount of dividends paid to you, your name and address and the amount of tax withheld, if any. A similar report will be sent to you. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in your country of residence.

 

Payments of dividends on or of proceeds from the disposition of our securities made to you may be subject to information reporting and backup withholding at a current rate of 30% unless you establish an exemption, for example, by properly certifying your non-U.S. status on an IRS Form W-8BEN or IRS Form W-8BEN-E or other applicable IRS Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that you are a U.S. person.

 

 
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Backup withholding is not an additional tax; rather, the U.S. federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.

 

Foreign Account Tax Compliance

 

The Foreign Account Tax Compliance Act generally imposes withholding tax at a rate of 30% on dividends from the sale or other disposition of our securities paid to a “foreign financial institution” (as specially defined under these rules), unless such institution enters into an agreement with the U.S. government to, among other things, withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding the U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or otherwise establishes an exemption. FATCA also generally imposes a U.S. federal withholding tax of 30% on proceeds from the sale or other disposition of our securities paid to a “non-financial foreign entity” (as specially defined for purposes of these rules) unless such entity provides the withholding agent with a certification identifying certain substantial direct and indirect U.S. owners of the entity, certifies that there are none or otherwise establishes an exemption. The withholding provisions under FATCA generally apply to dividends paid by us. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph. Non-U.S. holders should consult their own tax advisors regarding the possible implications of this legislation on their investment in our securities.

 

Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, owning and disposing of our securities, including the consequences of any proposed changes in applicable laws.

 

 
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UNDERWRITING

 

Aegis Capital Corp. (“Aegis” or the “underwriter”) is acting as the sole underwriter and the investment banker of this public offering. Under the terms of an underwriting agreement, which is filed as an exhibit to the registration statement, the underwriter has agreed to purchase from us the number of common units and pre-funded units shown opposite its name below:

 

Underwriter

 

 Number of

Common Units

 

 

Number of

Pre-funded Units

 

Aegis Capital Corp.

 

 

 

 

 

 

 

The underwriting agreement provides that the underwriter’s obligation to purchase the common units and pre-funded units depends on the satisfaction of the conditions contained in the underwriting agreement including:

 

 

·

the representations and warranties made by us to the underwriter are true;

 

·

there is no material change in our business or the financial markets; and

 

·

we deliver customary closing documents to the underwriter.

   

Underwriting Commissions and Discounts and Expenses

 

The following table shows the per share and total underwriting discounts and commissions we will pay to Aegis. These amounts are shown assuming both no exercise and full exercise of the underwriter’s option to purchase additional common units and/or pre-funded units.

 

 

 

Per

 

 

Per Pre-Funded

 

 

Total

 

 

 

 

 

Common Unit

 

 

 Units

 

 

No Exercise

 

 

Full Exercise

 

Public offering price

 

$

 

 

$

 

 

$

 

 

$

 

Underwriting discounts and commissions to be paid by us (7.0%)

 

$

 

 

$

 

 

$

 

 

$

 

Non-accountable expense allowance (1.0%)(1)

 

$

 

 

$

 

 

$

 

 

$

 

Proceeds, before expenses, to us

 

$

 

 

$

 

 

$

 

 

$

 

 

(1)

We have agreed to pay a non-accountable expense allowance to Aegis equal to 1.0% of the gross proceeds received in this offering.

 

We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $    , including a 1.0% non-accountable expense allowance. We have also agreed to reimburse the underwriter for certain of its expenses, including “roadshow”, diligence, and reasonable legal fees and disbursements, in an amount not to exceed $100,000 in the aggregate.

 

As additional compensation to Aegis, upon consummation of this offering, we will issue to Aegis or its designees warrants to purchase an aggregate number of shares of our common stock equal to 4.0% of the number of shares of common stock issued in this offering, at an exercise price per share equal to 125.0% of the public offering price (the “Underwriter’s Warrants”). The Underwriter’s Warrants and the underlying shares of common stock will not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the Underwriter’s Warrants by any person for a period of 180 days beginning on the date of commencement of sales of the offering in compliance with FINRA Rule 5110.

 

The Underwriter’s Warrants will be exercisable from the date that is six months from the commencement of the sales of the offering, and will expire five years after the commencement of sales of the offering in compliance with FINRA Rule 5110(g)(8)(A). Furthermore, (i) the Underwriter’s Warrants do not have more than one demand registration right at our Company’s expense in compliance with FINRA Rule 5110(g)(8)(B); (ii) the Underwriter’s Warrants do not have a demand registration right with a duration of more than five years from the commencement of sales of the public offering in compliance with FINRA Rule 5110(g)(8)(C); (iii) the Underwriter’s Warrants do not have piggyback registration rights with a duration of more than seven years from the commencement of sales of the public offering in compliance with FINRA Rule 5110(g)(8)(D); and (iv) the Underwriter’s Warrants have anti-dilution terms that are consistent with FINRA Rule 5110(g)(8)(E) and (F).

 

Over-Allotment Option

  

We have granted the underwriter an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriter to purchase up to an aggregate of 525,000 additional shares of common stock and/or pre-funded warrants, representing 15% of the shares and pre-funded warrants sold in the offering and/or up to 1,575,000 additional redeemable warrants, representing 15% of the redeemable warrants sold in the offering. The purchase price to be paid per additional share will be equal to the public offering price of one common unit, less the purchase price for the redeemable warrant included within the common unit and the underwriting discount. The purchase price to be paid per pre-funded warrant will be equal to the public offering price of one pre-funded unit, less the purchase price for the redeemable warrant included within the pre-funded unit and the underwriting discount. The purchase price to be paid per additional redeemable warrant will be $            . If this option is exercised in full to purchase shares of common stock and/or pre-funded warrants only, the total price to the public will be $                      and the total net proceeds, before expenses, to us will be $            . If this option is exercised in full to purchase redeemable warrants only, the total price to the public will be $                    and the total net proceeds, before expenses, to us will be $                                .

 

 
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Stabilization

 

In accordance with Regulation M under the Exchange Act, the underwriter may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including short sales and purchases to cover positions created by short positions, stabilizing transactions, syndicate covering transactions, penalty bids and passive market making.

 

 

·

Short positions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares or purchasing shares in the open market.

 

·

Stabilizing transactions permit bids to purchase the underlying security as long as the stabilizing bids do not exceed a specific maximum price.

 

·

Syndicate covering transactions involve purchases of our common stock in the open market after the distribution has been completed to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the underwriters’ option to purchase additional shares. If the underwriters sell more shares than could be covered by the underwriters’ option to purchase additional shares, thereby creating a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

·

Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

·

In passive market making, market makers in our common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchase shares of our common stock until the time, if any, at which a stabilizing bid is made.

   

These activities may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result of these activities, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on Nasdaq or otherwise and, if commenced, may be discontinued at any time.

 

Neither we nor the underwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor the underwriter make any representation that Aegis will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

 

 
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Offering Price Determination

 

The public offering price was negotiated between Aegis and us. In determining the public offering price of our units, Aegis considered: 

 

 

·

the history and prospects for the industry in which we compete;

 

·

our financial information;

 

·

the ability of our management and our business potential and earning prospects;

 

·

the prevailing securities markets at the time of this offering; and

 

·

the recent market prices of, and the demand for, publicly traded shares of generally comparable companies, as well as the recent market price of our Company’s common stock.

   

Indemnification

 

We have agreed to indemnify Aegis, its affiliates and each person controlling Aegis against any losses, claims, damages, judgments, assessments, costs, and other liabilities, as the same are incurred (including the reasonable fees and expenses of counsel), relating to or arising out of the offering, undertaken in good faith.

 

Discretionary Accounts

 

The underwriter has informed us that it does not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the shares of our common stock being offered in this offering.

 

Lock-Up Agreements

 

We have agreed that, the Company’s directors, executive officers, employees and shareholders holding at least ten percent (10%) of the outstanding common stock will enter into customary “lock-up” agreements in favor of the underwriter for a period of one hundred eighty (180) days from the closing date of the Offering; provided, however, that any sales by parties to the lock-ups shall be subject to the lock-up agreements and provided further, that none of such shares shall be saleable in the public market until the expiration of the one hundred eighty (180) day period described above.

 

Company Standstill

 

We have agreed that, for a period of eighteen (18) months from the closing date of the Offering, that without the prior written consent of Aegis, the Company will not (a) offer, sell, issue, or otherwise transfer or dispose of, directly or indirectly, any equity of the Company or any securities convertible into or exercisable or exchangeable for equity of the Company; (b) file or caused to be filed any registration statement with the Commission relating to the offering of any equity of the Company or any securities convertible into or exercisable or exchangeable for equity of the Company; or (c) enter into any agreement or announce the intention to effect any of the actions described in subsections (a) or (b) hereof. So long as none of such equity securities shall be saleable in the public market until the expiration of the eighteen (18) month period described above, the following matters shall not be prohibited by the Standstill: (i) the adoption of an equity incentive plan and the grant of awards or equity pursuant to any equity incentive plan, and the filing of a registration statement on Form S-8; and (ii) the issuance of equity securities in connection with an acquisition or a strategic relationship, which may include the sale of equity securities. In no event should any equity transaction during the Standstill period result in the sale of equity at an offering price to the public less than that of the Offering referred herein. 

 

Tail Financing

 

Aegis shall be entitled to compensation with respect to any public or private offering or other financing or capital raising transaction of any kind (“Tail Financing”) to the extent that such financing or capital is provided to the Company by funds whom Aegis had contacted during the engagement period pursuant to the Letter of Engagement dated November 8, 2021 or introduced to the Company during the engagement period, if such Tail Financing is consummated at any time within the 5 month period following the expiration or termination of the Letter of Engagement dated November 8, 2021.

 

Other Relationships

 

Aegis has provided us and our affiliates with investment banking and financial advisory services, including serving as placement agent for private placements of securities, for which Aegis received customary fees. Aegis may in the future provide us and our affiliates with such services. Aegis may release, or authorize us to release, as the case may be, the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice.

 

In connection with our initial public offering, we will enter into an underwriting agreement with Aegis pursuant to which we will pay Aegis an aggregate of $                 in commissions and non-accountable expenses ($                   assuming the overallotment is exercised). In addition, we issued Aegis warrants to purchase 4% of the shares of our common stock issued in this offering at an exercise price per share equal to 125% of the public offering price.

 

 
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Offer restrictions outside the United States

 

Other than in the United States, no action has been taken by us or the underwriter that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who come into possession of this prospectus are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

Electronic Distribution

 

A prospectus in electronic format may be made available on the websites maintained by the underwriter or selling group members, if any, participating in the offering. Aegis may allocate a number of shares to the selling group members, if any, for sale to their online brokerage account holders. Any such allocations for online distributions will be made by Aegis on the same basis as other allocations. 

 

 
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LEGAL MATTERS

 

Certain legal matters in connection with the securities offered by this prospectus have been passed upon for the Company by Harter Secrest & Emery LLP, Rochester, New York and for the underwriter by Kaufman & Canoles, P.C., Richmond, Virginia.

 

EXPERTS

 

Our financial statements as of December 31, 2021 and December 31, 2020 have been included in reliance on the report of Freed Maxick CPAs, P.C., an independent registered public accounting firm.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the shares of common stock being offered by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference. All filings we make with the SEC are available on the SEC’s web site at www.sec.gov. You may also request a copy of these filings, at no cost, by writing us at 175 Sully’s Trail, Suite 202, Pittsford, New York 14534 or contacting us at (585) 385-0610.

 

We are subject to the periodic reporting requirements of the Exchange Act, and we will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available on the website of the SEC referred to above. We maintain a website at www. igicybersecurity.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge or at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We have not incorporated by reference into this prospectus the information contained in, or that can be accessed through, our website, and you should not consider it to be a part of this prospectus.

 

 
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INDEX TO FINANCIAL STATEMENTS

INFINITE GROUP, INC.

 

Unaudited Financial Statements

For the Three and Six Months Ended June 30, 2022 and 2021

 

 

 

Page

 

 

 

Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021

 

F-2

 

Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021(Unaudited)

 

F-3

 

Statement of Changes in Stockholders’ Deficiency for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)

 

F-4

 

Statements of Cash Flows for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)

 

F-5

 

Notes to Financial Statements - Unaudited

 

F-6

 

 

Financial Statements

For the Fiscal Years Ended December 31, 2021 and 2020

 

 

 

Page

 

Report of Independent Registered Public Accounting Firm

 

F-12

 

Balance Sheets as of December 31, 2021 and 2020

 

F-14

 

Statements of Operations for the Years Ended December 31, 2021 and 2020

 

F-15

 

Statement of Changes in Stockholders’ Deficiency for the Years Ended December 31, 2021 and 2020

 

F-16

 

Statements of Cash Flows for the Years Ended December 31, 2021 and 2020

 

F-17

 

Notes to Financial Statements

 

F-18

 

 

 
F-1

Table of Contents

 

INFINITE GROUP, INC.

BALANCE SHEETS

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(Unaudited)

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$1,594

 

 

$99,432

 

Accounts receivable, net of allowances of $9,710 as of June 30, 2022 and

 

 

 

 

 

 

 

 

December 31, 2021, respectively

 

 

650,403

 

 

 

727,297

 

Prepaid expenses and other current assets

 

 

198,220

 

 

 

218,821

 

Total current assets

 

 

850,217

 

 

 

1,045,550

 

 

 

 

 

 

 

 

 

 

Right of Use Asset Operating Lease, net

 

 

684,552

 

 

 

41,490

 

Property and equipment, net

 

 

30,982

 

 

 

41,138

 

Software, net

 

 

421,224

 

 

 

417,650

 

Deposits

 

 

10,144

 

 

 

6,937

 

Total assets

 

$1,997,119

 

 

$1,552,765

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$1,086,528

 

 

$536,863

 

Accrued payroll

 

 

341,691

 

 

 

425,839

 

Accrued interest payable

 

 

670,117

 

 

 

594,241

 

Accrued retirement

 

 

280,958

 

 

 

275,422

 

Deferred revenue

 

 

475,400

 

 

 

497,734

 

Accrued expenses other and other current liabilities

 

 

154,729

 

 

 

167,310

 

Operating lease liability - Short-term

 

 

73,030

 

 

 

42,347

 

Current maturities of long-term obligations

 

 

765,000

 

 

 

765,000

 

Current maturities of long-term obligations - related parties

 

 

295,000

 

 

 

190,000

 

Notes payable, net

 

 

943,521

 

 

 

383,824

 

Notes payable - related parties

 

 

229,000

 

 

 

229,000

 

Total current liabilities

 

 

5,314,974

 

 

 

4,107,580

 

 

 

 

 

 

 

 

 

 

Long-term obligations:

 

 

 

 

 

 

 

 

Notes payable:

 

 

 

 

 

 

 

 

Other

 

 

458,576

 

 

 

458,309

 

Related parties

 

 

998,975

 

 

 

1,084,765

 

Operating lease liability - Long-term

 

 

612,136

 

 

 

0

 

Total liabilities

 

 

7,384,661

 

 

 

5,650,654

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficiency:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 60,000,000 shares authorized; 447,482 and 436,012 as of June 30, 2022 and December 31, 2021, respectively. shares issued and outstanding

 

 

447

 

 

 

436

 

Additional paid-in capital

 

 

31,780,806

 

 

 

31,369,036

 

Accumulated deficit

 

 

(37,168,795)

 

 

(35,467,361)

Total stockholders' deficiency

 

 

(5,387,542)

 

 

(4,097,889)

Total liabilities and stockholders' deficiency

 

$1,997,119

 

 

$1,552,765

 

 

See notes to unaudited financial statements.

 

 
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Table of Contents

 

INFINITE GROUP, INC.

STATEMENTS OF OPERATIONS (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$1,696,492

 

 

$1,797,504

 

 

$3,363,562

 

 

$3,621,846

 

Cost of revenue

 

 

1,059,639

 

 

 

1,109,223

 

 

 

2,180,879

 

 

 

2,182,138

 

Gross profit

 

 

636,853

 

 

 

688,281

 

 

 

1,182,683

 

 

 

1,439,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

613,317

 

 

 

541,711

 

 

 

1,217,300

 

 

 

1,006,103

 

Selling

 

 

612,957

 

 

 

507,042

 

 

 

1,260,582

 

 

 

894,767

 

Total costs and expenses

 

 

1,226,274

 

 

 

1,048,753

 

 

 

2,477,882

 

 

 

1,900,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(589,421)

 

 

(360,472)

 

 

(1,295,199)

 

 

(461,162)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income and Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

10

 

 

 

1

 

 

 

18

 

 

 

3

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related parties

 

 

(22,728)

 

 

(16,541)

 

 

(46,142)

 

 

(31,054)

Other

 

 

(221,061)

 

 

(39,491)

 

 

(360,111)

 

 

(76,517)

Total interest expense

 

 

(243,789)

 

 

(56,032)

 

 

(406,253)

 

 

(107,571)

Total other income (expense)

 

 

(243,779)

 

 

(56,031)

 

 

(406,235)

 

 

(107,568)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(833,200)

 

$(416,503)

 

$(1,701,434)

 

$(568,730)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share – basic and diluted

 

$(1.88)

 

$(1.07)

 

$(3.87)

 

$(1.46)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

 

443,953

 

 

 

389,845

 

 

 

440,005

 

 

 

388,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – diluted

 

 

443,953

 

 

 

389,845

 

 

 

440,005

 

 

 

388,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited financial statements.

 

 
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Table of Contents

 

INFINITE GROUP, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY (Unaudited)

Three and Six Months Ended June 30, 2022 and 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three and Six Months Ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2021

 

 

436,012

 

 

$436

 

 

$31,369,036

 

 

$(35,467,361)

 

$(4,097,889)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

0

 

 

 

0

 

 

 

923

 

 

 

0

 

 

 

923

 

Warrants issued

 

 

0

 

 

 

0

 

 

 

148,334

 

 

 

0

 

 

 

148,334

 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(868,234)

 

 

(868,234)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - March 31, 2022

 

 

436,012

 

 

 

436

 

 

 

31,518,293

 

 

 

(36,335,595)

 

 

(4,816,866)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of warrants

 

 

11,470

 

 

 

11

 

 

 

(11)

 

 

0

 

 

 

0

 

Stock based compensation

 

 

0

 

 

 

0

 

 

 

51,708

 

 

 

0

 

 

 

51,708

 

Warrants issued

 

 

0

 

 

 

0

 

 

 

210,816

 

 

 

0

 

 

 

210,816

 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(833,200)

 

 

(833,200)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2022

 

 

447,482

 

 

$447

 

 

$31,780,806

 

 

$(37,168,795)

 

$(5,387,542)

   

Three and Six Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2020

 

 

387,492

 

 

$387

 

 

$30,792,391

 

 

$(33,898,548)

 

$(3,105,770)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

0

 

 

 

0

 

 

 

28,248

 

 

 

0

 

 

 

28,248

 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(152,227)

 

 

(152,227)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - March 31, 2021

 

 

387,492

 

 

 

387

 

 

 

30,820,639

 

 

 

(34,050,775)

 

 

(3,229,749)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

3,334

 

 

 

3

 

 

 

58,122

 

 

 

0

 

 

 

58,125

 

Exercise of stock options

 

 

3,787

 

 

 

4

 

 

 

14,926

 

 

 

0

 

 

 

14,930

 

Stock based compensation

 

 

0

 

 

 

0

 

 

 

81,920

 

 

 

0

 

 

 

81,920

 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(416,503)

 

 

(416,503)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2021

 

 

394,613

 

 

$394

 

 

$30,975,607

 

 

$(34,467,278)

 

$(3,491,277)

 

See notes to unaudited financial statements.

 

 
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Table of Contents

 

INFINITE GROUP, INC.

STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$(1,701,434)

 

$(568,730)

Adjustments to reconcile net loss to net cash used

 

 

 

 

 

 

 

 

by operating activities:

 

 

 

 

 

 

 

 

Stock based compensation

 

 

52,631

 

 

 

110,168

 

Depreciation and amortization

 

 

117,686

 

 

 

87,551

 

Amortization of debt discount

 

 

255,042

 

 

 

0

 

(Increase) decrease in assets:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

76,894

 

 

 

157,170

 

Prepaid expenses and other assets

 

 

17,394

 

 

 

(26,730)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

549,665

 

 

 

14,978

 

Deferred revenue

 

 

(22,334)

 

 

109,424

 

Accrued expenses

 

 

12,014

 

 

 

98,469

 

Accrued retirement

 

 

5,536

 

 

 

5,320

 

Net cash used by operating activities

 

 

(636,906)

 

 

(12,380)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(969)

 

 

(8,722)

Capitalization of software development costs

 

 

(110,378)

 

 

(121,175)

 

 

 

 

 

 

 

 

 

Net cash used by investing activities

 

 

(111,347)

 

 

(129,897)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Gross proceeds from notes payable

 

 

918,900

 

 

 

0

 

Less debt issuance costs

 

 

(53,445)

 

 

0

 

Proceeds from notes payable - related parties

 

 

0

 

 

 

299,000

 

Repayment of notes payable - short-term

 

 

(215,040)

 

 

0

 

Proceeds from the exercise of common stock options

 

 

0

 

 

 

14,930

 

Repayment of long-term obligations

 

 

0

 

 

 

(200,000)

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

650,415

 

 

 

113,930

 

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

 

(97,838)

 

 

(28,347)

 

 

 

 

 

 

 

 

 

Cash - beginning of period

 

 

99,432

 

 

 

32,313

 

 

 

 

 

 

 

 

 

 

Cash - end of period

 

$1,594

 

 

$3,966

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash payments for interest

 

$54,826

 

 

$39,369

 

Right of use assets obtained in exchange for new operating lease liabilities

 

$

691,009

 

 

$

0

 

 

See notes to unaudited financial statements.

 

 
F-5

Table of Contents

  

INFINITE GROUP, INC.

 

Notes to Financial Statements - (Unaudited)

 

Note 1. Basis of Presentation

 

The accompanying unaudited financial statements of Infinite Group, Inc. (“Infinite Group, Inc.” or the “Company”) included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S.) (“GAAP”) for interim financial information and with instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. The December 31, 2021 balance sheet has been derived from the audited financial statements at that date but does not include all disclosures required by GAAP. The accompanying unaudited financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (SEC). Results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2022.

 

Note 2. Management Plans - Capital Resources

 

The Company reported net losses of $1,701,434 and $568,730 for the six months ended June 30, 2022 and 2021, respectively, and stockholders’ deficiencies of $5,387,542 and $4,097,889 at June 30, 2022 and December 31, 2021, respectively. The Company had a working capital deficit of approximately $4.4 million at June 30, 2022. These factors raise substantial doubt about the entity’s ability to continue as a going concern within one year. The Company has plans to issue stock via an equity raise of $15 million in the third quarter of 2022, restructure certain debt and anticipates significant growth of business. These plans, in management’s opinion, will allow the Company to meet its obligations and alleviate the substantial doubt.

 

The Company’s mission is to drive shareholder value by developing and bringing to market automated, cost effective, and innovative cybersecurity technologies. The Company’s strategy is to build its business by designing, developing, and marketing IT security-based products and solutions that fill technology gaps in cybersecurity.

 

The Company's goal is to increase sales and generate cash flow from operations on a consistent basis. The Company’s business plans require improving the results of its operations in future periods. The Company has renegotiated the terms of certain obligations, using operational cash flow to pay down balances and extending terms, and provided financing with the issuance of new loans.

 

During April 2022, the Company entered into a financing arrangement with Talos Victory Fund, LLC, for $296,000. Under the terms of the loan, amortization payments are due beginning August 12, 2022, and each month thereafter with the final payment due on April 12, 2023.

 

During May 2022, the Company entered into a financing arrangement with Mast Hill Fund, L.P. for $355,000. Under the terms of the loan, amortization payments are due beginning September 27, 2022, and each month thereafter with the final payment due on May 26, 2023.

 

As previously reported, on January 31, 2022, the Company, entered into a Stock Purchase Agreement (the “Pratum Agreement”), by and among the Company, the David A. Nelson, Jr. Living Trust (“Seller”), David A. Nelson, Jr. (the “Beneficiary” and, together with Seller, the “Seller Parties”); and Pratum, Inc., an Iowa corporation (“Pratum”), whereby the Company agreed to acquire all of the issued and outstanding equity securities of the Company from the Seller Parties (the “Pratum Acquisition”). Pursuant to the terms of the Pratum Agreement, the Agreement could be terminated under certain circumstances, including, among other things, if the Pratum Acquisition does not close by March 31, 2022 (the “Outside Date”). On March 28, 2022, the Company, the Seller Parties, and Pratum entered into an agreement whereby the parties agreed to extend the Outside Date, as set forth in Section 2.1 of the Pratum Agreement, to May 15, 2022. On June 15, 2022, the Company, received notice of termination of the Pratum Agreement from the Seller Parties and Pratum pursuant to Section 8.1(a)(ii) of the Pratum Agreement on the basis that the Acquisition had not closed by the outside date of May 15, 2022, as amended.

 

During the first quarter of 2022, the Company filed an S-1 for a public offering of $15 million of common stock and redeemable warrants, which was expected to be used for the Pratum Acquisition and working capital needs. Following the termination of the Pratum Agreement the Company has been reevaluating its capital needs and structure of the offering. The completion of this offering is not a certainty. Should the offering not proceed or be further delayed, or should it occur in a reduced format, the Company anticipates that it will scale down spending to reduce costs and to increase cash flow while continuing to grow the operations at a slower pace.

 

The Company believes the capital resources generated by anticipated improving operational results due to reduction of expenses, increased bookings and deposits in our Services business, and an influx of new Nodeware orders under contract at June 30, 2022 as well as cash available under its factoring line of credit and from additional related parties and third-party loans, if needed, provide sources to fund its ongoing operations and to support the internal growth of the Company. The Company may need to extend existing debt agreements in order to provide resources for other purposes. If the Company experiences significant growth in its sales, the Company believes that this may require it to increase its financing line, finance additional accounts receivable, or obtain additional working capital from other sources to support its sales growth.

 

The Company plans to continue to evaluate alternatives which may include continuing to renegotiate the terms of other notes, seeking conversion of the notes to shares of common stock and seeking funds to repay the notes. The Company continues to evaluate repayment of our remaining notes payable based on its cash flow. These plans, in management’s opinion, will allow the Company to meet its obligations for a reasonable period of time from the date the financial statements are available to be issued.

 

 
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Table of Contents

 

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, 2021 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 – It is the Company’s policy to reclassify prior year amounts to conform with the current year presentation.

 

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, 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 June 30, 2022 or 2021 for contracts with an expected original duration of more than one year. The following table summarizes the revenue recognized by the major services:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Managed support services

 

$1,115,607

 

 

$1,057,431

 

 

$2,204,614

 

 

$2,128,331

 

Cybersecurity projects and software

 

 

580,885

 

 

 

689,073

 

 

 

1,158,948

 

 

 

1,391,515

 

Other IT consulting services

 

 

0

 

 

 

51,000

 

 

 

0

 

 

 

102,000

 

Total sales

 

$1,696,492

 

 

$1,797,504

 

 

$3,363,562

 

 

$3,621,846

 

 

Managed support services

 

Managed support services consist of revenue primarily from our subcontracts with Peraton (which purchased Perspecta in May 2021) 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, testing and consulting as a CISO (Chief Information Security Officer).

 

Nodeware® and Webroot™ software offerings consist of fees generated from the use of the respective software by our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Substantially all customers are billed in the month of the service and is cancellable upon notice per the respective agreements. Substantially all payments are electronically billed, and the billed amounts are paid to the Company instantaneously via an online payment platform. If payments are made in advance, revenue 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 earned. Upon completion of performance obligation of service, payment terms are 30 days.

 

 
F-7

Table of Contents

 

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 and six months ended June 30, 2022, sales to one client, including sales under subcontracts for services to several entities, accounted for

65.8% and 65.5%, respectively, of total sales (58.8% and 58.1%, respectively for the three and six months ended June 30, 2021) and 20.7% of accounts receivable at June 30, 2022 (15.6% at December 31, 2021).

 

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. See Note 5 for further disclosure regarding capitalization of software for resale.

 

Leases - At contract inception, the Company determines whether the arrangement is or contains a lease and determines the lease classification. The lease term is determined based on the non-cancellable term of the lease adjusted to the extent optional renewal terms and termination rights are reasonably certain. Lease expense is recognized evenly over the lease term. Variable lease payments are recognized as period costs. The present value of remaining lease payments is recognized as a liability on the balance sheet with a corresponding right-of-use asset adjusted for prepaid or accrued lease payments. The Company uses its incremental borrowing rate for the discount rate, unless the interest rate implicit in the lease contract is readily determinable. The Company has adopted the practical expedients to not separate non-lease components from lease components and to not present short-term leases on the balance sheet. See Note 11 for further disclosure regarding lease accounting.

 

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 8.35% at June 30, 2022) against the average daily outstanding balance of funds advanced. The estimated future loss reserve for each receivable included in the estimated value of the retained asset is based on the payment history of the accounts receivable customer and is included in the allowance for doubtful accounts, if any. As collateral, the Company granted the Purchaser a first priority interest in accounts receivable and a blanket lien, which may be junior to other creditors, on all other assets.

 

The financing line provides the Company the ability to finance up to $2,000,000 of selected accounts receivable invoices, which includes a sublimit for one of the Company’s customers of $1,500,000. During the six months ended June 30, 2022, the Company sold approximately $1,062,000 ($1,778,000 – for the six months ended June 30, 2021) of its accounts receivable to the Purchaser. As of June 30, 2022, approximately $303,000 ($148,000 - December 31, 2021) of these receivables remained outstanding. Additionally, as of June 30, 2022, the Company had $1,000 available under the financing line with the Purchaser ($66,000 at December 31, 2021). After deducting estimated fees, allowance for bad debts and advances from the Purchaser, the net receivable from the Purchaser amounted to $38,000 at June 30, 2022 ($15,000 at December 31, 2021), 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 $22,306 for the six months ended June 30, 2022 ($13,967 – for the six months ended June 30, 2021). These financing line fees are classified on the statements of operations as interest expense.

 

Note 5. Capitalization of Software for Resale

 

As of June 30, 2022, there were $789,350 of costs capitalized ($678,973 as of December 31, 2021) and $368,126 of accumulated amortization ($261,323 as of December 31, 2021). During the three and six months ended June 30, 2022, there was $53,402 and $106,803 respectively, of amortization expense recorded ($39,844 and 74,794 respectively, for the three and six months ended June 30, 2021). Costs incurred prior to reaching technological feasibility are expensed as incurred. During the three and six months ended June 30, 2022, there was approximately $7,800 and $16,100, respectively, of labor amounts expensed related to these development costs ($46,900 and $87,700, respectively, for the three and six months ended June 30, 2021).

 

 
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Table of Contents

 

Note 6. Deferred Revenue and Performance Obligations

 

Deferred Revenue

 

Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met.

 

Revenue recognized during the three months ended June 30, 2022 and 2021, that was included in the deferred revenue balances at the beginning of the respective periods, was approximately $136,100 and $132,800, respectively. Revenue recognized during the six months ended June 30, 2022 and 2021 that was included in the deferred revenue balances at the beginning of the respective periods was approximately $278,300 and $210,300, respectively

 

Transaction Price Allocated to the Remaining Performance Obligations

 

Transaction price allocated to the remaining performance obligations represents all future, non-cancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods.

 

As of June 30, 2022, total remaining non-cancelable performance obligations under the Company’s contracts with customers was approximately $704,000. The Company expects to recognize all of this revenue over the next 12 months.

 

Note 7. Debt Obligations

 

During the six months ended June 30, 2022, the Company entered into a financing arrangement (the “Second Mast Hill Loan”) with Mast Hill Fund, L.P. (“Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, Mast Hill agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. Under the terms of the Second Mast Hill Loan, payments of $44,400, including principal and interest, are due beginning June 15, 2022, and each month thereafter with the final payment due on February 15, 2023.  As additional consideration for the Second Mast Hill Loan), the Company issued the “Lender” a 5-year warrant to purchase 12,334 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $131,600 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note. Debt issuance costs of $54,650 were incurred and are being amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note.  At June 30, 2022, the Company deferred the June 15, 2022 payment per the terms of the Second Mast Hill Loan.

 

On April 12, 2022, the Company entered into a financing arrangement (the “Talos Loan”) with Talos Victory Fund, LLC (“Talos”), a Delaware limited liability company. In exchange for a promissory note, Talos agreed to lend the Company $296,000, which bears interest at a rate of eight percent (8%) per annum, less $29,600 original issue discount. Under the terms of the Talos Loan,  payments of $35,520, including principal and interest, are due beginning August 12, 2022, and each month thereafter with the final payment due on April 12, 2023. As additional consideration for the Second Mast Hill Loan), the Company issued the “Lender” a 5-year warrant to purchase 9,867 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of $74,000 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note. Debt issuance costs of $45,920 were incurred and are being amortized over a twelve-month period ending April 2023.

 

On May 27, 2022, the Company entered into a financing arrangement (the “Third Mast Hill Loan”) with Mast Hill. In exchange for a promissory note, Mast Hill agreed to lend the Company $355,000, which bears interest at a rate of eight percent (8%) per annum, less $35,500 original issue discount. Under the terms of the Third Mast Hill Loan, payments of $42,600, including principal and interest, are due beginning September 27, 2022, and each month thereafter with the final payment due on May 26, 2023. As additional consideration for the Second Mast Hill Loan), the Company issued the “Lender” a 5-year warrant to purchase 11,834 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $113,400 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note. Debt issuance costs of $54,975 were incurred and are being amortized over a twelve-month period ending May 2023.

 

On June 30, 2022, the Company and Donald W. Reeve, a director of the Company, entered into two note modification agreements with respect to the Promissory Note originally dated December 30, 2020 and the Promissory Note originally dated May 25, 2021. There were two payments of principal of $100,000 each due June 1, 2022.  The Modification agreements each extended the previously amended due dates from June 1, 2022 to September 1, 2022.

  

Note 8. 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.

 

 
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Table of Contents

 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Numerator for basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(833,200)

 

$(416,503)

 

$(1,701,434)

 

$(568,730)

Basic and diluted net loss per share

 

$(1.88)

 

$(1.07)

 

$(3.87)

 

$(1.46)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted shares

 

 

443,953

 

 

 

389,845

 

 

 

440,005

 

 

 

388,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive shares excluded from net loss per share calculation

 

 

319,350

 

 

 

308,644

 

 

 

319,350

 

 

 

308,644

 

 

Certain common shares issuable under stock options and convertible notes payable have been omitted from the diluted net loss per share calculation because their inclusion is considered anti-dilutive because the exercise prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.

 

Note 9. Stock Option Plans and Agreements

 

The Company has approved stock option plans and agreements covering up to an aggregate of 217,394 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. 1,267 options were granted for the six months ended June 30, 2022. 7,667 options were granted for the six months ended June 30, 2021. The following assumptions were used for the six months ended June 30, 2022.

 

Risk-free interest rate

 

1.26%-3.35

% 

Expected dividend yield

 

 

0%

Expected stock price volatility

 

110%-130

% 

Expected life of options (years)

 

 

2.75

 

 

The Company recorded expense for options issued to employees and independent service providers of $51,708 and $52,631 for the three and six months ended June 30, 2022, respectively ($81,920 and $110,168 for the three and six months ended June 30, 2021).

 

4,800 options vested during the six months ended June 30, 2022.

 

The Company issued 10,000 performance-based stock options during 2021 at $18.375 per share to an executive of the Company. Certain revenue targets must be made to grant the options in three tranches of 3,334 shares each. In the three months ended June 30, 2022, the Company amended the targets for these options and recognized one third of the compensation in the amount of $45,275. The remaining unrecognized compensation expense for these options was approximately $90,550 at June 30, 2022.

 

A summary of all stock option activity for the six months ended June 30, 2022 follows:

 

 

 

Number of

 

 

Weighted

 

 

Remaining

 

Aggregate

 

 

 

Options

 

 

Average

 

 

Contractual

 

Intrinsic

 

 

 

Outstanding

 

 

Exercise Price

 

 

Term

 

Value

 

Outstanding at December 31, 2021

 

 

143,401

 

 

$5.85

 

 

 

 

 

 

Granted

 

 

1,267

 

 

 

9.75

 

 

 

 

 

 

Expired

 

 

(4,634)

 

 

3.30

 

 

 

 

 

 

Outstanding at June 30, 2022

 

 

140,034

 

 

$5.92

 

 

2.9 years

 

$870,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2022- vested or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expected to vest

 

133,234

 

 

$5.33

 

 

2.9 years

 

$870,900

 

Exercisable

 

 

133,234

 

 

$5.33

 

 

2.9 years

 

$870,900

 

 

 

Note 10. Warrants

 

On April 29, 2022, Mast Hill Fund, LP elected to purchase 18,667 warrant shares in a cashless exercise per the terms of the warrant agreement dated November 3, 2021.  Based on the calculation per the agreement, 11,470 shares were issued to Mast Hill Fund, LP.

 

 
F-10

Table of Contents

 

Note 11. Lease

 

Beginning on August 1, 2016, the Company leased its headquarters facility under an operating lease agreement that was scheduled to expire on June 30, 2022. Rent expense was $80,000 annually during the first year of the lease term and increased by 1.5% annually thereafter.  The lease was terminated one month early, and a new lease agreement, at the existing headquarters location, commenced on June 1, 2022.  The term of the new lease agreement is 84 months. The first year’s rent will be $118,487 and will increase by 2% annually thereafter.

 

Supplemental balance sheet information related to the leases on June 30, 2022 and December 31, 2021 is as follows:

  

Description

 

Classification

 

June 30,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

 

 

Right of Use Asset - Lease, net

 

Other assets (non-current)

 

$684,552

 

 

$41,490

 

 

 

 

 

 

 

 

 

 

 

 

Operating Lease Liability - Short Term

 

Accrued liabilities

 

 

73,030

 

 

 

42,347

 

Operating Lease Liability - Long Term

 

Other long-term liabilities

 

 

612,136

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Lease Liability

 

 

 

$685,166

 

 

$42,347

 

 

 

 

 

 

 

 

 

 

 

 

Discount Rate - Operating Lease

 

 

 

 

7.0%

 

 

6.0%

 

 

Note 12. Related Party Accrued Interest Payable

Included in accrued interest payable is amounts due to related parties of approximately $134,000, at June 30, 2022 ($107,000 at December 31, 2021). An additional $136,675 of accrued interest to related parties is included with short and long-term debt and is due to be paid after June 30, 2022.

 

 

Note 13. Subsequent Events

 

On July 29, 2022, the “Company and Andrew Hoyen (“Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Modification Agreement”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000, dated July 18, 2017, issued by the Company to the Lender (the “Hoyen Note”). The Note and the Modification Agreement was approved by the disinterested members of the Company’s Board of Directors. The Modification Agreement extends the due date of the Note to July 31, 2023, on which date the current outstanding principal balance of $90,000 and accrued and unpaid interest will be due. Pursuant to the Modification Agreement, the Company agreed to repay to Lender $16,000 of the accrued interest on the Hoyen Note and off-set such repayment against the exercise on July 29, 2022 by Lender of certain options to acquire 5,334 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Hoyen Note was $10,930 as of July 29, 2022. Except as set forth in the Modification Agreement, the terms of the Hoyen Note remain the same

 

On August 10, 2022, the Company received funding from a loan agreement with Stripe and Celtic Bank.  The loan amount was $139,400 plus a fixed fee of $11,152. The repayment amount of $150,522 will be repaid at a repayment rate of 25% of the Company’s receivables automatically withheld by Stripe.  There is no financing percentage.  The repayment start date is August 15, 2022, with a minimum payment amount of $16,728 over every 60-day period. The final repayment date is February 6, 2024, if total repayment amount is not paid as of that date.

 

Note 14. Retroactive Effect of Reverse Stock Split

 

On December 15, 2021, the Company’s board of directors approved a reverse stock split of outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1, to be effective at the ratio and date to be determined by the board of directors.  The stockholders approved granting discretionary authority to the Company’s board of directors to amend the Company’s Certificate of Incorporation to effect the reverse stock split within the range of 3-to-1 and 75-to-1 at the annual meeting on January 26, 2022. On October 17, 2022  the board of directors approved a reverse stock split of the outstanding shares of common stock by a ratio of 75-to-1, which became effective October 19, 2022. All share and per share data in the accompanying financial statements have been retroactively restated to reflect the effect of the reverse stock split. 

   

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

 

 
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Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

Infinite Group, Inc.

 

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Infinite Group, Inc. (the Company) as of December 31, 2021 and 2020, and 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, 2021 and 2020, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit 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 audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

 

F-12

Table of Contents

 

As discussed in Note 2 to the financial statements, the Company has negative working capital, which raises substantial doubt about the entity’s ability to continue as a going concern.  The ability to continue to meet its obligations as they become due is dependent on the Company generating operating cash flow to satisfy these obligations, managing the date these obligations are settled, and identifying alternative equity or long-term liability financing to replace the current obligations.  The Company has concluded that management’s plans have alleviated this substantial doubt about the ability to continue as a going concern.  We have identified this item as a critical audit matter because certain estimates and assumptions used by the Company in their plan to alleviate substantial doubt are subjective and required a high degree of auditor judgement. 

 

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.  The primary procedures we performed include: obtaining an understanding of the process and assumptions used by management to develop their plan, obtaining executed agreements and documents to support this plan where available, evaluating the reasonableness and consistency of methodology and assumptions applied by management based on historical facts, and evaluating the disclosures in the notes to the financial statements.

 

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.

 

/s/ Freed Maxick CPAs, P.C.

 

Rochester, New York

March 15, 2022, except for Note 14 as to which the date is April 1, 2022 and Note 15 as to which the date is October 19, 2022.

 

  

F-13

Table of Contents

 

 

INFINITE GROUP, INC.

BALANCE SHEETS

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash

 

$99,432

 

 

$32,313

 

Accounts receivable, net of allowances of $9,710 and $10,089 as of December 31, 2021 and 2020, respectively

 

 

727,297

 

 

 

953,826

 

Prepaid expenses and other current assets

 

 

218,821

 

 

 

96,483

 

Total current assets

 

 

1,045,550

 

 

 

1,082,622

 

 

 

 

 

 

 

 

 

 

Right of Use Asset Operating Lease, net

 

 

41,490

 

 

 

120,777

 

Property and equipment, net

 

 

41,138

 

 

 

48,199

 

Software, net

 

 

417,650

 

 

 

354,905

 

Deposits

 

 

6,937

 

 

 

6,937

 

Total assets

 

$1,552,765

 

 

$1,613,440

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS DEFICIENCY

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$536,863

 

 

$343,073

 

Accrued payroll

 

 

425,839

 

 

 

353,268

 

Accrued interest payable

 

 

594,241

 

 

 

531,409

 

Accrued retirement

 

 

275,422

 

 

 

264,675

 

Deferred revenue

 

 

497,734

 

 

 

320,042

 

Accrued expenses other and other current liabilities

 

 

167,310

 

 

 

74,579

 

Current maturities of long-term obligations

 

 

765,000

 

 

 

1,004,445

 

Operating lease liability - Short-term

 

 

42,347

 

 

 

80,258

 

Current maturities of long-term obligations - related parties

 

 

190,000

 

 

 

0

 

Notes payable, net

 

 

383,824

 

 

 

162,500

 

Notes payable - related parties

 

 

229,000

 

 

 

0

 

Total current liabilities

 

 

4,107,580

 

 

 

3,134,249

 

 

 

 

 

 

 

 

 

 

Long-term obligations:

 

 

 

 

 

 

 

 

Notes payable:

 

 

 

 

 

 

 

 

Other

 

 

458,309

 

 

 

457,769

 

Related parties

 

 

1,084,765

 

 

 

1,015,820

 

Payroll taxes due 2022

 

 

0

 

 

 

69,025

 

Operating Lease liability - Long-term

 

 

0

 

 

 

42,347

 

Total liabilities

 

 

5,650,654

 

 

 

4,719,210

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficiency:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 60,000,000 shares authorized; issued and outstanding: 436,012 and 387,492 shares as of December 31, 2021 and 2020, respectively.

 

 

436

 

 

 

387

 

Additional paid-in capital

 

 

31,369,036

 

 

 

30,792,391

 

Accumulated deficit

 

 

(35,467,361)

 

 

(33,898,548)

Total stockholders' deficiency

 

 

(4,097,889)

 

 

(3,105,770)
Total liabilities and stockholders' deficiency

 

$1,552,765

 

 

$1,613,440

 

 

See notes to audited financial statements.

 

F-14

Table of Contents

 

INFINITE GROUP, INC. 

STATEMENTS OF OPERATIONS 

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Sales

 

$7,224,242

 

 

$7,219,446

 

Cost of sales

 

 

4,489,306

 

 

 

4,177,268

 

Gross profit

 

 

2,734,936

 

 

 

3,042,178

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

General and administrative

 

 

2,159,378

 

 

 

1,696,415

 

Selling

 

 

1,983,127

 

 

 

1,344,472

 

Total costs and expenses

 

 

4,142,505

 

 

 

3,040,887

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(1,407,569)

 

 

1,291

 

 

 

 

 

 

 

 

 

 

Other income - (see Note 6 & Note 7)

 

 

120,505

 

 

 

967,007

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

37

 

 

 

786

 

Interest expense:

 

 

 

 

 

 

 

 

Related parties

 

 

(72,455)

 

 

(62,789)

Other

 

 

(209,331)

 

 

(230,299)

Total interest expense

 

 

(281,786)

 

 

(293,088)

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$(1,568,813)

 

$675,996

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

 

$

(3.91

)

 

$

1.74

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share diluted

 

$(3.91)

 

$1.17

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding basic

 

 

401,637

 

 

 

387,492

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding diluted

 

 

401,637

 

 

 

579,335

 

 

See notes to audited financial statements.

 

F-15

Table of Contents

 

 

INFINITE GROUP, INC.  

STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY' 

 

 

 

Years Ended December 31, 2021 and 2020

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2019

 

 

387,492

 

 

$387

 

 

$30,666,847

 

 

$(34,574,544)

 

$(3,907,310)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

0

 

 

 

0

 

 

 

125,544

 

 

 

0

 

 

 

125,544

 

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

675,996

 

 

 

675,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2020

 

 

387,492

 

 

$387

 

 

$30,792,391

 

 

$(33,898,548)

 

$(3,105,770)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

16,667

 

 

 

17

 

 

 

158,108

 

 

 

0

 

 

 

158,125

 

Exercise of stock options

 

 

31,853

 

 

 

32

 

 

 

98,898

 

 

 

0

 

 

 

98,930

 

Stock based compensation

 

 

0

 

 

 

0

 

 

 

117,587

 

 

 

0

 

 

 

117,587

 

Warrants issued

 

 

0

 

 

 

0

 

 

 

202,052

 

 

 

0

 

 

 

202,052

 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1,568,813)

 

 

(1,568,813)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2021

 

 

436,012

 

 

$436

 

 

$31,369,036

 

 

$(35,467,361)

 

$(4,097,889)

 

See notes to audited financial statements.

 

F-16

Table of Contents

 

INFINITE GROUP, INC.

 

STATEMENTS OF CASH FLOWS

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(1,568,813)

 

 

$675,996

 

Adjustments to reconcile net income (loss) to net cash        

 

 

 

 

 

 

 

 provided by (used in) operating activities:

 

 

 

 

 

 

 

Stock based compensation

 

 

117,587

 

 

 

125,544

 

Depreciation and amortization

 

 

186,379

 

 

 

97,874

 

Amortization of debt discount

 

 

51,891

 

 

 

0

 

Bad debt expense

 

 

9,000

 

 

 

7,000

 

Forgiveness of note payable and interest

 

 

(120,505)

 

 

(963,516)

(Increase) decrease in assets:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

217,529

 

 

 

(528,537)

Prepaid expenses and other current assets

 

 

(64,213)

 

 

(31,198)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

193,790

 

 

 

125,296

 

Deferred revenue

 

 

177,692

 

 

 

141,218

 

Accrued expenses and other current liabilities

 

 

254,846

 

 

 

(63,432)

Net cash used in operating activities

 

 

(544,817)

 

 

(413,755)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(13,506)

 

 

(48,310)

Capitalization of software development costs

 

 

(229,528)

 

 

(255,230)

Net cash used in investing activities

 

 

(243,034)

 

 

(303,540)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from note payable

 

 

403,200

 

 

 

957,372

 

Debt issuance costs

 

 

(25,160)

 

 

0

 

Proceeds from notes payable - related parties

 

 

578,000

 

 

 

50,000

 

Repayments of notes payable - related parties

 

 

0

 

 

 

(96,635)

Repayments of note payable - short-term

 

 

0

 

 

 

(167,527)

Repayment of long-term obligations

 

 

(200,000)

 

 

0

 

Proceeds from the exercise of common stock options

 

 

98,930

 

 

 

0

 

Net cash provided by financing activities

 

 

854,970

 

 

 

743,210

 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

67,119

 

 

 

25,915

 

 

 

 

 

 

 

 

 

 

Cash - beginning of year

 

 

32,313

 

 

 

6,398

 

 

 

 

 

 

 

 

 

 

Cash - end of year

 

$99,432

 

 

$32,313

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

 

Interest

 

$84,203

 

 

$346,328

 

Income taxes

 

$0

 

 

$0

 

 

 

 

 

 

 

 

 

 

      Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

              Warrant issued in conjunction with debts

 

$202,052

 

 

$0

 

              Common stock issued to extinguish debt

 

$100,000

 

 

$0

 

              Common stock issued for prepaid consulting agreement

 

$58,125

 

 

$0

 

 

See notes to audited financial statements.

 

F-17

Table of Contents

 

INFINITE GROUP, INC.

 

NOTES TO THE AUDITED FINANCIAL STATEMENTS

 

NOTE 1. - BASIS OF PRESENTATION & BUSINESS

 

The accompanying financial statements consist of the financial statements of Infinite Group, Inc. (the Company).

 

The Company operates in one segment, the field of information technology (IT) consulting services, with all operations based in the United States. The primary consulting services are in the cybersecurity industry. There were no significant sales from customers in foreign countries during 2021 and 2020. All assets are located in the United States.

 

NOTE 2. - MANAGEMENT PLANS

 

The Company reported operating loss of $1,407,569 in 2021 and operating income of $1,291 in 2020, net loss of $1,568,813 in 2021 and net income of $675,996 in 2020, and stockholders’ deficiencies of $4,097,889 and $3,105,770 at December 31, 2021 and 2020, respectively. The Company has a working capital deficit of approximately $ 3.1 million at December 31, 2021. Previously, this has raised substantial doubt about the entity’s ability to continue as a going concern within one year. The Company has plans to issue stock, restructure certain debt and anticipates significant growth of business. These plans, in management’s opinion, will allow the Company to meet its obligations alleviate the substantial doubt.

 

The Company’s mission is to drive shareholder value by developing and bringing to market automated, cost effective, and innovative cybersecurity technologies. The Company’s strategy is to build its business by designing, developing, and marketing IT security-based products and solutions that fill technology gaps in cybersecurity.

 

The Company's goal is to increase sales and generate cash flow from operations on a consistent basis. The Company’s business plans require improving the results of its operations in future periods. The Company has renegotiated the terms of some certain obligations, using operational cash flow to pay down balances and extending terms, and provided financing with the issuance of new loans.

 

During 2020, the Company paid off approximately $96,600 to related parties under the terms of demand notes and established a $328,000 note payable from a related party as part of a modification.

 

During 2020, the Company paid off approximately $167,500 to a third party under the terms of demand notes and extended the terms of the remaining $166,500 balance.

 

During 2021, the Company has renegotiated the due dates of approximately $446,000 of notes payable into 2023 and 2024.

 

During 2021, the Company settled the long-term debt agreement with the Pension Benefit Guaranty Corporation (“PBGC”) for $200,000 on the outstanding principal of $246,000 and accrued interest of approximately $74,500. The Company recorded a gain of approximately $120,500.

 

During 2021, the Company received proceeds of $229,000 from related parties. The Company issued a short-term note payable to a board member for $100,000. The note bears a 6% interest rate and is due on March 31, 2022. The Company also issued four demand notes payable to two board members for $79,000 in total. The demand notes bear a 6% interest rate. The Company also issued a demand note payable to another related party for $50,000 in total. The demand note bears a 6% interest rate.

 

F-18

Table of Contents

 

During 2021, the Company entered into a financing arrangement with Mast Hill Fund, L.P. for $448,000. Under the terms of the Loan, amortization payments are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022 (Notes 5 and 9).

 

During 2022, the Company entered into a financing arrangement with Mast Hill Fund, L.P. for $370,000. Under the terms of the Loan, amortization payments are due beginning June 15, 2022, and each month thereafter with the final payment due on February 15, 2023.

 

During the first quarter of 2022, the Company filed an S-1 for a public offering of $15 million of common stock and warrants, which is expected to be used for the acquisition discussed in Note 14 and working capital needs. The Company anticipates this offering to during the second quarter of 2022. The completion of this offering is not a certainty. Should the offering not proceed or be delayed, or should it occur in a reduced format, the Company will scale down spending to reduce costs and to increase cash flow while continuing to grow the operations at a slower pace.

 

The Company believes the capital resources generated by the improving results of its operations as well as cash available under its factoring line of credit and from additional related parties and third-party loans, if needed, provide sources to fund its ongoing operations and to support the internal growth of the Company. The Company may need to extend existing debt agreements in order to provide resources for other purposes. If the Company experiences significant growth in its sales, the Company believes that this may require it to increase its financing line, finance additional accounts receivable, or obtain additional working capital from other sources to support its sales growth.

 

The Company plans to continue to evaluate alternatives which may include continuing to renegotiate the terms of other notes, seeking conversion of the notes to shares of common stock and seeking funds to repay the notes. The Company continues to evaluate repayment of our remaining notes payable based on its cash flow. These plans, in management’s opinion, will allow the Company to meet its obligations for a reasonable period of time from the date the financial statements are available to be issued.

 

NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounts Receivable

 Credit is granted to substantially all customers throughout the United States. The Company carries its accounts receivable at invoice amount, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. The Company’s policy is to not accrue interest on past due receivables. Management determined that an allowance of $9,710 for doubtful accounts was reasonably stated at December 31, 2021 ($10,089 - 2020).

 

Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in financial institutions. The cash accounts occasionally exceed the federally insured deposit amount; however, management does not anticipate nonperformance by financial institutions. Management reviews the financial viability of these institutions on a periodic basis.

 

Loan Origination Fees - The Company capitalizes the costs of loan origination fees and amortizes the fees as interest expense over the contractual life of each agreement and they are shown as a reduction of the debt.

 

Sale of Certain Accounts Receivable - The Company has available a financing line with a financial institution (the Purchaser). In connection with this line of credit, the Company adopted FASB ASC 860 “Transfers and Servicing”. FASB ASC 860 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company has a factoring line with the Purchaser which enables the Company to sell selected accounts receivable invoices to the Purchaser with full recourse against the Company.

 

F-19

Table of Contents

 

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 6.85% at December 31, 2021) 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, 2021, the Company sold approximately $3,629,800 ($1,749,700 - 2020) of its accounts receivable to the Purchaser. As of December 31, 2021, $148,155 ($0 - 2020) of these receivables remained outstanding. Additionally, as of December 31, 2021, the Company had $66,000 available under the financing line with the financial institution ($362,000 - 2020). After deducting estimated fees and advances from the Purchaser, the net receivable from the Purchaser amounted to $14,816 at December 31, 2021 ($0 - 2020) 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 $34,200 for the year ended December 31, 2021 ($21,100 - 2020). These financing line fees are classified on the statements of operations as interest expense.

 

Property and Equipment - Property and equipment are recorded at cost and are depreciated over their estimated useful lives for financial statement purposes. The cost of improvements to leased properties is amortized over the shorter of the lease term or the life of the improvement. Maintenance and repairs are charged to expense as incurred while improvements are capitalized.

 

Capitalization of Software for Resale - The Company capitalizes the software development costs for software to be sold, leased, or otherwise marketed. Capitalization begins upon the establishment of technological feasibility of a new product or enhancements to an existing product, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. Costs incurred after the enhancement has reached technological feasibility and before it is released in the market are capitalized and are primarily labor costs related to coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. Costs associated with major upgrade releases begin amortization in the month after release. The amortization period is three years. As of December 31, 2021, there is $678,973 of costs capitalized and $261,323 of accumulated amortization ($449,445 and $94,541, respectively, in 2020). During the year ended December 31, 2021 there was $166,783 of amortization expense recorded ($85,002 in 2020). Future amortization is expected to be $428,650 at a rate of $217,722, $144,989, $63,208 and $2,731 for the years 2022, 2023, 2024 and 2025 respectively. Costs incurred prior to reaching technological feasibility are expensed as incurred. Labor amounts expensed related to these development costs amounted to approximately $153,600 and $159,700 during the years ended December 31, 2021 and 2020, respectively.

 

Accounting for the Impairment or Disposal of Long-Lived Assets - The Company follows provisions of FASB ASC 360 “Property, Plant and Equipment” in accounting for the impairment of disposal of long-lived assets. This standard specifies, among other things, that long-lived assets are to be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The Company determined that there was no impairment of long-lived assets during 2021 and 2020.

 

F-20

Table of Contents

 

Revenue Recognition - Effective January 1, 2018, the Company adopted Topic 606 using the modified retrospective approach and applied the guidance to those contracts which were not completed as of January 1, 2018. Adoption of Topic 606 did not impact the timing of revenue recognition in the Company’s financial statements for the current or prior periods. Accordingly, no adjustments have been made to opening retained earnings or prior period amounts.

 

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’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, 2021 or 2020 for contracts with an expected original duration of more than one year. The following table summarizes the revenue recognized by the major services:

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Managed support services        

 

$4,325,067

 

 

$4,669,570

 

Cybersecurity projects and software

 

 

2,780,175

 

 

 

2,285,876

 

Other IT consulting services

 

 

119,000

 

 

 

264,000

 

Total sales

 

$7,224,242

 

 

$7,219,446

 

 

Managed support services

 

Managed support services consist of revenue primarily from our subcontracts for services to its end clients, principally a major establishment of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments.

 

• We generate revenue primarily from these subcontracts through fixed price service and support agreements. Revenues are earned and billed weekly and are generally paid within 45 days. The revenues are recognized at time of service.

 

Cyber security projects and software

 

Cyber security projects and software revenue includes the selling of licenses of Nodeware® and third-party software, principally Webroot™ as well as performing cybersecurity assessments, testing and consulting as a CISO (Chief Information Security Officer).

 

 

 

·

Nodeware® and Webroot™ software offerings consist of fees generated from the use of the respective software by our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Substantially all customers are billed in the month of the service and is cancellable upon notice per the respective agreements.  Substantially all payments are electronically billed, and the billed amounts are paid to the Company instantaneously via an online payment platform.   If payments are made in advance, revenues related to the term associated with our software licenses is recognized ratably over the contractual period.

 

 

F-21

Table of Contents

 

 

·

Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our standalone selling price.

 

 

 

 

·

Cybersecurity assessments, testing and CISO services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For substantially all these contracts, revenue is recognized when the specific performance obligation is satisfied. If the contract has multiple performance obligations, the revenue is recognized when the performance obligations are satisfied. Depending on the nature of the service, the amounts recognized are either based on an allocation of the transaction price to each performance obligation based on a relative standalone selling price of the products sold.

 

 

 

 

·

In substantially all 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, 2021, we recognized revenue of approximately $320,000 that was included in the deferred revenue liability balance at the beginning of the period presented. Deferred revenue that will be realized during the succeeding 12-month period is approximately $500,000.

 

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 2021, sales to one client, including sales under subcontracts for services to several entities, accounted for 59.6% of total sales (61.2% - 2020) and 15.6% of accounts receivable at December 31, 2021 (38.8% - 2020).

 

Stock Options - The Company recognizes compensation expense related to stock-based payments at the grant date fair value of the awards. The Company uses the Black-Scholes option pricing model to determine the estimated fair value of the awards.

 

                 Income Taxes - The Company accounts for income tax expense in accordance with FASB ASC 740 “Income Taxes.” Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

The Company periodically reviews tax positions taken to determine if it is more likely than not that the position would be sustained upon examination. The Company did not have any material unrecognized tax benefit at December 31, 2021 or 2020. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2021 and 2020, the Company recognized no interest and penalties.

 

 

F-22

Table of Contents

 

The Company files U.S. federal tax returns and tax returns in various states. The tax years 2018 through 2021 remain open to examination by the taxing jurisdictions to which the Company is subject.

 

Fair Value of Financial Instruments - The Company has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels.

Level 1 uses observable inputs such as quoted prices in active markets;

Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3 is defined as unobservable inputs in which little or no market data exist and requires the Company to develop its own assumptions.

 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

The carrying amounts of cash, accounts receivable and accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity. The carrying amount of the Company’s term debt and notes payable approximates fair value because the effective yields on these obligations, which include contractual interest rates, taken together with other features such as concurrent issuance of warrants, are comparable to rates of returns for instruments of similar credit risk.

 

Earnings Per Share - Basic earnings per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company’s case, comprise shares issuable under convertible notes payable, warrants and stock options. The treasury stock method is used to calculate dilutive shares, which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of options and notes assumed to be exercised. In a loss year, the calculation for basic and diluted earnings per share is the same, as the impact of potential common shares is anti-dilutive.           

 

            The following table sets forth the computation of basic and diluted loss per share as of December 31, 2021 and 2020:

 

 

 

Years ended December 31,

 

 

 

2021

 

 

2020

 

Numerator for basic and diluted net income per share:

 

 

 

 

 

 

Net income (loss)

 

$(1,568,813)

 

$675,996

 

Weighted average common shares outstanding - Basic

 

 

401,637

 

 

 

 387,492

 

Basic net income (loss) per share

 

$(3.91)

 

$1.74

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities-stock options

 

 

 0

 

 

 

 82,879

 

Effect of dilutive securities-convertible debt

 

 

 0

 

 

 

 108,964

 

Weighted average common shares outstanding - Diluted

 

 

401,637

 

 

 

579,335

 

Diluted net income (loss) per share

 

$

 (3.91

) 

 

$

 1.17

 

 

 

 

 

 

 

 

 

 

Anti-dilutive shares excluded from net income per share

 

 

301,651

 

 

 

52,867

 

 

Certain common shares issuable under stock options and convertible notes payable have been omitted from the diluted net income (loss) per share calculation because their inclusion is considered anti-dilutive because the exercise or conversion prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.

 

Reclassifications - The Company reclassifies amounts in its prior year financial statements to conform to the current year’s presentation.

 

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Table of Contents

 

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Leases

 The Company recognizes a liability for their lease obligations and a corresponding right-of-use asset, initially measured at the present value of the lease payments. Subsequent accounting depends on whether the agreement is deemed to be a financing or operating lease. For operating leases, a lessee recognizes its total lease expense as an operating expense over the lease term. Assets and liabilities are presented and disclosed separately, and the liabilities must be classified appropriately as current and noncurrent.

 

NOTE 4. - PROPERTY AND EQUIPMENT

 

Property and equipment consists of:

 

 

 

 

 

December 31,

 

 

 

Depreciable Lives

 

2021

 

 

2020

 

Software

 

3 years

 

$72,834

 

 

$72,834

 

Equipment

 

3 to 10 years

 

 

155,635

 

 

 

142,129

 

Furniture and fixtures

 

5 to 7 years

 

 

17,735

 

 

 

17,735

 

 

 

 

 

 

246,204

 

 

 

232,698

 

Accumulated depreciation

 

 

 

 

(205,066)

 

 

(184,499)

 

 

 

 

$41,138

 

 

$48,199

 

 

Depreciation expense was $20,567 and $6,025 for the years ended December 31, 2021 and 2020, respectively.

 

NOTE 5. - NOTES PAYABLE - CURRENT

 

Notes payable consist of:

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Demand note payable, 10%, secured by software (A)

 

$12,500

 

 

$12,500

 

Convertible promissory note, 8%, due November 3, 2022 (B)

 

 

448,000

 

 

 

0

 

Convertible notes payable, 6%

 

 

150,000

 

 

 

150,000

 

 

 

610,500

 

 

162,500

 

Less: Deferred financing costs (B)

 

 

58,300

 

 

 

0

 

Debt discounts - warrants (B)

 

 

168,377

 

 

 

0

 

 

 

$383,823

 

 

$162,500

 

 

 

(A)

Demand Note payable, 10%, secured by Software - During 2015, the Company issued a note in connection with the purchase of Software.

 

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Table of Contents

   

 

(B)

Convertible promissory note, 8%, due November 3, 2022 - During 2021, the Company entered into a convertible promissory note. In exchange for the convertible promissory note, the lender agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum. The convertible promissory note is recorded net of a $44,800 original issue discount. Under the terms of the convertible promissory note, monthly payments of principal and interest of $53,760 are due beginning March 3, 2022, and each month thereafter with the final payment due on November 3, 2022. Additionally, in the event of a default as defined in the promissory note agreement, or if the Company elects to pre-pay the convertible promissory note, the lender and the agent has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. The promissory note contains customary anti-dilution provisions. The Company evaluated the terms of the conversion feature under ASC 480 and ASC 815 and determined that separate bifurcation of the conversion feature was not required. In addition to the issuance of the convertible promissory note, the Company also granted the lender warrants (Note 9). In exchange for the Promissory Note, the Company accepted an original discount on the Promissory note of $44,800 as noted above, paid a finder’s fee of $20,160, and the lender’s legal fees of $5,000. These deferred financing fees are being amortized ratably through October 2022.

 

 

 

 

(C)

Convertible notes payable, 6%, maturity date of December 31, 2016 - At December 31, 2021, the Company was obligated to unrelated third parties for $150,000 ($150,000 - 2020) (“The Notes”). The principal is unsecured and convertible at the option of the holders into shares of common stock at $3.75 per share. The Notes bear interest at 6.0% and is past due. The Notes are convertible into shares of common stock subject to the following limitations. The Notes are not convertible to the extent that shares of common stock issuable upon the proposed conversion would result in a change in control of the Company which would limit the use of its net operating loss carryforwards; provided, however if the Company closes a transaction with another third party or parties that results in a change of control which will limit the use of its net operating loss carryforwards, then the foregoing limitation shall lapse. Prior to any conversion by a requesting note holder, each note holder holding a note which is then convertible into 5% or more of the Company’s common stock shall be entitled to participate on a pari passu basis with the requesting note holder and upon any such participation the requesting note holder shall proportionately adjust his conversion request such that, in the aggregate, a change of control, which will limit the use of the Company’s net operating loss carryforwards, does not occur.

 

Notes payable - related parties consist of:

 

 

 

December 31,

 

 

 

 2021

 

 

 2020

 

Demand notes payable to director, 6%, unsecured

 

$130,000

 

 

$0

 

Demand note payable to employee, 6% unsecured

 

 

50,000

 

 

 

0

 

Demand notes payable to officer and director, 6%, unsecured

 

 

37,000

 

 

 

0

 

Demand note payable to officer and director, 6%, unsecured

 

 

12,000

 

 

 

0

 

 

 

$229,000

 

 

$0

 

 

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Table of Contents

 

NOTE 6. - LONG-TERM OBLIGATIONS

 

Notes Payable - Other - Term notes payable - other consist of:

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

2016 note payable, 6%, unsecured, due December 31, 2021 (A)

 

$500,000

 

 

$500,000

 

Note payable, 10%, secured, due January 1, 2018 (B)

 

 

265,000

 

 

 

265,000

 

Convertible term note payable,12%, secured, due January 1, 2024 (C)

 

 

175,000

 

 

 

175,000

 

Term note payable - PBGC, 6%, secured (D)

 

 

0

 

 

 

246,000

 

2020 note payable, 6%, unsecured, due August 24, 2024 (E)

 

 

166,473

 

 

 

166,473

 

Convertible term note payable,7%, secured (F)

 

 

100,000

 

 

 

100,000

 

Convertible notes payable, 6%, due January 1, 2024 (G)

 

 

9,000

 

 

 

9,000

 

Accrued interest due after 2021(H)

 

 

7,836

 

 

 

7,296

 

 

 

 

1,223,309

 

 

 

1,468,769

 

Less: deferred financing costs

 

 

0

 

 

 

6,555

 

 

 

 

1,223,309

 

 

 

1,462,214

 

Less: current maturities

 

 

765,000

 

 

 

1,004,445

 

 

 

$458,309

 

 

$457,769

 

 

 

 (A)

2016 note payable, 6%, unsecured, due December 31, 2021 - On March 14, 2016, the Company entered into an unsecured financing agreement with a third-party lender. At December 31, 2016, the Company was obligated for $500,000. Borrowings bear interest at 6% with interest payments due quarterly. Principal was due on December 31, 2021 and is now past due. Principal and interest may become immediately due and payable upon the occurrence of customary events of default. In consideration for providing the financing, the Company paid the lender a fee of 2,500,000 shares of its common stock valued at $37,500 on the date of the agreement based upon the closing bid quotation of its common stock on the OTC Bulletin Board on that date. These deferred financing costs are recorded as a reduction of the principal owed and are amortized over the life of the debt. The balance of the note payable was $467,225 at December 31, 2016 consisting of principal due of 500,000 offset by deferred financing costs of $32,775. As of December 31, 2021, the balance was $500,000 (2020 - $493,445). The lender has piggy back registration rights for these shares. The Company’s Chief Executive Officer and President agreed to guarantee the loan obligations if he is no longer an “affiliate” of the Company as defined by Securities and Exchange Commission rules.

 

 

 

 

 (B)

Note payable, 10%, secured, due January 1, 2018 - During the years ended December 31, 2004 and 2003, the Company issued secured notes payable aggregating $265,000. These borrowings bear interest at 10% and were due, as modified on January 1, 2018. This note has not been further extended and is past due. The notes are secured by a first lien on accounts receivable that are not otherwise used by the Company as collateral for other borrowings and by a second lien on accounts receivable.

 

 

 

 

 (C)

Convertible term note payable, 12%, secured, due January 1, 2024 - The Company entered into a secured loan agreement during 2008 for working capital. The loan bears interest at 12%, which is payable monthly and was due, as modified on August 31, 2018 for an aggregate of $175,000. During 2009, the note was modified for its conversion into common shares at $18.75 per share, which was the closing price of the Company’s common stock on the date of the modification. The note is secured by a subordinate lien on all assets of the Company.

 

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Table of Contents

 

 

 (D)

Term note payable - PBGC, 6%, secured - On October 17, 2011, in accordance with the settlement agreement dated September 6, 2011 the Company issued a secured promissory note in favor of the PBGC for $300,000 bearing interest at 6% per annum due in scheduled quarterly payments over a seven-year period with a balloon payment of $219,000 due on September 15, 2018. During 2021, the Company settled the long-term debt agreement with the PBGC for $200,000 and accrued interest of approximately $74,500. The PBGC released the remaining principal and accrued interest owed. The Company recorded a gain of approximately $120,500.

 

 

 

 

 (E)

2020 note payable, 6%, unsecured, due August 24, 2024 - The Company entered into a promissory note agreement dated August 24, 2020 with a third-party lender. The note represents the negotiated amount owed due to the lender after a payment in the amount of $550,000 was made to settle previous notes and interest held by the Lender See Note 6 and item (B) of this note. The principal amount of the new note is $166,473. This note becomes due on August 24, 2024.

 

 

 

 

 (F)

Convertible term note payable, 7%, secured, due January 1, 2024 - The note bears interest at the rate of 7% per annum, payable monthly, and is secured by a subordinate lien on all the Company’s assets. The note's principal is convertible at the option of the holder into shares of the Company’s common stock at $7.5 per share, which was the price of the Company's common stock on the closing date of the agreement.

 

 

 

 

 (G)

Convertible notes payable, 6%, due January 1, 2024 - The Company has a note payable to a former related party in the amount of $9,000. The note’s maturity was extended to January 1, 2024 from January 1, 2021. In consideration for this extension, the Company agreed to issue the borrower 334 options with a 3-year term to purchase common stock of Infinite Group Inc. exercisable at $7.50 per share. Principal and accrued interest are convertible at the option of the holder into shares of common stock at $3.75 per share. The note beared interest at 6% at December 31, 2021 and December 31, 2020. The rate is adjusted annually, on January 1st of each year, to the prime rate in effect on December 31st of the immediately preceding year, plus one and one quarter percent, and in no event, shall the interest rate be less than 6% per annum. The rate effective as of January 1, 2021 and 2022 was 6%.

 

 

 

 

 (H)

Accrued interest due after 2021 - The accrued interest for items (G) above is not due until the due date of the respective loan.

 

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Table of Contents

 

Notes Payable - Related Parties

 

Notes payable - related parties consist of:

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Note payable, up to $500,000, 7.5%, due August 31, 2026 (A)

 

$499,000

 

 

$250,000

 

2020 Note payable, 6%, due January 1, 2024 (B)

 

 

328,000

 

 

 

328,000

 

Convertible notes payable, 6% (C)

 

 

146,300

 

 

 

146,300

 

Convertible note payable, 7%, due June 30, 2023 (D)

 

 

25,000

 

 

 

25,000

 

Note payable, $100,000 line of credit, 6%, unsecured (E)

 

 

90,000

 

 

 

90,000

 

Note payable, $75,000 line of credit, 6%, unsecured (F)

 

 

70,000

 

 

 

70,000

 

Accrued interest due after 2022 (G)

 

 

116,465

 

 

 

106,520

 

 

 

 

1,274,765

 

 

 

1,015,820

 

Less current maturities

 

 

190,000

 

 

 

-

 

 

 

$

1,084,765

 

 

$ 

1,015,820

 

 

 (A)

Note payable of up to $500,000, 7.5%, due August 31, 2026 - On May 7, 2019, the Company entered into a note payable agreement for up to $500,000 with a related party. The note has an interest rate of 7.5% and is due on August 31, 2026. The Company borrowed $200,000 during the year ended December 31, 2019, $50,000 during the year ended December 31, 2020, and $249,000 during the year ended December 31, 2021 which remains outstanding.

 

 

 

 

 (B)

2020 Note payable, 6%, due January 1, 2024 - On December 30, 2020, the Company entered into a promissory note agreement with a member of its Board. The interest payments are due quarterly. First payment to be made on April 1, 2021 and every three (3) months thereafter until the note is retired. Principal payments of one hundred thousand dollars ($100,000.00) are to be made on March 31, 2022 and January 1, 2023 and a balloon payment of $128,000 on January 1, 2024.

 

 

 

 

 (C)

Convertible notes payable, 6% - The Company has a note payable to a related party of $146,300 maturing on January 1, 2024. This note’s maturity date was extended from January 1, 2020. Principal and accrued interest are convertible at the option of the holder into shares of common stock at $3.75 per share, subject to certain limitations. The notes bear interest at 6% at December 31, 2021. The rate is adjusted annually, on January 1st of each year, to the prime rate in effect on December 31st of the immediately preceding year, plus one and one quarter percent, and in no event, shall the interest rate be less than 6% per annum. The rate effective as of January 1, 2021 and 2022 was 6%.

 

 

 

 

 

The Company executed collateral security agreements with the note holders providing for a subordinate security interest in all the Company’s assets. Generally, upon notice, prior to the note maturity date, the Company can prepay all or a portion of the outstanding notes.

 

 

 

 

 (D)

Convertible note payable, 7%, due June 30, 2023 - On February 12, 2015, the Company borrowed $25,000 from a Company officer. The note is unsecured and matured on March 31, 2018 with principal convertible at the option of the holder into shares of common stock at $7.50 per share. In 2019, the Company officer extended the due date to June 30, 2023.

 

 

 

 

 (E)

Note payable, $100,000 line of credit, 6%, unsecured - On July 18, 2017, the Company entered into an unsecured line of credit financing agreement with an officer and member of its Board. The LOC Agreement provides for working capital of up to $100,000 with interest at 6% due quarterly through July 1, 2022. In consideration for providing the financing, the lender was granted an option to purchase 5,334 shares of common stock at $3.00 per share. The option expires on July 17, 2022.

 

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Table of Contents

   

 

 (F)

Note payable, $75,000 line of credit, 6%, unsecured - On September 21, 2017, the Company entered into an unsecured line of credit financing agreement with a related party. The LOC Agreement provides for working capital of up to $75,000 with interest at 6% due quarterly through January 2, 2023. In consideration for providing the financing, the lender was granted an option to purchase 5,334 shares of common stock at $3.00 per share. The option expires on January 2, 2023.

 

 

 

 

 (G)

Accrued interest due after 2022 - The accrued interest for item (C) above is not due until the due date of the loan.

 

      Long-Term Obligations

 

As of December 31, 2021, minimum future annual payments of long-term obligations and amortization of deferred financing costs are as follows:

 

 

 

Annual

 

 

Annual

 

 

 

 

 

Payments

 

 

Amortization

 

 

Net

 

Due Prior to 2022

 

$1,156,500

 

 

$0

 

 

$1,156,500

 

2022

 

 

638,000

 

 

 

226,677

 

 

 

411,323

 

2023

 

 

206,667

 

 

 

0

 

 

 

206,667

 

2024

 

 

837,408

 

 

 

0

 

 

 

837,408

 

2025

 

 

0

 

 

 

0

 

 

 

0

 

2026

 

 

499,000

 

 

 

0

 

 

 

499,000

 

Total long-term obligations

 

$3,337,575

 

 

$226,677

 

 

$3,110,898

 

 

NOTE 7. - STOCK AND STOCK OPTION PLANS

 

Preferred Stock - The Company’s certificate of incorporation authorizes its Board to issue up to 1,000,000 shares of preferred stock. The stock is issuable in series that may vary as to certain rights and preferences, as determined upon issuance, and has a par value of $0.01 per share. As of December 31, 2021, and 2020, there were no preferred shares issued or outstanding.

 

2005 Plan - The Company’s Board and stockholders approved a stock option plan adopted in 2005, which has authority to grant options to purchase up to an aggregate of 13,200 common shares at December 31, 2021 and 2020.

 

2009 Plan - During 2009, the Company’s Board approved the 2009 stock option plan, which grants options to purchase up to an aggregate of 48,894 common shares at December 31, 2021 and 2020. Options issued to date are nonqualified since the Company has decided not to seek stockholder approval of the 2009 Plan. There are 0 shares available for grant at December 31, 2021.

 

2019 Plan - During 2019, the Company’s Board approved the 2019 stock option plan, which grants options to purchase up to an aggregate of 20,000 common shares of which 1,687 common shares are available for grant at December 31, 2021. Options issued to date are nonqualified since the Company has decided not to seek stockholder approval of the 2019 Plan.

 

2020 Plan - During 2020, the Company’s Board approved the 2020 stock option plan, which grants options to purchase up to an aggregate of 20,000 common shares of which 734 common shares are available for grant at December 31, 2021. Options issued to date are nonqualified since the Company has decided not to seek stockholder approval of the 2020 Plan.

 

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Table of Contents

 

NOTE 8. - STOCK OPTION AGREEMENTS AND TRANSACTIONS

 

The Company grants stock options to its key employees and independent service providers as it deems appropriate. Most options expire from five to ten years after the grant date.

 

Option Agreements - The Company's Board approved stock option agreements with consultants, an employee for a performance-based award and a member of the Board of which options for an aggregate of 19,354common shares are outstanding at December 31, 2021 with an average exercise price of $15.75 per share. At December 31, 2021, options for 9,354 shares are vested as the performance based award has not been reached.

 

On April 6, 2021, the Company granted a stock option to purchase a total of 2,667 common shares at an exercise price of $14.438 per share to a former executive of the Company who consults with the Company. The individual forfeited an option grant of 6,307 common shares from the 2009 Plan.

 

On April 19, 2021, the Company issued 10,000 performance-based stock options at $18.375 per share to an executive of the Company. Certain revenue targets must be made to grant the options in three tranches of 3,334 shares each. The unrecognized compensation expense for these options is approximately $135,800 at December 31, 2021.

 

The remaining stock options issued during the year ended December 31, 2021 included in the table below relate to options issued to employees as compensation expense.

 

Loan Fees - On May 7, 2019, the Company entered into a note payable agreement for up to $500,000 with a related party. The note has an interest rate of 7.5% and is due on August 31, 2026. The Company borrowed $200,000 in 2019, $50,000 in 2020, and $249,000 in 2021. The $499,000 remains outstanding as of December 31, 2021. As consideration for providing this financing, the Company granted a stock option to purchase a total of 33,334 common shares at an exercise price of $1.50 and recorded interest expense of $14,250 using the Black-Scholes option pricing model to determine the estimated fair value of the option in 2019.

 

On August 24, 2020, the Company entered into a note payable agreement for $166,473 with a third party. The note has an interest rate of 6% and is due on August 24, 2024. As consideration for providing this financing, the Company granted a stock option to purchase a total of 6,667 common shares at an exercise price of $3.75 and recorded interest expense of $52,900 using the Black-Scholes option pricing model to determine the estimated fair value of the option.

 

On November 17, 2020, the Company extended a note payable agreement of $146,300 with a related party. The note has an interest rate of 6% and is due on January 1, 2022. As consideration for providing this extension of the financing, the Company granted a stock option to purchase a total of 3,334 common shares at an exercise price of $9.00 and recorded interest expense of $15,450 using the Black-Scholes option pricing model to determine the estimated fair value of the option in 2020. On February 14, 2021, the Company extended this note payable agreement’s due date to January 1, 2024.

 

On December 31, 2020, the Company extended a note payable agreement of $9,000 with a third party. The note has an interest rate of 6% and is due on January 1, 2024. As consideration for providing this extension of the financing, the Company granted a stock option to purchase a total of 334 common shares at an exercise price of $7.50 and recorded interest expense of $958 using the Black-Scholes option pricing model to determine the estimated fair value of the option.

 

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Table of Contents

 

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, 2021 and 2020.

 

 

 

2021

 

 

2020

 

Risk free interest rate

 

0.16% to 0.64

%

 

0.17% to 1.40

%

Expected dividend yield

 

 

0%

 

 

0%

Expected stock price volatility

 

100% to 140

%

 

 

100%

Expected life of options

 

1.25 to 5.25 years

 

 

1.75 to 3.01 years

 

 

The following is a summary of stock option activity, including qualified and non-qualified options for the years ended December 31, 2021 and 2020:

 

 

 

Number of

Options

Outstanding

 

 

Weighted

Average

Exercise Price

 

 

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

Outstanding at December 31, 2019

 

 

145,474

 

 

$3.90

 

 

 

 

 

 

 

Granted

 

 

25,067

 

 

$6.15

 

 

 

 

 

 

 

Expired

 

 

(4,466)

 

$10.95

 

 

 

 

 

 

 

Forfeited

 

 

(333)

 

$3.75

 

 

 

 

 

 

 

Outstanding at December 31, 2020

 

 

165,742

 

 

$3.98

 

 

 

 

 

 

 

Granted

 

 

23,420

 

 

$15.98

 

 

 

 

 

 

 

Exercised

 

 

(31,854)

 

$2.78

 

 

 

 

 

 

 

Expired

 

 

(600)

 

$7.13

 

 

 

 

 

 

 

Forfeited

 

 

(13,307)

 

$7.20

 

 

 

 

 

 

 

Outstanding at December 31, 2021

 

 

143,401

 

 

$5.85

 

 

 

3.4 years

 

 

$544,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested or expected to vest at December 31, 2021

 

 

133,400

 

 

$4.95

 

 

 

3.3 years

 

 

$544,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2021

 

 

133,067

 

 

$4.88

 

 

3.3 years 

 

 

$544,100

 

 

At December 31, 2021, there was approximately $135,800 of total unrecognized compensation cost related to outstanding non-vested options.

 

The weighted average fair value of options granted was $15.95 and $6.15 per share for the years ended December 31, 2021 and 2020, 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 with the exception of the 6,667 options granted in consideration for providing the financing on August 24, 2020.

 

NOTE 9. - WARRANTS

 

            On November 3, 2021, as additional consideration for the convertible promissory note financing (Note 6), the Company issued the Mast Hill Fund, L.P. (the “Lender”) a 5-year warrant to purchase 18,667 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $181,900 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 6).

 

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Table of Contents

 

            On November 3, 2021, J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the same convertible promissory note and was paid a cash fee of $20,160 and issued a 5-year warrant to purchase 2,135 shares of Company common stock at a fixed price of $14.40 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately $20,200 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note (Note 6).

 

NOTE 10. - INCOME TAXES

 

The components of income tax expense (benefit) consists of the following:

 

 

 

December 31,

 

 

 

   2021

 

 

   2020

 

Deferred:

 

 

 

 

 

 

Federal

 

$(277,000)

 

$39,000

 

State

 

 

(47,000)

 

 

(10,000)

 

 

 

(324,000)

 

 

29,000

 

Change in valuation allowance

 

 

324,000

 

 

 

(29,000)

 

 

$0

 

 

$0

 

 

At December 31, 2021, the Company had federal net operating loss carryforwards of approximately $8,500,000 ($6,900,000 - 2020) and various state net operating loss carryforwards of approximately $4,900,000 ($3,200,000 - 2020).  Approximately $2,100,000 of these carryforwards can be carried forward indefinitely, while the remaining carryforwards expire from 2022 through 2041.  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, 2021, a net deferred tax asset, representing the future benefit attributed primarily to the available net operating loss carryforwards in the amount of approximately $2,238,000 ($1,914,000 - 2020), had been fully offset by a valuation allowance because management believes that the statutory limitations on utilization of the operating losses and concerns over achieving profitable operations diminish the Company’s ability to demonstrate that it is more likely than not that these future benefits will be realized before they expire.

 

The following is a summary of the Company's temporary differences and carryforwards which give rise to deferred tax assets and liabilities.

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Deferred tax assets (liabilities):

 

 

 

 

 

 

Net operating loss carryforwards

 

$1,956,000

 

 

$1,550,000

 

Defined benefit pension liability

 

 

0

 

 

 

60,000

 

Operating Lease ROU

 

 

(10,000)

 

 

(30,000)

Operating Lease Liability

 

 

10,000

 

 

 

30,000

 

Deferred Revenue

 

 

0

 

 

 

11,000

 

Property and Equipment

 

 

(14,000)

 

 

0

 

Reserves and accrued expenses payable

 

 

296,000

 

 

 

293,000

 

Gross deferred tax asset

 

 

2,238,000

 

 

 

1,914,000

 

Deferred tax asset valuation allowance

 

 

(2,238,000)

 

 

(1,914,000)

Net deferred tax asset

 

$0

 

 

$0

 

 

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The differences between the U.S. statutory federal income tax rate and the effective income tax rate in the accompanying statements of operations are as follows:

 

 

 

December 31,

 

 

 

2021

 

 

  2020

 

Statutory U.S. federal tax rate

 

 

21.0%

 

 

21.0%

 

 

 

 

 

 

 

 

 

Change in valuation allowance

 

 

(20.7)

 

 

(4.2)

Net operating loss carryforward expiration

 

 

(5.9)

 

 

13.4

 

State taxes

 

 

3.0

 

 

 

(1.5)

 

 

 

 

 

 

 

 

 

Expired stock-based compensation

 

 

1.1

 

 

 

1.0

 

Forgiveness of PPP Loan

 

 

1.6

 

 

 

(29.9)

Other permanent non-deductible items

 

 

(0.1)

 

 

0.2

 

Effective income tax rate

 

 

0.0%

 

 

0.0%

 

NOTE 11. - EMPLOYEE RETIREMENT PLANS

 

Simple IRA Plan - Through December 31, 2012, the Company offered a simple IRA plan as a retirement plan for eligible employees who earned at least $5,000 of annual compensation. Eligible employees could elect to contribute a percentage of their compensation up to a maximum of $11,500. The accrued liability for the simple IRA plan, including interest, was $275,422 and $264,675, as of December 31, 2021 and 2020, respectively.

 

401(k) Plan - Effective January 1, 2013, the Company began offering a defined contribution 401(k) plan in place of the simple IRA plan. For 2021, 401(k) employee contribution limits are $19,500 plus a catch-up contribution for those over age 50 of $6,500. The Company can elect to make a discretionary contribution to the Plan. No discretionary contribution was approved for 2021 or 2020.

 

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.

 

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Supplemental balance sheet information related to the operating lease was as follows:

 

 

 

December 31, 2021

 

Right of use asset - lease, net

 

$41,490

 

Operating lease liability - short-term

 

$42,437

 

Operating lease liability - long-term

 

 

0

 

Total operating lease liability

 

$42,437

 

 

 

 

 

 

Discount rate - operating lease

 

 

6.0%

 

NOTE 13. - RELATED PARTY ACCRUED INTEREST PAYABLE

 

Accrued Interest Payable - Included in accrued interest payable is accrued interest payable to related parties of approximately $107,000 at December 31, 2021 ($62,000 - 2020). An additional $116,465 of accrued interest to related parties is due to paid after 2022.

 

NOTE 14. - SUBSEQUENT EVENTS

 

On January 31, 2022, the Company entered into a Stock Purchase Agreement (the “Agreement”), by and among the Company; the David A. Nelson, Jr. Living Trust (“Seller”); David A. Nelson, Jr. (the “Beneficiary” and, together with Seller, the “Seller Parties”); and Pratum, Inc., an Iowa corporation (the “Pratum”) and security services firm that helps clients solve challenges and find the right balance between information security, IT support, and compliance. Pratum is based in Ankeny, Iowa.

 

Pursuant to the Agreement, Company agreed to acquire all of the issued and outstanding equity securities of the Company from the Seller Parties (the “Acquisition”) for an aggregate purchase price of $8,500,000 (the “Acquisition Consideration”), subject to customary purchase price adjustments for, among other things, indebtedness of Pratum as of the closing. $8,000,000 of the Acquisition Consideration will be paid to the Seller Parties at closing and $500,000 of the Acquisition Consideration will be deposited at closing with an escrow agent to be held in escrow for a period of six months. The escrow amount may be used to account for indemnification claims and any post-closing adjustment of the Acquisition Consideration.

 

The Agreement contains customary representations, warranties and covenants by each of the parties, and contains indemnification provisions under which the parties have agreed, subject to certain limitations, to indemnify each other against losses resulting from certain liabilities.

 

The closing of the Acquisition is subject to customary conditions, including, among others, (i) receipt of any necessary regulatory approvals and licenses, (ii) the absence of any litigation or governmental order that restrains, prevents or materially alters the transactions contemplated by the Agreement, (iii) the accuracy of the parties’ representations and warranties contained in the Agreement remaining true as of closing (subject to certain qualifications), (iv) Pratum’s and the Seller Parties’ material compliance with the covenants and agreements in the Agreement, and (v) the Buyer obtaining sufficient debt or equity financing to fund the Acquisition Consideration. The Company expects the transaction to close in the first half of 2022.

 

The Agreement also contains customary pre-closing covenants, including the obligation of Pratum and the Seller Parties to cause Pratum to conduct its business in all material respects in the ordinary course and to refrain from taking certain specified actions without the written consent of the Company.

 

On March 28, 2022 the parties to the Pratum Agreement amended the agreement to extend the outside date for closing from March 31, 2022 to May 15, 2022.  Accordingly, the Pratum Agreement may be terminated under certain circumstances, including, among others if the Acquisition does not close by May 15, 2022. Additionally, either party may terminate the Agreement upon a breach by the other party of any representation, warranty, covenant or agreement made by such breaching party in the Agreement, such that the conditions related to the representations, warranties, covenants and agreements made by such breaching party would not be satisfied and such breach or condition is not curable or, if curable, is not cured 30 days after written notice of such breach.

 

NOTE 15. - RETROACTIVE EFFECT OF REVERSE STOCK SPLIT

 

On December 15, 2021, the Company’s board of directors approved a reverse stock split of outstanding shares of common stock by a ratio within the range of 3-to-1 and 75-to-1, to be effective at the ratio and date to be determined by the board of directors.  The stockholders approved granting discretionary authority to the Company’s board of directors to amend the Company’s Certificate of Incorporation to effect the reverse stock split within the range of 3-to-1 and 75-to-1 at the annual meeting on January 26, 2022. On October 17, 2022  the board of directors approved a reverse stock split of the outstanding shares of common stock by a ratio of 75-to-1, which became effective October 19, 2022. All share and per share data in the accompanying financial statements have been retroactively restated to reflect the effect of the reverse stock split.

 

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On February 15, 2022, the Company, as borrower, entered into a financing arrangement (the “Loan”) with Mast Hill Fund, L.P. (the “Lender”), a Delaware limited partnership. In exchange for a promissory note, Lender agreed to lend the Company $370,000, which bears interest at a rate of eight percent (8%) per annum, less $37,000 original issue discount. Under the terms of the Loan, amortization payments are due beginning June 15, 2022, and each month thereafter with the final payment due on February 15, 2023. Additionally, in the event of a default under the Loan or if the Company elects to pre-pay the Loan, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to Mast Hill in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The Loan is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. As additional consideration for the financing, the Company issued Lender a 5-year warrant to purchase 12,334 shares of Company common stock at a fixed price of $12.00 per share, subject to price adjustments for certain actions, including dilutive issuances, representing 40% warrant coverage on the principal amount of the Loan. The closing price of the Company common stock on February 15, 2022 was $12.75 per share. The Company has granted the Mast Hill customary “piggy-back” registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Mast Hill, other than in respect of the Loan and a similar loan between the Company and Lender entered into on November 2, 2021.

 

J.H. Darbie & Co., Inc. ( “Finder”), a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $14,650 (4.39% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 1,619 shares of Company common stock at a fixed price of $14.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary “piggy-back” registration rights with respect to the shares issuable upon exercise of the warrant.

   

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Up to 3,500,000 Units Consisting of

 

Common Units

Each Consisting of

     

One Share of Common Stock and

Three Redeemable Warrants Each to Purchase One Share of Common Stock

 

Pre-funded Units

Each Consisting of

 

One Pre-funded Warrant to Purchase One Share of Common Stock and

Three Redeemable Warrants Each to Purchase One Share of Common Stock

 

______________________

 

PROSPECTUS

______________________

 

 

Sole Book-Running Manager

 

 

 

Aegis Capital Corporation

 

      , 2022

 

Through and including     , 2022 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Table of Contents

   

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

 

The following table sets forth the costs and expenses payable by us in connection with the registration of the securities hereunder. All amounts are estimates, except the SEC registration fee.

 

SEC registration fee

 

$3,268

 

Nasdaq listing fees

 

 

75,000

 

FINRA filing fees

 

 

5,788

 

Accounting fees and expenses

 

 

75,000

 

Legal fees and expenses

 

 

370,000

 

Miscellaneous fees and expenses*

 

 

25,000

 

Total

 

$

554,056

 

 

* To be completed by amendment.

 

Item 14. Indemnification of Directors and Officers

 

Section 102 of the Delaware General Corporation Law (the “DGCL”) permits a corporation to eliminate the personal liability of its directors or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his or her duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Our Certificate of Incorporation, as amended, provides for this limitation of liability.

 

Section 145 of the DGCL, or Section 145, provides, among other things, that a Delaware corporation may indemnify any person who was, is or is threatened to be made, party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), because such person is or was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit, or proceeding, provided such person acted in good faith and in a manner they reasonably believed to be in or not opposed to the corporation’s best interests and, concerning any criminal action or proceeding, had no reasonable cause to believe that their conduct was illegal. A Delaware corporation may indemnify any persons who were or are a party to any threatened, pending, or completed action or suit by or in the right of the corporation by reason of the fact that such person is or was a director, officer, employee, or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests, provided further that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred.

 

Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him in any such capacity or arising out of his or her status as such, whether or not the corporation would otherwise have the power to indemnify him or her under Section 145.

 

Our Certificate of Incorporation, as amended, provides that we will indemnify a director of the Company against actions brought by the Company or by its stockholders alleging breach of fiduciary duty, except for liability: (1) for any breach of the director’s duty of loyalty to the Company or its stockholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) under §174 of the DGCL; or (4) for any transaction from which the director derived an improper benefit.

 

Section 174 of the DGCL provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or unlawful stock purchase or redemption, may be held jointly and severally liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time may avoid liability by causing his or her dissent to such actions to be entered in the books containing the minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

 

 
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In addition, we intend to enter into new indemnification agreements with all of our directors and executive officers prior to the completion of this offering. In general, these agreements provide that we will indemnify the executive officer or director to the fullest extent permitted by law for claims arising in his or her capacity as an executive officer or director of our company or in connection with his or her service at our request for another corporation or entity. The indemnification agreements also provide for procedures that will apply in the event that an executive officer or director makes a claim for indemnification and establish certain presumptions that are favorable to the executive officer or director.

 

In addition, upon consummation of this offering, we intend to obtain a general liability insurance policy that covers certain liabilities of directors and officers of our corporation arising out of claims based on acts or omissions in their capacities as directors or officers.

 

The underwriting agreement we will enter into in connection with the offering of securities being registered hereby provides that the underwriter will indemnify, under certain conditions, our directors and officers (as well as certain other persons) against certain liabilities arising in connection with such offering.

 

Insofar as the foregoing provisions permit indemnification of directors, executive officers or persons controlling us for liability arising under the Securities Act of 1933, as amended, or the Securities Act, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Item 15. Recent Sales of Unregistered Securities

 

In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act.

 

(a) Exchanges Exempt Under Section 3(a)(9) of the Securities Act

 

On November 2, 2021, the Company entered into a subscription agreement with its Vice President of Business Development, Richard Popper whereby Mr. Popper agreed to purchase an aggregate amount of 13,334

 shares of the Company’s common stock, par value $0.001 per share, at $7.50 per share, in exchange for the conversion and cancellation of an aggregate of $100,000 principal amount of an existing promissory note held by Mr. Popper.

 

On April 29, 2022, Mast Hill exercised the warrant issued to them on November 3, 2021 in full on a cashless basis and acquired 11,470 shares of Common Stock.

 

(b) Sales Exempt Under Section 4(a)(2) of the Securities Act

 

On April 30, 2021, the Company issued 667 shares with a value of $17.43 per share, or $11,625, to a consultant for services to be rendered from April 1, 2021 to September 30, 2021.

 

On May 7, 2021, the Company issued 2,667 shares with a value of $17.435 per share, or $46,500, for consulting services to be rendered from March 1, 2021 to February 28, 2023.

 

On June 22, 2021, two non-executive employees exercised stock options of the Company. The issuances were for 267 and 854 shares at prices of $2.25 and $7.12, respectively.

 

On June 25, 2021, a non-executive employee exercised stock options of the Company. The issuances were for 2,667 shares at a price of $3.093.

 

On July 6, 2021, a non-executive employee exercised stock options of the Company. The issuances were for 667 shares at a price of $3.75.

 

On September 10, 2021, two non-executive employees exercised stock options of the Company. The issuances were for 1,067 and 1,400 shares at prices of $3.00 and $3.00, respectively.

 

On September 16, 2021, three executives exercised stock options of the Company. The issuances were for 6,667, 6,667 and 10,667 shares at prices of $3.00, $3.00 and $3.00, respectively.

 

 
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On November 3, 2021, the Company issued a 5-year warrant to Mast Hill to purchase 18,667 shares of Company common stock at a fixed price of $12.00 per share in connection with a financing arrangement.

 

Additionally, in the event of a default under the loan or if the Company elects to pre-pay the Loan, the lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share.  These warrants were exercised via a cashless transaction on April 29, 2022.

 

On November 3, 2021, the Company issued a 5-year warrant to J.H. Darbie & Co., Inc. to purchase 2,135 shares of Company common stock at a fixed price of $14.40 per share in connection with services provided for a financing arrangement.

 

On November 29, 2021, two non-executive employees exercised stock options of the Company. The issuances were for 267 and 667 shares at prices of $2.25 and $2.25, respectively.

 

On February 15, 2022, the Company issued a 5-year warrant to Mast Hill to purchase 12,334 shares of Company common stock at a fixed price of $12.00 per share in connection with a financing arrangement. Additionally, in the event of a default under the loan or if the Company elects to pre-pay the Loan, the lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share.

 

On February 15, 2022, the Company issued a 5-year warrant to J.H. Darbie & Co., Inc. to purchase 1,619 shares of Company common stock at a fixed price of $14.40 per share in connection with services provided for a financing arrangement.

 

On April 12, 2022, the Company issued a 5-year warrant to Talos Victory Fund, LLC to purchase 9,867 shares of Company common stock at a fixed price of $12.00 per share in connection with a financing arrangement. Additionally, in the event of a default under the loan or if the Company elects to pre-pay the Loan, the lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share.

 

On April 12, 2022, the Company issued a 5-year warrant to J.H. Darbie & Co., Inc. to purchase 1,295 shares of Company common stock at a fixed price of 14.40 per share in connection with services provided for a financing arrangement.

 

On May 31, 2022, the Company issued a 5-year warrant to Mast Hill to purchase 11,834 shares of Company common stock at a fixed price of $12.00 per share in connection with a financing arrangement. Additionally, in the event of a default under the loan or if the Company elects to pre-pay the Loan, the lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $7.50 per share.

 

On May 31, 2022, the Company issued a 5-year warrant to J.H. Darbie & Co., Inc. to purchase 1,554 shares of Company common stock at a fixed price of $14.40 per share in connection with services provided for a financing arrangement.

 

On July 29, 2022, an executive exercised stock options of the Company. The issuance was for 5,334 shares at a price of $3.00.

 

In August 2022, we informally agreed to sell 33,334 shares of our common stock to an employee at a price of $7.50 per share, subject to approval of our board directors and entering into a definitive purchase agreement.

 

The securities described above were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering, to the extent an exemption from such registration was required. The recipients of the securities in the transactions described above acquired the securities for their own account for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof. Appropriate legends were affixed to the instruments representing such securities issued in such transactions.

 

Item 16. Exhibits and Financial Statement Schedules

 

The following exhibits to this registration statement included in the Index to Exhibits are incorporated by reference.

 

INDEX TO EXHIBITS

 

Exhibit No.

 

Description

1.1

 

Form of Underwriting Agreement (incorporated by reference to Amendment No. 4 to the Company's Registration Statement on Form S-1 filed on September 9, 2022)

3.1

 

Certificate of Incorporation of the Company dated April 29, 1993 (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856).

3.2

 

Certificate of Amendment of Certificate of Incorporation dated December 31, 1997 (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997).

3.3

 

Certificate of Amendment of Certificate of Incorporation dated February 3, 1999 (incorporated herein by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998).

3.4

 

Certificate of Amendment of Certificate of Incorporation dated February 28, 2006 (incorporated herein by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005).

3.5

 

By-Laws of the Registrant (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856).

3.7

 

Certificate of Amendment of Certificate Incorporation dated October 17, 2022 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 19, 2022)

4.1

 

Specimen Stock Certificate (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856).

4.2

 

Form of Redeemable Warrant (incorporated by reference to Amendment No. 5 to the Company’s Registration Statement of Form S-1 filed on September 20, 2022)

4.3

 

Form of Pre-funded Warrant (incorporated by reference to Amendment No. 4 to the Company's Registration Statement on Form S-1 filed on September 9, 2022 )

4.4

 

Form of Underwriter’s Warrant (incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form S-1 filed on May 4, 2022 )

4.5

 

Form of Warrant Agent Agreement (Redeemable Warrants) (incorporated by reference to Amendment No. 4 to the Company's Registration Statement on Form S-1 filed on September 9, 2022 )

4.6

 

Form of Warrant Agent Agreement (Pre-funded Warrants) (incorporated by reference to Amendment No. 4 to the Company's Registration Statement on Form S-1 filed on September 9, 2022 )

5.1

 

Opinion of Harter Secrest & Emery, LLP(incorporated by reference to Amendment No. 6 to the Company's Registration Statement on Form S-1 filed on October 6, 2022 )

10.1†

 

2009 Stock Option Plan (incorporated herein by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).

    

 
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10.2

 

Form of Stock Option Agreement (incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File# 33-61856).

10.3

 

Promissory Note dated August 13, 2003 in favor of Carle C. Conway (incorporated herein by reference to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002).

10.4

 

Modification Agreement No. 3 to Promissory Notes between Allan Robbins and the Company dated October 1, 2005 (incorporated herein by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005).

10.5

 

Collateral Security Agreement between the Company and Northwest Hampton Holdings, LLC dated February 15, 2006 (incorporated herein by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10- KSB for the fiscal year ended December 31, 2005).

10.6

 

Collateral Security Agreement between the Company and Allan Robbins dated February 15, 2006 (incorporated herein by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005).

10.7

 

Purchase and Sale Agreement between the Company and Amerisource Funding, Inc. dated May 21, 2004 (incorporated herein by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006).

10.8

 

Account Modification Agreement between the Company and Amerisource Funding, Inc. dated August 5, 2005 (incorporated herein by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006).

10.9

 

Promissory Note between Northwest Hampton Holdings, LLC and the Company dated September 30, 2009 (incorporated herein by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009).

10.10

 

Demand Promissory Note between Allan M. Robbins and the Company dated August 13, 2010 (incorporated herein by reference to Exhibit 10.31 to the Company’s Quarter Report on Form 10-Q for the quarterly period ended September 30, 2010).

10.11

 

Stock Option Agreement between the Company and Donald W. Reeve dated September 5, 2013 (incorporated herein by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014).

10.12

 

Stock Option Agreement between the Company and Donald W. Reeve dated December 1, 2014 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 4, 2014).

10.13

 

Software Assets Purchase Agreement between the Company and UberScan, LLC and Christopher B. Karr and Duane Pfeiffer (incorporated herein by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014).

10.14

 

Amendment to Promissory Note between the Company and Northwest Hampton Holdings, LLC dated December 31, 2015 (incorporated herein by reference to Exhibit 10.41 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2017).

10.15

 

Promissory Note between the Company and James Leonardo Managing Member of a Limited Liability Corporation to be formed dated March 14, 2016 (incorporated herein by reference to Exhibit 10.38 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2017).

10.16

 

Stock Option Agreement between the Company and Donald W. Reeve dated September 30, 2016 (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarter Report on Form 10-Q for the quarterly period ended September 30, 2016).

10.17

 

Line of Credit and Note Agreement between the Company and Andrew Hoyen dated July 18, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarter Report on Form 10-Q for the quarterly period ended June 30, 2017).

10.18

 

Stock option agreement between the Company and Andrew Hoyen dated July 18, 2017 for 400,000 common shares (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarter Report on Form 10-Q for the quarterly period ended June 30, 2017).

10.19

 

Stock option agreement between the Company and Andrew Hoyen dated July 18, 2017 for 100,000 common shares (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarter Report on Form 10-Q for the quarterly period ended June 30, 2017).

10.20

 

Line of Credit and Note Agreement between the Company and Harry Hoyen dated September 21, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarter Report on Form 10-Q for the quarterly period ended September 30, 2017).

 

 
II-4

Table of Contents

 

10.21

 

Amendment to Promissory Note between the Company and Northwest Hampton Holdings, LLC dated December 8, 2016 (incorporated herein by reference to Exhibit 10.43 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2017).

10.22

 

Modification #1 to Line of Credit Note and Agreement between Harry Hoyen and the Company dated December 28, 2017 (incorporated herein by reference to Exhibit 10.44 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2017).

10.23

 

Stock option agreement between the Company and Harry Hoyen dated December 28, 2017 for 400,000 common shares (incorporated herein by reference to Exhibit 10.45 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2017).

10.24

 

Stock option agreement between the Company and Harry A. Hoyen III dated May 14, 2019 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 16, 2019).

10.25†

 

2019 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 22, 2019).

10.26

 

Stock option agreement between the Company and Andrew Hoyen dated December 10, 2019 (incorporated herein by reference to Exhibit 10.49 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2019).

10.27

 

Stock Option Agreement between the Company and Donald W. Reeve dated December 23, 2019 (incorporated herein by reference to Exhibit 10.50 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2019).

10.28

 

Stock Option Agreement between the Company and James Villa dated December 23, 2019 (incorporated herein by reference to Exhibit 10.51 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2019).

10.29

 

Stock option agreement between the Company and Andrew Hoyen dated December 23, 2019 (incorporated herein by reference to Exhibit 10.52 to the Company’s Current report on Form 10-K for the fiscal year ended December 31, 2019).

10.30

 

Small Business Administration Note Payable Agreement with Upstate Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarter Report on Form 10-Q for the quarterly period ended March 31, 2020).

10.31†

 

2020 Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarter Report on Form 10-Q for the quarterly period ended March 31, 2020).

10.32

 

Amendment to Promissory Note between the Company and Northwest Hampton Holdings, LLC dated November 17, 2020 (incorporated herein by reference to Exhibit 10.55 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020).

10.33

 

Promissory Note between Donald Reeve and the Company dated December 30, 2020 (incorporated herein by reference to Exhibit 10.56 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020).

10.34

 

Second Amended Settlement Agreement between the Company and the Pension Benefit Guaranty Corporation dated April 12, 2021 (incorporate herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 17, 2021).

10.35

 

Stock Purchase Agreement, dated November 3, 2021, by and between the Company and Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 15, 2021).

10.36

 

Promissory Note, issued November 3, 2021, by the Company to Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q on November 15, 2021).

10.37

 

Warrant, issued November 3, 2021, by the Company to Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 15, 2021).

10.38

 

Warrant, issued November 3, 2021, by the Company to J.H. Darbie & Co., Inc. (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on November 15, 2021).

10.39

 

Subscription Agreement, dated November 2, 2021, by and between the Company and Richard Popper (incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on November 15, 2021).

10.40

 

Form of Indemnification Agreement between the Registrant and each of its directors and executive officers. (incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form S-1 filed on May 4, 2022 )

10.41†

 

2021 Equity Incentive Plan (incorporated herein by reference to Company’s Registration Statement on Form S-1 filed on January 14, 2022).

 

 
II-5

Table of Contents

 

10.42

 

Stock Purchase Agreement, dated February 11, 2022, by and between the Company and Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 18, 2022).

10.43

 

Promissory Note, issued February 11, 2022, by the Company to Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 18, 2022).

10.44

 

Warrant, issued February 11, 2022, by the Company to Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 18, 2022).

10.45

 

Warrant, issued February 11, 2022, by the Company to J.H. Darbie & Co., Inc. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 18, 2022).

10.46

 

Amendment No. 1, dated February 18, 2022, by and between the Company and Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 18, 2022).

10.47

 

Modification Agreement to Promissory Note originally dated December 30, 2020 between the Company and Donald Reeve dated March 31, 2022 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 1, 2022)

10.48

 

Modification Agreement to Promissory Note originally dated May 25, 2021 between the Company and Donald Reeve dated March 31, 2022 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 1, 2022)

10.49

 

Stock Purchase Agreement, dated April 12, 2022, by and between the Company and Talos Victory Fund, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 15, 2022).

10.50

 

Promissory Note, issued April 12, 2022, by the Company to Talos Victory Fund, LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 15, 2022).

10.51

 

Warrant, issued April 12, 2022, by the Company to Talos Victory Fund, LLC (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 15, 2022).

10.52

 

Warrant, issued April 12, 2022, by the Company to J.H. Darbie & Co., Inc. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 15, 2022).

10.53

 

Stock Purchase Agreement, dated May 27, 2022, by and between the Company and Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 3, 2022).

10.54

 

Promissory Note, issued May 27, 2022, by the Company to Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 3, 2022).

10.55

 

Warrant, issued May 27, 2022, by the Company to Mast Hill Fund, L.P. (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 3, 2022).

10.56

 

Warrant, issued May 27, 2022, by the Company to J.H. Darbie & Co., Inc. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 3, 2022).

10.57

 

Modification Agreement to Promissory Note originally dated December 30, 2020 between the Company and Donald Reeve dated June 30, 2022 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 7, 2022).

10.58

 

Modification Agreement to Promissory Note originally dated May 25, 2021 between the Company and Donald Reeve dated June 30, 2022 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 7, 2022).

10.59

 

Modification Agreement to Line of Credit Note and Agreement originally dated July 17, 2017 between the Company and Andrew Hoyen dated July 29, 2022 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8--K filed on August 4, 2022).

10.60

 

Loan Agreement between the Company and Celtic Bank dated August 8, 2022 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8--K filed on August 12, 2022)..

10.61

 

Modification Agreement to Promissory Note originally dated December 30, 2020 between the Company and Donald Reeve dated September 6, 2022 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 8, 2022).

10.62

 

Modification Agreement to Promissory Note originally dated May 25, 2021 between the Company and Donald Reeve dated September 6, 2022 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 8, 2022).

14

 

Form of Code of Business Conduct and Ethics (incorporated herein by reference to Company’s Registration Statement on Form S-1 filed on January 14, 2022).

21.1

 

Subsidiary of the Registrant (incorporated herein by reference to Company’s Registration Statement on Form S-1 filed on January 14, 2022).

23.1*

 

Consent of Freed Maxick CPAs, P.C., independent registered public accounting firm

23.2

 

Consent of Harter Secrest & Emery, LLP (included in Exhibit 5.1)

 

 
II-6

Table of Contents

 

24.1

 

Power of Attorney (incorporated herein by reference to the signature page of the Company’s Registration Statement on Form S-1 filed on January 14, 2022)

99.1

 

Form of Audit Committee Charter (incorporated herein by reference to Company’s Registration Statement on Form S-1 filed on January 14, 2022).

99.2

 

Form of Compensation Committee Charter (incorporated herein by reference to Company’s Registration Statement on Form S-1 filed on January 14, 2022).

99.3

 

Form of Nominating and Corporate Governance Committee Charter (incorporated herein by reference to Company’s Registration Statement on Form S-1 filed on January 14, 2022).

99.4

 

Consent of Kenneth Edwards (incorporated herein by reference to Company’s Registration Statement on Form S-1 filed on January 14, 2022).

99.5

 

Consent of Teresa Bair (incorporated herein by reference to Company’s Registration Statement on Form S-1 filed on January 14, 2022).

101.INS*

 

XBRL Instance Document

101.SCH*

 

XBRL Taxonomy Extension Schema Document

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

107*

 

Filing Fee Table

 

*

Filed herewith.

 

 

†

Management contract or compensatory plan or arrangement

   

 
II-7

Table of Contents

 

Item 17. Undertakings

 

(a)

The undersigned registrant hereby undertakes:

 

 

 

 

(1)

To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

 

(i)

To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

 

 

 

(ii)

To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

 

 

 

(iii)

To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

 

(2)

That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

 

 

 

(3)

To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

 

 

 

(4)

That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

 

 

(b)

 

 

 

 

 

(1)

For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

 

 

 

(2)

For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

 
II-8

Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized in the Town of Pittsford, State of New York, on November 1, 2022.

 

 

INFINITE GROUP, INC.

 

 

 

 

 

/s/ James Villa

 

 

James Villa

 

 

Chief Executive Officer

 

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

 Signature

 

Title

 

Date

 

 

 

 

 

/s/ James Villa

 

Chief Executive Officer and Director

 

November 1, 2022

James Villa

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ Richard Glickman

 

Vice President of Finance and Chief Accounting Officer

 

November 1, 2022

Richard Glickman

 

(Principal Financial Officer and

Principal Accounting Officer)

 

 

 

 

 

 

 

/s/ Donald W. Reeve

 

Chairman of the Board

 

November 1, 2022

Donald W. Reeve

 

 

 

 

 

 

 

 

 

/s/ Andrew Hoyen

 

President, Chief Operating Officer and Director

 

November 1, 2022

Andrew Hoyen

 

 

 

 

 

 
II-9

 

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