UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2012
or
¨
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . to . . .
. . . . . . .
Commission File Number 0-21816
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INFINITE
GROUP, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE
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52-1490422
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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60 Office Park Way
Pittsford, NY 14534
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(Address of principal executive offices)
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Registrant's telephone number, including
area code (585) 385-0610
Securities registered pursuant to Section
12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock
Par value $.001
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
£
No
S
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
£
No
S
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
S
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
S
No
£
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K
(
§
229.405
of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
S
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.
Large accelerated filer
£
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Accelerated filer
£
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Non-accelerated filer
£
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Smaller reporting company
S
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Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
£
No
S
The aggregate market value of the common
stock of the registrant held by non-affiliates of the registrant (based upon the closing price on the NASDAQ "Over the Counter
Bulletin Board" of $.225 on June 29, 2012, the last business day of the registrant’s most recently completed second
fiscal quarter) was approximately $5,450,000.
As of March 29, 2013, 25,961,883 shares
of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
INFINITE GROUP,
INC.
Form 10-K
TABLE OF CONTENTS
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Page
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PART I
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Item 1.
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Business
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3
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Item 1A.
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Risk Factors
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8
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Item 1B.
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Unresolved Staff Comments
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17
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Item 2.
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Properties
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18
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Item 3.
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Legal Proceedings
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18
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Item 4.
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Mine Safety Disclosures
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18
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PART II
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Item 5.
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Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases
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of Equity Securities
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18
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Item 6.
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Selected Financial Data
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19
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Item 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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19
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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28
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Item 8.
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Financial Statements and Supplementary Data
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28
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
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28
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Item 9A.
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Controls and Procedures
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29
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Item 9B.
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Other Information
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29
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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29
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Item 11.
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Executive Compensation
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31
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related
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Stockholder Matters
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32
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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35
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Item 14.
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Principal Accountant Fees and Services.
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37
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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37
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FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Annual
Report on Form 10-K are “forward-looking statements” regarding the plans and objectives of management for future operations.
Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties.
Our plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately
and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements
included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements
included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded
as a statement by us or any other person that our objectives and plans will be achieved. Factors that could cause actual results
to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors
set forth herein under the headings “Business,” “Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” We undertake no obligation to revise or update publicly
any forward-looking statements for any reason.
PART I
Item 1. Business
Business Overview
We provide IT solutions that are intended
to deliver measurable results to small and medium sized businesses (SMBs), government agencies, and large commercial enterprises.
We provide:
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managed
services that include
managing leading
edge operations
and implementing
complex programs
in advanced server
management;
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desktop
and server monitoring
and remediation;
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help
desk and call center
services;
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third
party data storage;
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backup
and disaster recovery
solutions; and
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We also provide cloud computing solutions
that include public and private cloud architectures along with hybrid scalable cloud hosting, server virtualization and desktop
virtualization solutions. In addition, we provide IT solutions that address mobility, information security and unified communications.
We focus on aligning business processes with technology for delivery of solutions meeting our clients’ needs and providing
expert management services to the lifecycle of technology-based projects.
We also provide support to professional
service organizations of software companies that need additional skilled resources when implementing solutions. Our technical
support personnel maintain leading edge certifications and qualifications in the respective software applications.
We provide
on and off-site client support to best meet our clients' needs. Our professionals are located at our headquarters in Pittsford,
N.Y. and in Colorado, Maryland, Mississippi, North Carolina, Virginia, and Washington, D.C. We are able to provide onsite service
to most locations around the world including military bases.
In 2011 and 2012, we had consultants
in Afghanistan, Bahrain, Honduras, Kuwait, and many military bases in the U.S.
As of December 31, 2012, we had 74 full-time
employees and information technology independent contractors. Approximately 36% of our employees hold U.S. Government security
clearances.
In 2012, we had sales of approximately
$8.7 million as compared to sales of approximately $9.2 million in 2011. We generated operating income of approximately $592,000
in 2012 as compared to approximately $311,000 in 2011.
During 2012, we derived approximately
90% of our sales from U.S. Government clients including sales under subcontracts.
During 2012, we derived approximately
65% of our sales from one client, including sales under subcontracts for services to several different end clients. A portion
of the revenue was derived from managing one of the nation’s largest Microsoft Windows environments for a major establishment
of the U.S. Government. We provided this support under a subcontract we entered into in 2004 with this large systems integrator,
which has been renewed annually. Our team of server experts supports approximately 3,000 servers and 250,000 client stations from
facilities in Maryland and Colorado. Operating 24 hours per day and seven days per week, we consistently meet or exceed the requirements
of our service level agreements. We refer to this as our Advanced Server Management (ASM) team. We also provide services to a
large enterprise Fortune 100 company under this contract.
We also provide professional services
to another one of our partners under subcontracts to their end clients, of which, over 90% are to U.S. Government agencies and
less than 10% to commercial entities. We have provided services at more than 100 U.S. Government locations.
We have several contract vehicles that
enable us to deliver a broad range of our services and solutions to the U.S. Government and state governments. For example, we
have performed services for the State of Mississippi under a contract vehicle we possess.
We maintain an ISO 9001 certification
which was renewed in 2012. ISO, or the International Organization for Standardization, is an international-standard-setting body
composed of representatives from various national standards organizations which promulgates worldwide proprietary industrial and
commercial standards. We also possess certifications with our business and technology partners and our personnel maintain numerous
certifications and qualifications.
We have experience in U.S. Government
agencies, state government, Fortune 500 companies, and SMBs. The quality and consistency of our services and IT expertise allow
us to maintain long-term relationships with our major clients.
Information Technology (IT) Solutions
and Services - Our Core Strengths
We strategically built our business to
deliver IT solutions and services that are intended to address challenges common to many U.S. Government agencies, state and local
governments and commercial companies, including SMBs. Our key focus areas are as follows:
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Managed services including:
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Desktop and server monitoring and remediation;
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Data storage, back-up, and disaster recovery;
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Data center management.
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Cloud computing including:
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Cloud hosting services;
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Server consolidation; and
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Desktop and server virtualization.
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Unified communications including:
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Program and project management.
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Business continuity planning; and
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Business process optimization and management.
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Government Contract Vehicles
A government contract vehicle is a mechanism
for conducting business with government entities which helps to significantly reduce such entities’ lead time for procuring
products or services and lowers agency acquisition costs associated with managing complex bid procedures.
Our strategy
has been to bid for contract vehicles that facilitate Federal and State governments’ procurement requirements which allow
us to compete further on task orders issued under the contract vehicles. We believe that possessing contract vehicles will facilitate
sales growth if we are successful at bidding and winning business within task orders generated under these vehicles. However,
the amount of sales that we may generate is not determinable until a specific project award is made.
CGI Federal Inc.
(CGI) Team.
During 2012, we were added to the team supporting CGI, a provider of end-to-end IT and business process services
to clients worldwide and a contract holder with the National Institutes of Health (NIH) Information Technology Acquisition and
Assessment Center (NITAAC). NITAAC is a federal executive agent authorized by the Office of Management and Budget (OMB) to administer
three Government-Wide Acquisition Contracts (GWACs) for information technology procurement. CGI was awarded a ten-year contract
with a program ceiling of $20 billion by the NITAAC in June 2012. Under the contract, the team will deliver a range of technology
services and solutions to federal health organizations, federal civilian agencies, and the Department of Defense (DoD) across
ten task areas. Services include: CIO support; outsourcing; systems integration; software development; data center consolidation;
health IT; cloud computing; mobile solutions; and cyber security.
X-Feds Team.
During
2012, we were selected as a participant on the X-Feds team to provide engineering support services for the U.S. Space and Naval
Warfare Systems Center (SPAWARSYSCEN)
Atlantic’s Core Infrastructure and Application Services Integration (CASI)
in support of the Chief of Naval Operations and the Department of the Navy (DoN). We are a subcontractor to X-Feds on a $249 million,
indefinite-delivery, indefinite-quantity (IDIQ), multiple-award contract. X-Feds, a leading small business provider of engineering,
systems integration, technical, and business services, is one of seven small businesses selected to provide engineering support
on the CASI contract. The primary goal of CASI is to support overall application migration to a Service Oriented Architecture
(SOA) environment.
GovWin Verified
Status
. During 2012, we received GovWin Verified Status from Deltek, a leading global provider of enterprise software and
information solutions for professional services firms and government contractors. We believe that the GovWin certification will
further assist us in obtaining federal contracts and building partnerships/teaming with other federal contractors. GovWin from
Deltek helps the federal government source potential suppliers and partners knowing their eligibility to do business with the
government and all their key information has been verified through the industry’s first Supplier Verification System.
Federal Supply
Schedule Contract.
In 2003, we were awarded a Federal Supply Schedule Contract by the U.S. General Services Administration
(GSA) for IT consulting services (Schedule 70). In 2008, our Schedule 70 Contract was extended for an additional five years through
December 27, 2013. Having a Schedule 70 allows us to compete for and secure prime contracts with all executive agencies of the
U.S. Government, as well as other national and international organizations. Our Schedule 70 contract encompasses 95 different
labor categories. We have used the Schedule 70 as a basis for pricing our current and proposed work. We intend to continue using
our Schedule 70 to facilitate the sale of IT consulting services to the U.S. Government.
Navy’s SeaPort-Enhanced
(SeaPort-e) Program.
In 2006, we were awarded a prime contract under the SeaPort-e program. This contract allows us to compete
for and perform service requirements solicited by various Navy commands, the Marine Corps, other organizations within the DoD,
non-DoD agencies, and certain joint agency organizations for work that is integrally related to the scope and mission of the contract.
This work involves professional services in all phases of naval ship and weapon systems acquisition and life-cycle support, including
research and development support, prototyping, technology analysis, acquisition logistics, project management support, modeling,
test and evaluation trials, crisis and consequence management, and engineering support. We continue to monitor task orders issued
under this vehicle. We earned sales from this contract from 2008 through the first quarter of 2012 and believe that new task orders
issued in our area of expertise will occur, which may lead to additional sales under this program.
Mississippi Server
Virtualization Contract
. In 2009, the state of Mississippi awarded us a three-year contract, which was extended to November
2013, to provide server virtualization consulting services to all Mississippi state agencies. Under the agreement, we support
the virtualization projects of each agency to move their servers to a virtualized environment at the state’s new data center
located in Jackson, Mississippi or virtualize in place as directed. The program started with the Department of Human Services.
We prepared a “total cost of ownership” analysis which estimated that virtualizing the department’s 112 servers
and migration to the central data center will save an estimated $4 million over five years. We completed a virtualization
assessment project that studied, architected, and designed a program to consolidate and virtualize executive agency servers for
the state’s datacenter. The total cost of ownership analysis showed approximately $9 million of savings over five
years. Subsequently, we began implementing the second phase by virtualizing servers at four executive agencies. The
success of these agencies led the way for more agencies to adopt the modernization concept and all agencies are now fully designed.
The implementation phase will extend into 2013. The adoption and success of our implementation of VMware led to the selection
of VMware Site Recovery Manager for better backup and recovery at two agencies. Additionally, the Mississippi Department
of Information Technology engaged us to leverage the virtual machine environment at a chosen agency to design and implement an
application backup and replication system using Veeam Software’s (Veeam) solution. Veeam is an Elite VMware Technology Alliance
partner and a Microsoft managed partner, that develops innovative products for virtual infrastructure management and data protection.
The success of this endeavor led to our selection at another agency. We believe our track record of successful engagements in
Mississippi will lead to increased business in the state and that our state experience and track record in Mississippi will support
our effort to increase business in other states.
Mississippi Security
Consulting Services EPL.
Our agreement has been extended through October 2013 by the Mississippi Department of Information
Technology Services (ITS) as a Security Consulting Services vendor on an Express Products List (EPL) for Security Consulting Services.
Vendors on the EPL provide support to state agencies, institutions of higher learning, local governments, and school districts.
The purpose of the EPL is to provide ITS clients and staff with an economical, flexible mechanism to acquire security consulting
services in full compliance with all purchasing requirements from pre-approved vendors.
Certifications and Partner Agreements
Gold-level Partnership
Certification.
During 2012, we established a gold level partnership with Veeam. Gold-level partnership certification enables
us to work with Veeam specialists to create custom virtual infrastructure management and data protection solutions that leverage
both companies’ technical strengths to meet customers’ specific needs.
VMware Authorized
Consultant (VAC).
Since 2007, we have been approved as a VMware Authorized Consultant (VAC) by VMware, Inc. a subsidiary of
EMC Corporation. VMware is recognized as the industry leader in virtualization technology. As a VAC, we are trained and certified
to deliver consulting services and solutions leveraging VMware technology. We are also certified as a VMware Enterprise VIP Reseller
authorized to resell VMware’s full product line. We are an Enterprise Partner with VMware with the Infrastructure Virtualization
Competency. We are also a Virtualization Management Lighthouse Partner which is a distinction earned by invitation only
and requires passing select training courses specific to VMware Management solutions. We are a member of the Consulting and Integration
Partner Program (CIPP). Members of the CIPP design, plan, integrate and deploy sophisticated virtual infrastructures to meet the
demanding business needs of customers. We are also registered with the U.S. Federal Specialization within VMware. These certifications
are examples of our concerted effort to grow and expand our virtualization practice. We are actively working with a number
of current and potential clients that utilize this expertise. We believe our virtualization experience and expertise with VMware
will continue to facilitate increases in sales, particularly in the Cloud computing market.
Microsoft Silver
Certified Partner
.
We are part of Microsoft's Accredited Online Cloud Services
program. We have successfully 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 already providing real world benefits to our existing clients while allowing
us to offer clear guidelines for transitioning new users to hybrid-cloud-based solutions. We have also received certification
for Windows Intune which provides complete remote desktop support capabilities enhancing our overall goal of providing complete
solutions for virtualization and cloud based Software as a Service (SaaS). What once required expensive hardware and time consuming
deployments can now be delivered seamlessly, including web conferencing, collaboration, document management, messaging, customer
relationship management and productive office web applications all with lower total cost of ownership and quicker return on investment.
We believe our Microsoft competencies assist our business development personnel when presenting solutions that, if accepted, will
increase our sales.
Hewlett Packard
Supplier Based Consolidation Program (SBCP).
We have been accepted into the Hewlett Packard (HP) Supplier Based Consolidation
Program (SBCP). Under SBCP, we are a member of a select group of suppliers that are eligible to be awarded tasks by HP nationwide.
HP has many tools and resources to help us generate new sales streams, and improve our mutual profitability, while at the same
time adding unique value for our joint clients. The program comprises practical tools and services that we hope will help us in
the key areas of marketing and selling our solutions, optimizing the technology, and collaborating with other organizations within
our industry in order to generate more revenue. The Master Services Agreement covering the SCBP runs to August 2014.
Competition
We compete with other IT professional
services firms operating in the U.S. Government, state and local government and commercial marketplace. We obtain a portion of
our business on the basis of proposals submitted in response to requests from potential and current clients, who typically also
receive proposals from other firms.
In the U.S. Government market, many of
our proposed services are included with proposals of large prime contractors, where a specific area for our participation has
been identified based on our expertise and experience. Certain large prime contractors in the U.S. Government market are required
to allocate a portion of their contract to small businesses and we are able to fill that role. We also face indirect competition
from certain government agencies that perform services for themselves similar to those we market.
We have entered into subcontracts with
systems integrators holding multi-year, multi-million dollar contracts with various agencies of the U.S. Government. In such cases,
our competition is mainly with other IT services companies classified as small business entities by government standards. For
prime contracts with the U.S. Government, we anticipate that our competition will range from small business set aside contractors
to full and open competition with large firms such as Northrop Grumman Information Technologies, Science Applications International
Corp., Computer Sciences Corp., Unisys, IBM, Booz Allen Hamilton, SRA International, Inc. and Serco Services Inc.
Because of the diverse requirements of
U.S. Government clients and the highly competitive nature of large procurements, corporations frequently form teams to pursue
contract opportunities. The same companies listed as competitors will often team with us or subcontract to us in the pursuit of
new business. We believe that the major competitive factors in our market are distinctive technical competencies, successful past
contract performance, price of services, reputation for quality, and key management with domain expertise.
We face competition in the commercial
markets from other IT service providers, large and small in all of the markets we target.
Our competitors,
in general, have substantially
greater capital resources, research and development staffs, sales and marketing resources,
facilities and experience than we do.
Company Information Available on
the Internet
We maintain a website at www.IGIus.com.
Through a link to the Investor Relations section of our website, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available,
free of charge, as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities
and Exchange Commission (SEC).
The content of our website shall not be deemed part of this report.
Employees
At December 31, 2012, we have 74 full-time
employees and independent contractors, including 61 in information technology services, one in executive management, three in
finance and administration, one in employee recruiting, and eight in marketing and sales. We are not subject to any collective
bargaining agreements and we believe that our relations with our employees are good. We believe that we are currently staffed
at an appropriate level to administratively implement and carry out our business plan for the next 12 months. However, we expect
to add positions in information technology services as we expand our sales.
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.
General Information
We were incorporated under the laws of
the state of Delaware on October 14, 1986. On January 7, 1998, we changed our name from Infinite Machines Corp. to Infinite Group,
Inc. Our principal corporate headquarters are located at 60 Office Park Way, Pittsford, NY 14534. Our business is exclusively
in the field of IT services.
Item 1A. Risk Factors
In addition to the other information provided
in our reports, you should consider the following factors carefully in evaluating our business and us. Additional risks and uncertainties
not presently known to us, which we currently deem immaterial or that are similar to those faced by other companies in our industry
or business in general, such as competitive conditions, may also impair our business operations. If any of the following risks
occur, our business, financial condition, or results of operations could be materially adversely affected.
Risks Related to our Industry
We depend on prime contracts or
subcontracts with the U.S. Government 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 90% of our sales
in 2012 and 2011 from U.S. Government contracts as either a prime contractor or a subcontractor. We expect that we will continue
to derive a substantial portion of our sales for the foreseeable future from work performed under U.S. Government contracts, as
we have in the past, and from new marketing efforts focused on state and local governments and commercial enterprises. If we or
our prime contractors were suspended or prohibited from contracting with federal, state or local governments, or if our reputation
or relationship with the federal, state or local governments and commercial enterprises were impaired, or if any of the foregoing
otherwise ceased doing business with us or our prime contractors or significantly decreased the amount of business it does with
us or our prime contractors, our business, prospects, financial condition and operating results would be materially adversely
affected.
Our business could be adversely
affected by changes in budgetary priorities of the U.S. Government.
Because we derive a significant portion
of our sales from contracts with the U.S. Government, we believe that the success and development of our business will continue
to depend on our successful participation in U.S. Government contract programs. Changes in U.S. 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 U.S. Government contracting policies, could
cause U.S. Governmental agencies 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 enter into new contracts. Any of those
actions could seriously harm our business, prospects, financial condition or operating results. Moreover, although our contracts
with governmental agencies often contemplate that our services will be performed over a period of several years, Congress 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 by Congress could have a material adverse effect on our business. Additional factors
that could have a serious adverse effect on our U.S. Government contracting business include, but may not be limited to:
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changes
in U.S. Government
programs or requirements;
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budgetary
priorities limiting
or delaying U.S.
Government spending
generally, or by
specific departments
or agencies in particular,
and changes in fiscal
policies or available
funding, including
potential governmental
shutdowns;
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reductions
in the U.S. Government's
use of technology
solutions firms;
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a
decrease in the
number of contracts
reserved for small
businesses, or small
business set asides,
which could result
in our inability
to compete directly
for these prime
contracts; and
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curtailment
of the U.S. Government’s
use of IT or related
professional services.
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The Office of Management and Budget
process for ensuring government agencies properly support capital planning initiatives, including information technology investments,
could reduce or delay federal information technology spending and cause us to lose revenue.
The Office of Management and Budget, or
OMB, supervises spending by federal agencies, including enforcement of the Government Performance Results Act. This Act requires,
among other things, that federal agencies make an adequate business justification to support capital planning initiatives, including
all information technology investments. The factors considered by the OMB include, among others, whether the proposed information
technology investment is expected to achieve an appropriate return on investment, whether related processes are contemporaneously
reviewed, whether inter-operability with existing systems and the capacity for these systems to share data across government has
been considered, and whether existing off-the-shelf products are being utilized to the extent possible. If our clients do not
adequately justify proposed information technology investments to the OMB, the OMB may refuse funding for their new or continuing
information technology investments, and we may lose revenue as a result.
Our contracts with the U.S. Government may be terminated
or adversely modified prior to completion, which could adversely affect our business.
U.S. Government contracts generally contain
provisions, and are subject to laws and regulations, that give the U.S. Government rights and remedies not typically found in
commercial contracts, including provisions permitting the U.S. Government to:
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terminate
our existing contracts;
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reduce
potential future
revenues from our
existing contracts;
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modify
some of the terms
and conditions in
our existing contracts;
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suspend
or permanently prohibit
us from doing business
with the U.S. Government
or with any specific
government agency;
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impose
fines and penalties;
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subject
us to criminal prosecution;
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subject
the award of some
contracts to protest
or challenge by
competitors, which
may require the
contracting U.S.
agency or department
to suspend our performance
pending the outcome
of the protest or
challenge and which
may also require
the government to
solicit new bids
for the contract
or result in the
termination, reduction
or modification
of the awarded contract;
|
|
·
|
suspend
work under existing
multiple year contracts
and related task
orders if the necessary
funds are not appropriated
by Congress;
|
|
·
|
decline
to exercise an option
to extend an existing
multiple year contract;
and
|
|
·
|
claim
rights in technologies
and systems invented,
developed or produced
by us.
|
The U.S. Government may terminate a contract
with us either "for convenience" (for instance, due to a change in its perceived needs or its desire to consolidate
work under another contract) or if we default by failing to perform under the contract. If the U.S. Government terminates a contract
with us for convenience, we generally would be entitled to recover only our incurred or committed costs, settlement expenses and
profit on the work completed prior to termination. If the U.S. Government terminates a contract with us based upon our default,
we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the U.S.
Government in procuring undelivered items from an alternative source. We may in the future receive show-cause or cure notices
under contracts that, if not addressed to the U.S. Government's satisfaction, could give the government the right to terminate
those contracts for default or to cease procuring our services under those contracts.
Our U.S. Government contracts typically
have terms of one or more base years and one or more option years. Many of the option periods cover more than half of the contract's
potential term. U.S. Governmental agencies generally have the right not to exercise options to extend a contract. A decision to
terminate or not to exercise options to extend our existing contracts could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Certain of our U.S. Government contracts
also contain "organizational conflict of interest" clauses that could limit our ability to compete for certain related
follow-on contracts. For example, when we work on the design of a particular solution, we may be precluded from competing for
the contract to install that solution. While we actively monitor our contracts to avoid these conflicts, we cannot guarantee that
we will be able to avoid all organizational conflict of interest issues.
In addition, U.S. Government contracts
are frequently awarded only after formal competitive bidding processes, which have been and may continue to be protracted, and
typically impose provisions that permit cancellation in the event that funds are unavailable to the public agency.
The competitive bidding process presents a number of risks,
including the following:
|
·
|
we
expend substantial
funds, managerial
time and effort
to prepare bids
and proposals for
contracts that we
may not win;
|
|
·
|
we
may be unable to
estimate accurately
the resources and
cost that will be
required to service
any contract we
win, which could
result in substantial
cost overruns; and
|
|
·
|
we
may encounter expense
and delay if our
competitors protest
or challenge awards
of contracts to
us in competitive
bidding, and any
such protest or
challenge could
result in a requirement
to resubmit bids
on modified specifications
or in the termination,
reduction or modification
of the awarded contract.
|
Unfavorable government audits could
require us to refund payments we have received, to forgo anticipated sales and could subject us to penalties and sanctions.
The government agencies we work for generally
have the authority to audit and review our contracts with them and/or our subcontracts with prime contractors. As part of that
process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance
with applicable laws, regulations and standards. If the audit agency determines that we have improperly received payment or reimbursement,
we would be required to refund any such amount. If a government audit uncovers improper or illegal activities by us, we may be
subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or disqualification from doing business with the government. Any such unfavorable
determination could adversely impact our ability to bid for new work which would have a negative impact on our business.
The failure by Congress to approve
budgets on a timely basis for the U.S. Government agencies we support could delay procurement of our services and solutions and
cause us to lose future revenues.
On an annual basis, Congress must approve
budgets that govern spending by the U.S. Government agencies that we support. In years when Congress is not able to complete its
budget process before the end of the U.S. Government’s fiscal year, on September 30, Congress typically funds government
operations pursuant to a continuing resolution. A continuing resolution allows U.S. Government agencies to operate at spending
levels approved in the previous budget cycle. When the U.S. Government operates under a continuing resolution, it may delay funding
we expect to receive from clients on work we are already performing and will likely result in new initiatives being delayed or
in some cases cancelled.
Certain of our prime contractors expect
their customers to be negatively impacted by “sequestration” or the automatic U.S. Government spending cuts due to
the lack of an approved federal budget for the 2013 fiscal year by February 28, 2013. As a result, we believe that the volume
of our subcontract sales will be negatively impacted.
Our gross margin from our contracts
will suffer if we are not able to maintain our pricing and utilization rates and control our costs.
Our gross profit margin is largely a function
of the rates we charge for our IT Services and the utilization rate, or chargeability, of our employees. Accordingly, if we are
not able to maintain the rates we charge for our services or an appropriate utilization rate for our employees, we will not be
able to sustain our gross profit margin and earn a sufficient amount to fund our operating expenses. The rates we charge for our
IT Services are affected by a number of factors, including:
|
·
|
our clients'
perception of our
ability to add value
through our services;
|
|
·
|
introduction
of new services
or products by us
or our competitors;
|
|
·
|
pricing policies
of our competitors;
and
|
|
·
|
general economic
conditions.
|
Our utilization rates are also affected by a number of factors,
including:
|
·
|
seasonal trends,
primarily as a result
of holidays, vacations,
and slowdowns by
our clients, which
may have a more
significant effect
in the fourth quarter;
|
|
·
|
our ability
to transition employees
from completed engagements
to new engagements;
|
|
·
|
our ability
to forecast demand
for our services
and thereby maintain
an appropriately
balanced and sized
workforce; and
|
|
·
|
our ability
to manage employee
turnover.
|
We have implemented cost-management programs
to manage our costs, including personnel costs, support and other overhead costs. Some of our costs, like office rents, are fixed
in the short term, which limits our ability to reduce costs in periods of declining sales. Our current and future cost-management
initiatives may not be sufficient to maintain our margins as our level of sales varies.
If we fail to meet our contractual
obligations to our clients, our ability to compete for future work and our financial condition may be adversely affected.
If we fail to meet our contractual obligations,
we could be subject to legal liability, which could adversely affect our business, operating results and financial condition.
The provisions we typically include in our contracts which are designed to limit our exposure to legal claims relating to our
services may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions. It is
possible, because of the nature of our business, that we may be exposed to legal claims in the future. We have errors and omissions
insurance with coverage limits of $1 million, subject to a $100,000 deductible payable by us. The policy limits may not be adequate
to provide protection against all potential liabilities. As a consulting firm, we depend to a large extent on our relationships
with our clients and our reputation for high-quality services to retain and attract clients and employees. As a result, claims
made against us may damage our reputation, which in turn, could impact our ability to compete for new business.
The IT services industry is highly competitive, and we
may not be able to compete effectively.
We operate in a highly competitive industry
that includes a large number of participants. We believe that we currently compete principally with other IT professional services
firms, technology vendors and the internal information systems groups of our clients. Many of the companies that provide services
in our markets have significantly greater financial, technical and marketing resources than we do. Our marketplace is experiencing
rapid changes in its competitive landscape. Some of our competitors have sought access to public and private capital and others
have merged or consolidated with better-capitalized partners. These changes may create more or larger and better-capitalized competitors
with enhanced abilities to compete for market share generally and our clients specifically, in some cases, through significant
economic incentives to clients to secure contracts. These competitors may also be better able to compete for skilled professionals
by offering them large compensation incentives. One or more of our competitors may develop and implement methodologies that result
in superior productivity and price reductions without adversely affecting the competitors' profit margins. In addition, there
are relatively few barriers to entry into our markets and we have faced, and expect to continue to face, competition from new
entrants into our markets. As a result, we may be unable to continue to compete successfully with our existing or any new competitors.
We may lose money on some contracts
if we do not accurately estimate the expenses, time and resources necessary to satisfy our contractual obligations.
We enter into two types of U.S. Government
contracts for our services: time-and-materials and fixed-price. Each of these types of contracts, to varying degrees, involves
some risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit we earn or lead to a financial
loss on the contract.
Under time and materials contracts, we
are reimbursed for labor at negotiated hourly billing rates and for certain expenses. We assume financial risk on time and material
contracts because we assume the risk of performing those contracts at negotiated hourly rates.
Under fixed-price contracts, we perform
specific tasks for a fixed price. Compared to cost-plus contracts, fixed price contracts generally offer higher margin opportunities,
but involve greater financial risk because we bear the impact of cost overruns and bear the risk of underestimating the level
of effort required to perform the contractual obligations, which could result in increased costs and expenses.
Our profits could be adversely affected
if our costs under any of these contracts exceed the assumptions we used in bidding for the contract.
If we fail to establish and maintain
important relationships with government entities and agencies, our ability to successfully bid for new business may be adversely
affected.
To develop new business opportunities,
we rely on establishing and maintaining relationships with various government entities and agencies. We may be unable to successfully
maintain our relationships with government entities and agencies, and any failure to do so could materially adversely affect our
ability to compete successfully for new business.
Our business may suffer if our facilities
or our employees are unable to obtain or retain the security clearances or other qualifications needed to perform services for
our clients.
Many of our U.S. Government contracts
require employees and facilities used in specific engagements to hold security clearances and to clear National Agency Checks
and Defense Security Service checks. Some of our contracts require us to employ personnel with specified levels of education,
work experience and security clearances. Depending on the level of clearance, security clearances can be difficult and time-consuming
to obtain. If our employees or our facilities lose or are unable to obtain necessary security clearances or successfully clear
necessary National Agency or Defense Security Service checks, we may not be able to win new business and our existing clients
could terminate their contracts with us or decide not to renew them, and in each instance our operating results could be materially
adversely affected.
We must comply with a variety of
laws, regulations and procedures and our failure to comply could harm our operating results.
We must observe laws and regulations relating
to the formation, administration and performance of U.S. Government contracts which affect how we do business with our clients
and impose added costs on our business. For example, the Federal Acquisition Regulation and the industrial security regulations
of the Department of Defense and related laws include provisions that:
|
·
|
allow
our U.S. Government
clients to terminate
or not renew our
contracts if we
come under foreign
ownership, control
or influence;
|
|
·
|
require
us to disclose and
certify cost and
pricing data in
connection with
contract negotiations;
|
|
·
|
require
us to prevent unauthorized
access to classified
information; and
|
|
·
|
require
us to comply with
laws and regulations
intended to promote
various social or
economic goals.
|
We are subject to industrial security
regulations of the U.S. Government agencies that are designed to safeguard against foreigners' access to classified information.
If we were to come under foreign ownership, control or influence, we could lose our facility security clearance, which could result
in our U.S. Government clients terminating or deciding not to renew our contracts, and could impair our ability to obtain new
contracts.
In addition, our employees often must
comply with procedures required by the specific agency for which work is being performed, such as time recordation or prohibition
on removal of materials from a location.
Our failure to comply with applicable
laws, regulations or procedures, including U.S. Government procurement regulations and regulations regarding the protection of
classified information, could result in contract termination, loss of security clearances, suspension or prohibition from contracting
with the U.S. Government, civil fines and damages and criminal prosecution and penalties, any of which could materially adversely
affect our business.
The U.S. Government may revise its
procurement or other practices in a manner adverse to us.
The U.S. Government may revise its procurement
practices or adopt new contracting rules and regulations, such as cost accounting standards. It could also adopt new contracting
methods relating to GSA contracts, government-wide contracts, or adopt new standards for contract awards intended to achieve certain
social or other policy objectives, such as establishing new set-aside programs for small or minority-owned businesses. In addition,
the U.S. Government may face restrictions from new legislation or regulations, as well as pressure from government employees and
their unions, on the nature and amount of services the U.S. Government may obtain from private contractors. These changes could
impair our ability to obtain new contracts or contracts under which we currently perform when those contracts are put up for re-competition
bid. Any new contracting methods could be costly or administratively difficult for us to implement, and, as a result, could harm
our operating results. For example, the Truthfulness, Responsibility and Accountability in Contracting Act, proposed in 2001,
would have limited and severely delayed the U.S. Government's ability to use private service contractors. Although this proposal
was not enacted, it or similar legislation could be proposed at any time. Any reduction in the U.S. Government's use of private
contractors to provide federal information technology services could materially adversely impact our business.
Failure to maintain strong relationships
with government contractors could result in a decline in our sales.
We derived over 90% of our sales in 2012
from contracts under which we acted as a subcontractor. Our subcontracts with prime contractors contain many of the same provisions
as the prime contracts and therefore carry many of the same risks previously identified in these Risk Factors. As a subcontractor,
we often lack control over fulfillment of a contract, and poor performance on the contract by others could tarnish our reputation,
even when we perform as required. We expect to continue to depend on relationships with other contractors for a significant portion
of our sales in the foreseeable future. Moreover, our sales and operating results could be materially adversely affected if any
prime contractor chooses to offer services of the type that we provide or if any prime contractor teams with other companies to
independently provide those services.
Risks Related to our Business and Financial
Condition
We are highly leveraged, which increases our operating
deficit and makes it difficult for us to grow.
At December 31, 2012, we had current liabilities,
including trade payables, of approximately $1.5 million and long-term liabilities of $2.0 million. We had a working capital deficit
of approximately $865,000 and a current ratio of .43. If we experience working capital shortages that impair our business operations
and growth strategy, our business, operations and financial condition will be materially adversely affected.
We have been dependent on a limited
number of high net worth individuals to fund our working capital needs.
From 2003 through 2012, we received approximately
$3.1 million in a combination of equity, debt conversion and debt transactions from a limited number of high net worth investors.
We cannot provide assurance that we will be able to continue to raise additional capital from this group of investors, or that
we will be able to secure funding from additional sources.
We have current notes payable of $149,000
to a related party, $30,000 to a third party, and current maturities of long-term obligations of $22,867. Our long-term notes
to third parties totaling $1,544,593 mature through 2018, with significant amounts beginning to mature on January 1, 2015. We
cannot provide assurance that we will be able to obtain extensions of maturity dates for long-term notes payable when they mature
or that we will be able to repay or otherwise refinance the notes at their scheduled maturities.
We may require additional financing in the future, which
may not be available on acceptable terms.
We may require additional funds for working
capital and general corporate purposes. We cannot provide assurance that adequate additional financing will be available or, if
available, will be offered on acceptable terms.
Moreover, our IT services billings generate
accounts receivable that are generally paid within 30 to 60 days from the invoice date. The cost of those sales generally consists
of employee salaries and benefits that we must pay prior to our receipt of the accounts receivable to which these costs relate.
We therefore need sufficient cash resources to cover such employee-related costs which, in many cases, require us to borrow funds
at costly terms.
We have secured an accounts receivable
financing line of credit from an independent finance organization institution that allows us to sell selected accounts receivable
invoices to the financial institution with full recourse against us in the amount of $2 million, including a sublimit for one
major client of $1.5 million. This provides us with the cash needed to finance certain costs and expenses. At December 31, 2012,
we had financing availability, based on eligible accounts receivable, of approximately $183,000 under this line. We pay fees based
on the length of time that the invoice remains unpaid. As we grow, additional working capital may be required to support this
difference in the timing of cash receipts versus payroll disbursements. Moreover, our accounts receivable financing lender may
decide to cease subsequent advances at any time in its discretion, upon our failure to meet certain contractual requirements or
upon the occurrence of certain events or contingencies that are out of our control. In such event, our short-term cash requirements
would exceed available cash on hand resulting in material adverse consequences to our business.
Finally, any additional equity financing
and conversions by the holders of existing notes payable to common stock will be dilutive to stockholders. Debt financings, if
available, may involve restrictive covenants that further limit our ability to make decisions that we believe will be in our best
interests. In the event we cannot obtain additional financing on terms acceptable to us when required, our operations will be
materially adversely affected and we may have to cease or substantially reduce operations.
Recent events affecting the credit
markets may restrict our ability to access additional financing.
Over the last several years, the U.S.
and worldwide capital and credit markets have experienced significant price volatility, dislocations and liquidity disruptions,
which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen
considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings
less attractive, and in some cases have resulted in the unavailability of financing. Continued uncertainty in the capital and
credit markets may negatively impact our business, including our ability to access additional financing at reasonable terms, which
may negatively affect our ability to fund current operations or expand our business. A prolonged downturn in the financial markets
may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan
accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of our equity
securities. Disruptions in the financial markets may have a material adverse effect on the market value of our common stock and
other adverse effects on our business.
If we acquire businesses and do
not successfully integrate the businesses that we acquire, our results of operations could be adversely affected.
We may grow our business by acquiring
companies and businesses that we feel have synergy and will complement our business plan. As such, we periodically evaluate potential
business combinations. We may be unable to profitably manage businesses that we may acquire or we may fail to integrate them successfully
without incurring substantial expenses, delays or other problems that could negatively impact our results of operations.
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 in order
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. 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 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 expansion will enhance our profitability. If we do not achieve sufficient sales growth to offset increased expenses associated
with our expansion, our results will be adversely affected.
We depend on the continued services of our key personnel.
Our future success depends, in part, on
the continuing efforts of our senior executive officers. The loss of any of these key employees may materially adversely affect
our business.
Our future success depends on our ability to continue
to retain and attract qualified employees.
We believe that our future success depends
upon our ability to continue to train, retain, effectively manage and attract highly skilled technical, managerial, sales and
marketing personnel. Employee turnover is generally high in the IT services industry. If our efforts in these areas are not successful,
our costs may increase, our sales efforts may be hindered, and the quality of our client service may suffer. Although we invest
significant resources in recruiting and retaining employees, there is often significant competition for certain personnel in the
IT services industry. From time to time, we experience difficulties in locating enough highly qualified candidates in desired
geographic locations, or with required specific expertise.
We may lose revenue and our cash
flow and profitability could be negatively affected if expenditures are incurred prior to final receipt of a contract or contract
funding modification.
We provide professional services and sometimes
procure materials on behalf of our clients under various contract arrangements. From time to time, in order to ensure that we
satisfy our clients’ delivery requirements and schedules, we may elect, based on verbal authorization, to initiate procurements
or provide services in advance of receiving formal written contractual authorization from the government client or a prime contractor.
If our government or prime contractor requirements should change or the government directs the anticipated procurement to a contractor
other than us, or if the materials become obsolete or require modification before we are under contract for the procurement, our
investment might be at risk. If we do not receive the required funding, our cost of services incurred in excess of contractual
funding may not be recoverable. This could reduce anticipated revenue or result in a loss, negatively affecting our cash flow
and profitability.
Our employees or subcontractors
may engage in misconduct or other improper activities, which could cause us to lose contracts.
While we have ethics and compliance programs
in place, we are exposed to the risk that employee fraud or other misconduct could occur. We enter into arrangements with prime
contractors and joint venture partners to bid on and execute particular contracts or programs. As a result, we are exposed to
the risk that fraud or other misconduct or improper activities by such persons may occur. Misconduct by employees, prime contractors
or joint venture partners could include intentional failures to comply with federal laws, including U.S. Government procurement
regulations, proper handling of sensitive or classified information, compliance with the terms of our contracts that we receive,
and falsifying time records or failures to disclose unauthorized or unsuccessful activities to us. These actions could lead to
civil, criminal, and/or administrative penalties (including fines, imprisonment, suspension and/or bars from performing U.S. Government
contracts) and harm our reputation. The precautions we take to prevent and detect such activity may not be effective in controlling
unknown or unmanaged risks or losses, and such misconduct by employees, prime contractors or joint venture partners could result
in serious civil or criminal penalties or sanctions or harm to our reputation, which could cause us to lose contracts or cause
a reduction in revenue.
Risks Related to our Common Stock
Certain stockholders own a significant
portion of our stock and may delay or prevent a change in control or adversely affect the stock price through sales in the open
market.
As of February 28, 2013, one individual
and three related parties or their affiliates owned approximately 9.1%, 3.9%, 2.4%, and 1.7%, respectively, (17.1% in the aggregate)
of our outstanding common stock (excluding stock options, warrants and convertible notes).
Two related
parties that hold convertible notes payable have the right to convert notes payable and accrued interest into shares of common
stock at $.05 per share. Another related party has the right to convert a note payable at $.16 per share. If these parties converted
all of the principal and accrued interest into common stock, these three individuals would own approximately 24.9%, 13.6% and
2.4%, respectively, of our then outstanding common stock. However, such notes
may not be converted if such conversion would
result in a change in control which would limit the use of our net operating loss carryforwards.
We estimate at February 28, 2013 that
substantially all convertible notes payable and accrued interest due to all related parties could be converted to shares of common
stock, without affecting a change of control that would limit the use of our net operating loss carryforwards. If these related
party holders converted all of their notes payable and accrued interest into shares of common stock, then three related party
individuals or their affiliates would own approximately 40.9% in the aggregate of our then outstanding common stock (excluding
stock options and warrants).
The concentration of large percentages
of ownership by a single stockholder or a few stockholders may delay or prevent a change in control. Additionally, the sale of
a significant number of our shares in the open market by a single stockholder or otherwise could adversely affect our stock price.
The price of our common stock may be adversely affected
by the possible issuance of shares to third parties as a result of the conversion of outstanding notes.
We have various convertible notes outstanding
to third parties that are convertible into shares of common stock at prices ranging from $.05 to $.25 per share. If all of these
notes were converted into common stock, the holders would receive 4,700,000 shares of our common stock or approximately 15.3 %
of our then outstanding common stock.
The conversion or exercise of convertible
notes payable and the subsequent sale, or potential sale, of a substantial number of shares of our common stock could adversely
impact the market price of our stock.
Our stock price is volatile and could be further affected
by events not within our control.
The trading price of our common stock
has been volatile and will continue to be subject to volatility in the trading markets and other factors.
During 2012, the market price for our
common stock varied between a low of $.04 in February, 2012 and a high of $.28 in November, 2012. This volatility may affect the
price at which a stockholder could sell its shares of common stock, and the sale of substantial amounts of our common stock could
adversely affect the price of our common stock. Our stock price is likely to continue to be volatile and subject to significant
price and volume fluctuations in response to market and other factors, including variations in our quarterly operating results
and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, or capital commitments.
Our common stock
is currently quoted on the OTC Bulletin Board. Because there is a limited public market for our common stock, a stockholder
may not be able to sell shares when it wants.
We cannot assure you that an active trading
market for our common stock will ever develop.
There is limited trading in our common
stock and we cannot assure you that an active public market for our common stock will ever develop. The lack of an active
public trading market means that a stockholder may not be able to sell shares of common stock when wanted, thereby increasing
market risk. Until our common stock is listed on an exchange, we expect that the shares will continue to be quoted on the
OTC Bulletin Board. However, an investor may find it difficult to obtain accurate quotations regarding the common stock’s
market value. In addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be
imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors.
Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect
the shares liquidity. Moreover our ability to obtain future financing may be adversely affected by the consequences of our common
stock trading on the Over the Counter Bulletin Board.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
The table below lists our facility locations
and square feet owned or leased. The lease for our Pittsford, New York headquarters includes an escalation provision for property
taxes and two three-year renewal options with annual rent escalating at 3.5% at each lease renewal. Our lease for office space
in Vienna, Virginia expired on May 31, 2012 and we decided not to renew it or lease other office space.
At December 31, 2012
|
|
Owned
|
|
|
Square Feet
Leased
|
|
|
Annual Rent
|
|
|
Termination Date
|
Pittsford, New York
|
|
|
-
|
|
|
|
2,942
|
|
|
$
|
29,800
|
|
|
April 30, 2015
|
We believe all properties are in good
operating condition. We do not own or intend to invest in any real property and currently have no policy with respect to investments
or interests in real estate, real estate mortgage loans or securities or interests in persons primarily engaged in real estate
activities.
Item 3. Legal Proceedings
We are not presently involved in any material
legal proceedings
.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on NASDAQ’s
Over the Counter Bulletin Board (“OTCBB”) under the symbol IMCI. The following table sets forth, for the periods indicated,
the high and low closing bid quotations per share for our common stock for each quarter within the last two fiscal years, as reported
by the OTCBB. Quotations represent interdealer prices without an adjustment for retail markups, markdowns or commissions and may
not represent actual transactions:
|
|
Bid Prices
|
|
Year Ended December 31, 2012
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
.10
|
|
|
$
|
.04
|
|
Second Quarter
|
|
$
|
.23
|
|
|
$
|
.10
|
|
Third Quarter
|
|
$
|
.26
|
|
|
$
|
.21
|
|
Fourth Quarter
|
|
$
|
.28
|
|
|
$
|
.17
|
|
Year Ended December 31, 2011
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
.12
|
|
|
$
|
.03
|
|
Second Quarter
|
|
$
|
.12
|
|
|
$
|
.05
|
|
Third Quarter
|
|
$
|
.20
|
|
|
$
|
.05
|
|
Fourth Quarter
|
|
$
|
.19
|
|
|
$
|
.04
|
|
At March 22, 2013 we had 235 record stockholders
and approximately 1,500 beneficial stockholders.
Dividend Policy
We have never declared or paid a cash
dividend on our common stock. It has been the policy of our board of directors (the “Board”) to retain all available
funds to finance the development and growth of our business. The payment of cash dividends in the future will be dependent upon
our earnings and financial requirements and other factors deemed relevant by our Board.
Item 6. Selected Financial Data
As a smaller reporting company we are
not required to provide the information in response to this Item.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary statement identifying
important factors that could cause our actual results to differ from those projected in forward looking statements.
Readers of this report are advised
that this document contains both statements of historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the
forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of sales, income
or loss, earnings per share, capital expenditures, dividends, capital structure, and other financial items, (ii) statements of
our plans and objectives with respect to business transactions and enhancement of stockholder value, (iii) statements of future
economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects.
This report also identifies important
factors, which could cause actual results to differ materially from those indicated by the forward looking statements. These risks
and uncertainties include the factors discussed under the heading “Risk Factors” beginning at page 8 of this report.
The following Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and
the notes thereto appearing elsewhere in this report.
Business Overview
We provide IT solutions that are intended
to deliver measurable results to small and medium sized businesses (SMBs), government agencies, and large commercial enterprises.
We provide:
|
·
|
managed
services that include
managing leading
edge operations
and implementing
complex programs
in advanced server
management;
|
|
·
|
desktop
and server monitoring
and remediation;
|
|
·
|
help
desk and call center
services;
|
|
·
|
third
party data storage;
|
|
·
|
backup
and disaster recovery
solutions; and
|
We also provide cloud computing solutions
that include public and private cloud architectures along with hybrid scalable cloud hosting, server virtualization and desktop
virtualization solutions. In addition, we provide IT solutions that address mobility, information security and unified communications.
We focus on aligning business processes with technology for delivery of solutions meeting our clients’ needs and providing
expert management services to the lifecycle of technology-based projects.
We believe we are positioned to take advantage
of the growing marketplace for cloud related IT managed services and solutions. Our goal is to remain focused on growing our business
internally through increased marketing efforts, by expanding into new market areas and by beginning to review potential acquisitions.
In addition, we remain committed to remaining on the leading edge of technologies and trends in the IT service sector. Our ability
to succeed depends on how successful we are at differentiating ourselves from our competition particularly at a time when competition
is on the increase.
We also provide support to professional
services organizations of software companies that need additional skilled resources when implementing solutions. Our technical
support personnel maintain leading edge certifications and qualifications in their respective software applications. We intend
to use our service track record and experience to our advantage and market our excellent record to other software companies who
need our services. We plan to expand our sales with our existing clients by expanding within those organizations.
We provide
on and off-site client support to best meet our clients' needs. Our professionals are located at our headquarters in Pittsford,
N.Y. and in Colorado, Maryland, Mississippi, North Carolina, Virginia, and Washington, D.C . We are able to provide onsite service
to most locations around the world including military bases.
In 2012 and 2011, we had consultants
in Afghanistan, Bahrain, Honduras, Kuwait, and many military bases in the U.S. Our ability to provide quality resources in a timely
cost effective manner is a key factor that differentiates us from the competition. We have a mechanism to monitor one of our most
important metrics which is client satisfaction in every segment of our business.
As of December 31, 2012, we had 74 full-time
employees and information technology independent contractors. Approximately 36% of our employees hold U.S. Government security
clearances. Our staffing strategy includes the use of independent contractors. We maintain an in house recruiting department and
we monitor key metrics to maintain our quality objectives. Our business objectives include the use of qualified independent contractors
when certain specialty skill sets are required and generally when assignments are of shorter term duration. We consistently monitor
utilization rates as a key metric to our business decisions when hiring and/or contracting.
During 2012, we derived approximately
90% of our sales from U.S. Government clients including sales under subcontracts. We derived approximately 65% of our sales from
one client, including sales under subcontracts for services to several different end clients. A portion of the revenue was derived
from managing one of the nation’s largest Microsoft Windows environments for a major establishment of the U.S. Government.
We provided this support under a subcontract we entered into in 2004 with this large systems integrator, which has been renewed
annually. Our team of server experts supports approximately 3,000 servers and 250,000 client stations from facilities in Maryland
and Colorado. Operating 24 hours per day and seven days per week we consistently meet or exceed the requirements of our service
level agreements. We refer to this as our Advanced Server Management (ASM) team. We also provide services to a large enterprise
Fortune 100 company under this contract. Our goal is to expand on our track record with our partner and the end clients to increase
our business with this client.
We also provide professional services
to another one of our partners under subcontracts to their end clients, of which, over 90% are to U.S. Government agencies and
less than 10% to commercial entities. We have provided services at more than 100 U.S. Government locations. We have provided these
services to small and large commercial enterprises under this partnership subcontract. Our experience with this cloud computing
related software has placed us in a position to take advantage of a growing trend towards Managed IT Services, particularly in
the SMB space. We believe that the cloud virtualization experience that we gained from working with large institutions and government
agencies differentiates us from competition, particularly within the SMB space. A goal to increase our revenue from direct sales
to SMB’s is a priority. During 2013, we expect to increase our activity in this pursuit.
One of our strategies has been to bid
for contract vehicles that facilitate Federal and State governments procurement requirements. There is uncertainty in the process
that leads to an award which includes the possibility that no award is ever made. A win on one of these procurements will allow
us to compete further on task orders issued under the contract vehicle. In the past we have been awarded or we have become a subcontractor
on certain contract vehicles which permit us to bid on new projects (task orders) and/or be included within bids of prime contractors.
We continue to pursue the capture of business by remaining active in the bidding process.
Although we believe we have opportunities
for sales growth with government and commercial clients, the lengthy and uncertain procurement processes may result in operating
losses or inconsistent operating income until sales increase to support our infrastructure. We understand that the U.S. Government
has expressed its intention to reduce its budgets related to technical services contracts in the coming years, which may impact
our ability to increase our sales to certain U.S. Government agencies. As a business development strategy, we jointly bid with
prime contractors on large government wide procurements. If an award is made and our team wins we expect to be allocated a portion
of sales to a U.S. Government agency under the small business requirement.
In the future, we may issue additional
debt or equity securities to satisfy our cash needs. Any debt incurred or issued may be secured or unsecured, at a fixed or variable
interest rate and may contain other terms and conditions that our Board deems prudent. Any sales of equity securities may be at
or below current market prices. We cannot assure you that we will be successful in generating sufficient capital to adequately
fund our working capital needs.
Other Trends
The recessionary economy that we have
continued to experience since 2009 has impacted certain portions of our business and our growth opportunities as certain projects
are deferred pending funding or improved economic conditions. In addition, the U.S. Government trend toward in sourcing has impacted
certain areas of our business. Subsequent to the 2012 elections, there continues to be uncertainty in the U.S. Government market
which negatively impacts our business strategy. Certain of our prime contractors expect their customers to be negatively impacted
by “sequestration” or the automatic U.S. Government spending cuts due to the lack of an approved federal budget for
the 2013 fiscal year by February 28, 2013. As a result, we believe that the volume of our subcontract sales will be negatively
impacted.
Since 2009, the United States and worldwide
capital and credit markets experienced significant price volatility and liquidity disruptions, which have caused market prices
of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances
have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some
cases have resulted in the unavailability of financing. Continued uncertainty in the capital and credit markets may negatively
impact our business, including our ability to access additional financing at reasonable terms or to refinance our credit at improved
terms, which may negatively affect our ability to make future acquisitions or expansions of our business. A prolonged downturn
in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us
to adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital. The disruptions
in the financial markets may have a material adverse effect on the market value of our common stock and other adverse effects
on our business.
Osley & Whitney, Inc. Retirement
Plan
The following discussion of the Osley
& Whitney, Inc. Retirement Plan (the
"
O&W Plan") relates to the business that was closed and sold and
its current effect on our operations and financial position. Prior to December 30, 2002, we owned 100% of the common stock of
Osley & Whitney, Inc. (O&W). On December 30, 2002, we sold 100% of the O&W common stock to a third party, but continued
to act as the sponsor of the O&W Plan. Although we continued to act as the sponsor of the O&W Plan after the sale, during
2007 management determined that it had no legal obligation to do so.
During 2007, we submitted information
to the Department of the Treasury (Treasury) advocating that we had no legal obligation to act as the sponsor of the O&W Plan
to ascertain whether the Treasury concurred or disagreed with this position.
O&W Plan Termination in 2011
On November 1, 2011, in accordance with
the terms of the Settlement Agreement, dated September 6, 2011 (the “Settlement Agreement”), between us and the Pension
Benefit Guaranty Corporation (the “PBGC”), we received from the PBGC the executed Agreement for Appointment of Trustee
and Termination of the Osley & Whitney, Inc. Retirement Plan (the "O&W Plan") (the “Trusteeship Agreement”).
The Trusteeship Agreement:
|
·
|
terminated
the O&W Plan;
|
|
·
|
appointed
the PBGC as the
statutory trustee
of the O&W
Plan; and
|
|
·
|
established
November 30, 2001
as the termination
date for the O&W
Plan.
|
On October 17, 2011, in accordance with
the Settlement Agreement, we: (i) purchased 500,000 shares of our common stock from the O&W Plan for $130,000; (ii) issued
a promissory note in favor of the PBGC for $300,000 bearing interest at 6% per annum amortizing in quarterly payments over a seven
year period; and (iii) agreed to make future payments through December 31, 2017 out of our “Free Cash Flow,” as defined
in the Settlement Agreement, not to exceed $569,999. The Settlement Agreement contains specific events of default and provisions
for remedies upon default. The purchase price for the 500,000 shares was funded with the proceeds from the private placement of
a convertible note in the principal amount of $100,000 to a non-affiliated accredited investor on October 4, 2011 and $30,000
of our working capital.
During 2011, the PBGC assumed the obligation
to pay benefits in connection with the termination of the O&W Plan and, as a result, we recorded a gain of $294,438. Defined
benefit pension plan expense for 2011 of $103,822 associated with the O&W Plan consisted of periodic pension costs of $246,436,
legal and professional fees of $32,500 and accrued interest and fees on unpaid excise taxes of $119,324, offset by the gain of
$294,438.
On March 30, 2012, we received the decision
of United States Tax Court entered on March 27, 2012 (the "Decision") wherein the Court determined that we did not have
any liability for taxes, excise taxes or penalties for the taxable years 2006 or 2007 related to the O&W Plan. As a result,
during 2012, we recorded a reduction of $480,000 in obligations previously accrued and reflected related to excise taxes, including
late fees and interest on unfunded O&W Plan contributions.
Since the PBGC terminated the O&W
Plan as of November 30, 2001, we have no further obligation to the O&W Plan and the PBGC other than those stated in the Settlement
Agreement.
Liquidity and Capital Resources
At December 31, 2012, we had cash of $56,158
available for our primary liquidity needs for working capital needs and planned capital asset expenditures. Our primary source
of liquidity is cash provided by collections of accounts receivable and our factoring line of credit. At December 31, 2012, we
had approximately $183,000 of availability under this line.
At
December 31, 2012, we had a working capital deficit of approximately $865,000 and a current ratio of .43. Our objective is to
improve our working capital position through profitable operations. During 2012, we financed our business activities principally
through sales with recourse of our accounts receivable.
The following table sets forth our sources
and uses of cash for the years presented.
|
|
Years
ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net cash provided
(used) by operating activities
|
|
$
|
110,969
|
|
|
$
|
(5,289
|
)
|
Net cash used by investing activities
|
|
|
(10,515
|
)
|
|
|
(10,018
|
)
|
Net cash
provided (used) by financing activities
|
|
|
(81,190
|
)
|
|
|
19,046
|
|
Net increase in cash
|
|
$
|
19,264
|
|
|
$
|
3,739
|
|
Cash Flows Provided
(Used) by Operating Activities
Cash provided by operations was $110,969
for 2012 as compared to cash used by operations of $5,289 in 2011. Accounts receivable decreased $438,004 in 2012 offset by a
reduction of accounts payable by $285,963. Accrued pension obligation was reduced by $438,867 in 2012, consisting of a gain of
$480,000 as a result of the termination of the O&W Plan offset by accrued IRA expenses. The increase in cash provided by operations
was primarily due to net income of $271,197 as compared to net income of $19,579 for 2011. Non cash expenses consisted of depreciation
and stock based compensation totaled $113,958.
Cash used by operations was reduced to
$5,289 in 2011. The decrease in cash used by operations was primarily due to net income of $19,579, an increase in accounts receivable
of $314,024 offset by an increase in current liabilities of $157,030 and non cash expenses of depreciation and stock based compensation
of $135,437.
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 by using cash generated by operations and financing our accounts receivable. We invoice
our clients weekly or monthly after services are performed, depending on the contract terms.
Cash Flows Used
by Investing Activities
Cash used by investing activities was
for capital expenditures for computer hardware and software of $10,515 and $10,018 in 2012 and 2011, respectively. We expect to
continue to invest in computer hardware and software to update our technology to support our business.
Cash Flows Provided
(Used) by Financing Activities
Cash used by financing activities was
$81,190 for 2012 compared with cash provided by financing activities of $19,046 for 2011. In 2012, we repaid related party notes
of $48,000 and reduced other notes payable by $33,130. In 2011, we generated cash of $123,000 from the issuances of new notes
payable. The proceeds from the note issuances were used to repurchase shares of our common stock in connection with the termination
of the O&W Plan and to satisfy current maturities of long-term debt of $28,954.
We anticipate that we will use approximately
$22,900 through the next twelve months for funding contractual requirements of current maturities of long-term debt obligations.
We continue to evaluate repayment of other notes payable based on our cash flow. We renegotiated the terms of notes payable of
$265,000 and $175,000 scheduled to mature on January 1, 2013 and extended their maturities to January 1, 2015 and January 1, 2016,
respectively.
We generated operating income of $591,853
and net income of $271,197 during the year ended December 31, 2012 as compared to operating income of $311,190 and net income
of $19,579 during the year ended December 31, 2011. During 2012 and 2011, we recorded gains of $480,000 and $294,438 respectively,
as a result of the termination of the O&W Plan.
Our goal is to increase sales and generate
cash flow from operations. We continue to use ISO 9001-2008 processes to manage certain key metrics. These improvements have aided
us in the management of our overall performance including the expense reductions and other key internal performance metrics.
Our leases for certain office space in
Vienna, Virginia and Colorado Springs, Colorado, expired in 2012 and 2011, respectively, and were not renewed, whereby we realized
expense reductions. In addition, a reduction in selling expenses was realized from reduced number of business development positions
and the use of virtual meetings, webinars and conference calls.
As a result of the Settlement Agreement,
in future periods we will no longer accrue O&W Plan pension expenses in our financial statements.
Credit Resources
We maintain an accounts receivable financing
line of credit with an independent financial institution that allows us to sell selected accounts receivable invoices to the financial
institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000.
This provides us with the cash needed to finance certain of our on-going costs and expenses. At December 31, 2012, we had financing
availability, based on eligible accounts receivable, of approximately $183,000 under this line. We pay fees based on the length
of time that the invoice remains unpaid.
We believe the capital resources available
under our factoring line of credit, cash from additional related party loans and cash generated by improving the results of our
operations will be sufficient to fund our ongoing operations and to support the internal growth we expect to achieve for at least
the next 12 months. However, if we do not continue to improve the results of our operations in future periods, we expect that additional
working capital will be required to fund our business. There is no assurance that in the event we need additional funds that adequate
additional working capital will be available or, if available, will be offered on acceptable terms.
We anticipate financing growth from acquisitions
of other businesses, if any, and our longer-term internal growth through one or more of the following sources: cash from collections
of accounts receivable; additional borrowing from related parties; issuance of equity; use of our existing accounts receivable
credit facility; or a refinancing of our accounts receivable credit facility.
Results of Operations
Comparison of the years ended December
31, 2012 and 2011
The following table compares
our statements of income data for the years ended December 31, 2012 and 2011.
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 vs. 2011
|
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
Amount of
|
|
|
% Increase
|
|
|
|
2012
|
|
|
Sales
|
|
|
2011
|
|
|
Sales
|
|
|
Change
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
8,725,886
|
|
|
|
100.0
|
%
|
|
$
|
9,163,780
|
|
|
|
100.0
|
%
|
|
$
|
(437,894
|
)
|
|
|
(4.8
|
)%
|
Cost of services
|
|
|
6,375,501
|
|
|
|
73.1
|
|
|
|
6,602,364
|
|
|
|
72.0
|
|
|
|
(226,863
|
)
|
|
|
(3.4
|
)
|
Gross profit
|
|
|
2,350,385
|
|
|
|
26.9
|
|
|
|
2,561,416
|
|
|
|
28.0
|
|
|
|
(211,031
|
)
|
|
|
(8.2
|
)
|
General and administrative
|
|
|
1,118,397
|
|
|
|
12.8
|
|
|
|
897,289
|
|
|
|
9.8
|
|
|
|
221,108
|
|
|
|
24.6
|
|
Defined benefit pension plan
|
|
|
(480,000
|
)
|
|
|
(5.5
|
)
|
|
|
103,822
|
|
|
|
1.1
|
|
|
|
(583,822
|
)
|
|
|
(562.3
|
)
|
Selling
|
|
|
1,120,135
|
|
|
|
12.8
|
|
|
|
1,249,115
|
|
|
|
13.6
|
|
|
|
(128,980
|
)
|
|
|
(10.3
|
)
|
Total costs and expenses
|
|
|
1,758,532
|
|
|
|
20.2
|
|
|
|
2,250,226
|
|
|
|
24.6
|
|
|
|
(491,694
|
)
|
|
|
(21.9
|
)
|
Operating income
|
|
|
591,853
|
|
|
|
6.8
|
|
|
|
311,190
|
|
|
|
3.4
|
|
|
|
280,663
|
|
|
|
90.2
|
|
Interest expense
|
|
|
(320,656
|
)
|
|
|
(3.7
|
)
|
|
|
(291,611
|
)
|
|
|
(3.2
|
)
|
|
|
29,045
|
|
|
|
10.0
|
|
Net income
|
|
$
|
271,197
|
|
|
|
3.1
|
%
|
|
$
|
19,579
|
|
|
|
.2
|
%
|
|
$
|
251,618
|
|
|
|
1,285.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic and diluted
|
|
$
|
.01
|
|
|
|
|
|
|
$
|
.00
|
|
|
|
|
|
|
$
|
.01
|
|
|
|
|
|
Sales
Sales for 2012 were $8,725,886, a decrease
of $437,894 or 4.8 % as compared to sales of $9,163,780 for 2011. The sales decrease that we experienced in 2012 resulted from
the completion of certain projects under subcontracts to the U.S. Government. We experienced a more significant slowdown of new
U.S. Government projects especially during the fourth quarter of 2012, which has continued into the first quarter of 2013. We continue
to pursue opportunities to develop additional sales from new and existing target markets, such as investing marketing resources
in the commercial segment.
A government contract vehicle is a mechanism
for conducting business with government entities which helps to significantly reduce such entities’ lead time for procuring
products or services and lowers agency acquisition costs associated with managing complex bid procedures.
We have formed
alliances with large systems integrators, who are mandated by federal policy to direct defined percentages of their work to companies
like ours which are small business subcontractors. We have completed proposals with major prime contractors to the U.S. Government.
We have several contract vehicles that enable us to deliver a broad range of our services and solutions to the U.S. Government.
The acquisition of these contract vehicles allows us additional opportunities to bid on new projects. Although we believe we have
opportunities for sales growth with government and commercial clients, the lengthy procurement processes may slow our sales growth
in future periods. We understand that the U.S. Government has expressed its intention to reduce its budgets related to technical
services contracts in certain areas during the coming years, which may impact our ability to increase our sales to certain U.S.
Government agencies.
We believe we are positioned to take advantage
of the growing marketplace for cloud related IT managed services and solutions. Since 2004, we have operated our managed
services practice using remote systems using cloud computing. We are a leading edge provider and innovator in IT management
through the cloud. We believe government and commercial clients will continue to pursue the operational and economic advantages
of cloud IT management on a larger scale. Given our experience and expertise from building cloud environments to operating
complex IT data centers through the cloud, we continue to position ourselves as a provider of choice for cloud computing users.
Cost of Services
and Gross Profit
Cost of services represents the cost of
employee services related to the IT Services Group. Cost of services for the year ended December 31, 2012 was $6,375,501 or 73.1%
of sales, a decrease of 3.4% as compared to $6,602,364 or 72.0% of sales for 2011. Gross profit was $2,350,385 for 2012, a decrease
of $211,031 or 8.2% as compared to $2,561,416 for 2011. The decrease in gross profit margin percent in 2012 is due to a change
in the mix of our business resulting from new projects in 2012 which carried different profit margins than work completed in 2011.
Gross profit margins in 2012 were also adversely affected by a decrease in certain personnel utilization rates when certain project
commencement dates were deferred. We experienced a slowdown of new subcontract projects during the fourth quarter of 2012.
General and Administrative
Expenses
General and administrative expenses include
corporate overhead such as compensation and benefits for administrative and finance personnel, rent, insurance, professional fees,
travel, and office expenses. General and administrative expenses for 2012 were $1,118,397, which was an increase of $221,108 or
24.6% as compared to $897,289 for 2011. As a percentage of sales, general and administrative expense was 12.8% for 2012 and 9.8%
for 2011.
The increase in general and administrative
expenses in 2012 was a result of variable compensation expenses relating to certain performance measures that were met, increases
in consulting expenses and ongoing brand development and marketing expenses during 2012. During 2012, we updated our web site,
updated our business strategies and our branding and marketing plans.
Defined Benefit
Pension Plan Expenses
On March 30, 2012, we
received a decision of United States Tax Court entered on March 27, 2012 (the "Decision") wherein the Court determined
that we did not have any liability for taxes, excise taxes or penalties for the taxable years 2006 or 2007 related to the Osley
& Whitney, Inc. Retirement Plan (O&W Plan). As a result, in 2012, we recorded a reduction of $480,000 in obligations previously
accrued and reflected related to excise taxes, including late fees and interest, on unfunded O&W Plan contributions. Since
the Pension Benefit Guaranty Corporation (PBGC) terminated the O&W Plan as of November 30, 2001 and as a result of the Decision,
we have no further obligations to the O&W Plan, the PBGC and the Treasury other than those stated in the Settlement Agreement
with the PBGC which are reflected in the accompanying consolidated financial statements.
Defined benefit pension plan expense for
2011 of $103,822 associated with the O&W Plan consisted of periodic pension costs of $246,436, legal and professional fees
of approximately $32,500 and accrued interest and fees on unpaid excise taxes of $119,324 offset by a gain of $294,438 in connection
with the O&W Plan termination.
Selling Expenses
In 2012, we incurred selling expenses of
$1,120,135 as compared to $1,249,115 in 2011, a decrease of $128,980 or 10.3%. This decrease is primarily attributable to the reduction
of business development compensation expense and a reduction in occupancy expenses by changing to virtual offices for certain of
our employees. We also realized expense reductions associated with less travel and other selling expenses due to maintaining fewer
business development positions and utilizing more virtual meetings, webinars and conference calls.
Operating Income
In 2012, we earned operating income of
$591,853 as compared to $311,190 for 2011, an improvement of $280,663. This is principally attributable to a reduction in operating
expenses of $491,694 which was offset by a decrease in gross profit of $211,031 due to lower sales volume and gross profit margin.
As discussed above, the decreases in operating expenses in 2012 and 2011 includes a reduction of $480,000 in O&W Plan obligations
previously accrued and, in 2011, a gain on O&W Plan termination of $294,438.
Non-cash expenses and credits for 2012
and 2011 included in operating income consist of:
|
|
Years
Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Stock-based compensation
|
|
$
|
85,619
|
|
|
$
|
103,913
|
|
Depreciation
|
|
|
28,339
|
|
|
|
31,524
|
|
Gain resulting from O&W Plan termination
|
|
|
(480,000
|
)
|
|
|
(294,438
|
)
|
Periodic pension costs, interest and fees
|
|
|
0
|
|
|
|
416,495
|
|
Total
|
|
$
|
(366,042
|
)
|
|
$
|
257,494
|
|
Interest Expense
Interest expense includes interest on indebtedness
and fees for financing accounts receivable invoices. Interest expense was $320,656 for 2012 compared to $291,611 for 2011, an increase
of $29,045 or 10.0%. The increase results from an increase in notes payable to third parties of $400,000 originated in the fourth
quarter of 2011 in connection with the termination of the O&W Plan. In addition, average balances of accounts receivable financed
increased in 2012 resulting in increased fees.
Net Income
In 2012, we earned net income of $271,197
or $.01 per share compared to $19,579 or $.00 per share for 2011, an increase of $251,618.
Critical Accounting Policies and Estimates
There are several accounting policies that
we believe are significant to the presentation of our consolidated financial statements. These policies require management to make
complex or subjective judgments about matters that are inherently uncertain. Note 3 to our consolidated financial statements presents
a summary of significant accounting policies. The most critical accounting policies follow.
Revenue Recognition
Our revenues are generated
under both time and material and fixed price consulting agreements. Consulting 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. 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, we believe that collection is reasonably assured.
Client deposits received
in advance are recorded as liabilities until associated services are completed. During 2012, sales to one client, including sales
under subcontracts for services to several entities, accounted for 65.1% of total sales (65.5% - 2011) and 59.5% of accounts receivable
(42.5% - 2011) at December 31, 2012.
Accounts Receivable
Provisions
As part of the financial reporting process,
management estimates and establishes reserves for potential credit losses relating to the collection of certain receivables. This
analysis involves a degree of judgment regarding clients’ ability and willingness to satisfy its obligations to us. These
estimates are based on past history with clients and current circumstances. Management’s failure to identify all factors
involved in determining the collectability of an account receivable could result in bad debts in excess of reserves established.
Deferred Tax Asset
Valuation and Income Taxes
Management calculates the future tax benefit
relating to certain tax timing differences and available net operating losses and credits available to offset future taxable income.
This deferred tax asset is then reduced by a valuation allowance if management believes it is more likely than not that all or
some portion of the asset will not be realized. This estimate is based on historical profitability results, expected future performance
and the expiration of certain tax attributes which give rise to the deferred tax asset. As of the balance sheet date, a reserve
has been established for the entire amount of the deferred tax asset. In the event, we generate future taxable income we will be
able to utilize the net operating loss carry forwards subject to any utilization limitations. This will result in the realization
of the deferred tax asset, which has been fully reserved. As a result, we would have to revise estimates of future profitability
and determine if its valuation reserve requires downward adjustment.
At December 31, 2012, we had federal net
operating loss carryforwards of approximately $6,500,000 and various state net operating loss carryforwards of approximately $4,000,000
which expire from 2018 through 2032.
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.
We periodically review
tax positions taken to determine if any uncertainty exists related to those tax positions. We do not have any material unrecognized
tax benefit at December 31, 2012. We recognize interest accrued and penalties related to unrecognized tax benefits in tax expense.
During the years ended December 31, 2012 and 2011, we recognized no interest and penalties.
Stock Option Awards
We apply the provisions of FASB ASC 718,
“Share-Based Payment,”
and recognize compensation expense related to stock based payments over the requisite
service period based on the grant date fair value of the awards. We use the Black-Scholes option pricing model to determine the
estimated fair value of the awards.
The compensation cost that has been charged
against income for options granted to employees under the plans was $85,619 and $103,913 for the years ended December 31, 2012
and 2011, respectively.
For stock options issued as non-ISO’s,
a tax deduction is not allowed for income tax purposes until the options are exercised. The amount of this deduction will be the
difference between the fair value of our common stock and the exercise price at the date of exercise. Accordingly, there is a deferred
tax asset recorded for the tax effect of the financial statement expense recorded. The tax effect of the income tax deduction in
excess of the financial statement expense will be recorded as an increase to additional paid-in capital. Due to the uncertainty
of our ability to generate sufficient taxable income in the future to utilize the tax benefits of the options granted, we have
recorded a valuation allowance to reduce its gross deferred tax asset to zero. As a result, for 2012 and 2011, there is no income
tax expense impact from recording the fair value of options granted. No tax deduction is allowed for stock options issued as ISO’s.
We used volatility of 75% when computing
the value of stock options and warrants. This is based on volatility data used by other companies in our industry and overall greater
market volatility of companies during recent periods. The expected life of the options is assumed to be 5.75 years using the simplified
method for plain vanilla options as stated in FASB ASC 718-10-S99 to improve the accuracy of this assumption while simplifying
record keeping requirements until more detailed information about exercise behavior is available. The expected dividend yield is
zero percent. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve
in effect at the time of grant and ranged from .83% to 1.10% for 2012 and 1.16% to 2.46% for 2011.
Equity Instruments
Issued to Consultants and Vendors in Exchange for Goods and Services
Our accounting policy for equity instruments
issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC 718,
“Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”
and
“Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees.”
The measurement date for the fair value award of the equity instruments issued is determined at the earlier of (i) the date at
which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s
performance is complete. We use the Black-Scholes option-pricing model to determine the fair value of the awards. The fair value
of the equity instrument is recognized over the term of the consulting agreement. We periodically evaluate the likelihood of reaching
the performance requirements and recognize consulting expense over the expected term associated with these performance based awards
once it is probable the consultants will achieve their performance criteria and the awards will become vested.
Recent Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective accounting standard if currently adopted would have a material effect on the accompanying consolidated
financial statements.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
As a smaller reporting company we are not
required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted
as a separate section of this report beginning on page F-1.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation
of our acting chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure
controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e)
and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation,
our acting chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls
and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules
and forms and (ii) is accumulated and communicated to our management, including our acting chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our acting chief
executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls
will prevent all errors and all fraud. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving
their objectives, and our acting chief executive officer and chief financial officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that
there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within Infinite Group have been detected.
(b)
Management's
Report on Internal Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment,
our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Our management has concluded that, as of December 31, 2012, our internal control over financial reporting
was effective based on these criteria.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control
over financial reporting that occurred during the quarter ended December 31, 2012 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers
and Corporate Governance
Set forth below are the names, ages and
positions of our executive officers and directors.
Name
|
|
Age
|
|
Position
|
|
Affiliated
Since
|
James Villa (1)
|
|
55
|
|
Chairman of the Board, Acting Chief Executive Officer and President
|
|
2003
|
Allan M. Robbins (1)
|
|
63
|
|
Director
|
|
2003
|
William S. Hogan
|
|
52
|
|
Chief Operations Officer
|
|
2004
|
James Witzel
|
|
59
|
|
Chief Financial Officer
|
|
2004
|
Deanna Wohlschlegel
|
|
41
|
|
Secretary, Controller, Human Resources Director, Facility and Clearance Officer
|
|
2003
|
__________________________
(1) Member of the audit and compensation
committees.
Each director is elected for a period of
one year and serves until his successor is duly elected and qualified. Officers are elected by and serve at the will of our Board.
Background
The principal occupation of each of our
directors and executive officers for at least the past five years is as follows:
James Villa
became a director on July 1, 2008 and was appointed chairman by the Board on June 30, 2012. He is chairman of the audit and compensation
committees. Mr. Villa was appointed President by our Board on February 25, 2010 and was appointed Acting Chief Executive Officer
on December 31, 2010. Since 2000, Mr. Villa has been the President of Intelligent Consulting Corporation (“ICC”). ICC
provides business consulting services to public and privately held middle market companies and has provided consulting services
to us from January 2003 through February 2010. 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.
Dr. Allan M. Robbins
became a director in April 2003 and is a member of the audit and compensation committees. Dr. Robbins is the Medical Director and
Chief Surgeon at Robbins Eye Associates and Robbins Laser Site in Rochester, New York. He has also served as the CEO of the Genesee
Valley Eye Institute. Dr. Robbins is a board-certified ophthalmologist and completed his fellowship training at the University
of Rochester. Dr. Robbins has been recognized and received the AMA Commendation for Continuing Medical Education as well as the
Americas Top Ophthalmologists 2002-2003 Award from the Consumers Research Council of America. Dr. Robbins is a member of the New
York State Medical Society, New York State Ophthalmologist Society, American Academy of Ophthalmology, American College of Surgeons,
International Society of Refractive Surgery (ISRS), and the American Society of Cataract and Refractive Surgery (ASCRS). Dr. Robbins
was on the Scientific Advisory Council for Phoenix Laser and a principal clinical investigator for the VISX laser during the FDA
clinical trials. Dr. Robbins brings to the Board the experience of operating a technology based company in a competitive environment
including dealing with issues that a growing company must address. Beginning in 2003, Dr. Robbins has provided us with working
capital through demand and term loans and continued, most recently in 2010, to provide an additional working capital loan.
William S. Hogan
was appointed as our chief operations officer in May 2008. Mr. Hogan joined us in July 2004 as practice director and has provided
IT consulting services including building and leading the implementation, integration and support of high technology solutions
for our major client. Previously, Mr. Hogan was employed with Hewlett Packard, Inc. since 1997 and was North American operations
manager for messaging services from 2001 until joining us.
James Witzel
was
appointed as our chief financial officer in May 2008. Mr. Witzel joined us in October 2004 as finance manager reporting to our
then chief financial officer and assisted him with accounting, financial reporting, financial analyses, and various special projects.
Prior to joining us, Mr. Witzel was a consultant providing accounting and management consulting services to a variety of middle
market companies. He has over 35 years of experience in accounting, financial reporting, and management. He has a Bachelor of Arts
degree and a Master of Business Administration degree from the University of Rochester.
Deanna Wohlschlegel
has been our corporate secretary and controller since May 2003. During 2007, Ms. Wohlschlegel was appointed to the position of
security officer and director of human resources. In August 2008, she was appointed to the position of facilities clearance officer.
She has an Associate’s degree in Accounting from Finger Lakes Community College.
Committees of the Board of Directors
Our Board has an audit committee and a
compensation committee. The audit committee reviews the scope and results of the audit and other services provided by our independent
accountants and our internal controls. The compensation committee is responsible for the approval of compensation arrangements
for our officers and the review of our compensation plans and policies. Each committee is comprised of Mr. Villa and Dr. Robbins.
Audit Committee Financial Expert
Our audit committee is comprised of Mr.
Villa, as chairman, and Dr. Robbins. The Board has determined that Mr. Villa qualifies as our “audit committee financial
expert,” as that term is defined in Item 407(d)(5) of Regulation S-K. Neither Mr. Villa nor Dr. Robbins is independent for
audit committee purposes under the definition contained in Section 10A(m)(3) of the Exchange Act.
Code of Ethics
We have adopted a code of ethics that applies
to our principal executive officer, principal financial officer and other persons performing similar functions, as well as all
of our other employees and directors. This code of ethics is posted on our website at www.IGIus.com.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires
our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports
of ownership and changes in ownership with the SEC. Officers, directors and greater than ten-percent stockholders are required
by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of
such forms furnished to us, or written representations that no Forms 5 were required, we believe that all required Section 16(a)
filings were timely made for the year ended December 31, 2012. With respect to any of our former directors, officers, and
greater than ten-percent stockholders, we have no knowledge of any known failure to comply with the filing requirements of Section
16(a).
Item 11. Executive Compensation
The Summary Compensation Table below includes,
for each of the years ended December 31, 2012 and 2011, individual compensation for services to Infinite Group, Inc. paid to: (i)
our acting chief executive officer, and (ii) the next two other of our most highly paid executive officers whose total compensation
exceeded $100,000 for the year ended December 31, 2012 (together, the “Named Executives”).
Name and Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Option
Awards (1)
|
|
|
All Other
Compensation (2)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Villa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman, President and
|
|
|
2012
|
|
|
$
|
211,369
|
|
|
$
|
25,000
|
|
|
$
|
-
|
|
|
$
|
998
|
|
|
$
|
237,367
|
|
Acting Chief Executive Officer
|
|
|
2011
|
|
|
$
|
167,204
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
305
|
|
|
$
|
167,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William S. Hogan
|
|
|
2012
|
|
|
$
|
199,808
|
|
|
$
|
40,000
|
|
|
$
|
-
|
|
|
$
|
2,043
|
|
|
$
|
241,851
|
|
Chief Operations Officer
|
|
|
2011
|
|
|
$
|
184,432
|
|
|
$
|
10,000
|
|
|
$
|
16,500
|
|
|
$
|
884
|
|
|
$
|
211,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Witzel
|
|
|
2012
|
|
|
$
|
124,260
|
|
|
$
|
24,000
|
|
|
$
|
-
|
|
|
$
|
1,260
|
|
|
$
|
149,520
|
|
Chief Financial Officer
|
|
|
2011
|
|
|
$
|
123,900
|
|
|
$
|
-
|
|
|
$
|
28,380
|
|
|
$
|
300
|
|
|
$
|
152,580
|
|
_________________
|
(1)
|
The amounts in this column reflect the grant date fair value for stock option awards granted during
the year and do not reflect whether the recipient has actually realized a financial gain from such awards such as by exercising
stock options. The fair value of the stock option awards was determined using the Black-Scholes option pricing model. See the Critical
Accounting Policies “Stock Option Awards” in this report regarding assumptions underlying valuation of equity awards.
|
|
(2)
|
Reflects life insurance premiums
and matching contributions under the
Simple IRA Plan paid by us.
|
Stock Options
The following table provides information
with respect to the value of all unexercised options previously awarded to our Named Executives.
Name
|
|
Number
of Securities
Underlying
Unexercised Options
- Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options -
Unexercisable
|
|
|
Option
Exercise
Price
|
|
|
Option
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
William S. Hogan
|
|
|
20,000
|
|
|
|
-
|
|
|
$
|
.12
|
|
|
7/5/2014
|
|
|
|
15,000
|
|
|
|
-
|
|
|
$
|
.20
|
|
|
6/16/2015
|
|
|
|
2,000
|
|
|
|
-
|
|
|
$
|
.33
|
|
|
11/13/2015
|
|
|
|
65,000
|
|
|
|
-
|
|
|
$
|
.25
|
|
|
12/31/2015
|
|
|
|
25,000
|
|
|
|
-
|
|
|
$
|
.50
|
|
|
3/8/2017
|
|
|
|
173,000
|
|
|
|
-
|
|
|
$
|
.51
|
|
|
8/23/2017
|
|
|
|
50,000
|
|
|
|
-
|
|
|
$
|
.67
|
|
|
7/27/2018
|
|
|
|
75,000
|
|
|
|
-
|
|
|
$
|
.16
|
|
|
2/4/2019
|
|
|
|
200,000
|
|
|
|
100,000
|
|
|
$
|
.145
|
|
|
6/17/2020
|
|
|
|
183,333
|
|
|
|
91,667
|
|
|
$
|
.093
|
|
|
8/11/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Witzel
|
|
|
100,000
|
|
|
|
-
|
|
|
$
|
.11
|
|
|
10/17/2014
|
|
|
|
2,000
|
|
|
|
-
|
|
|
$
|
.33
|
|
|
11/13/2015
|
|
|
|
50,000
|
|
|
|
-
|
|
|
$
|
.37
|
|
|
4/10/2016
|
|
|
|
50,000
|
|
|
|
-
|
|
|
$
|
.67
|
|
|
7/27/2018
|
|
|
|
25,000
|
|
|
|
-
|
|
|
$
|
.16
|
|
|
2/4/2019
|
|
|
|
200,000
|
|
|
|
100,000
|
|
|
$
|
.145
|
|
|
6/17/2020
|
|
|
|
315,333
|
|
|
|
157,667
|
|
|
$
|
.093
|
|
|
8/11/2021
|
Employment Agreements
We do not have any employment agreements
with any of the Named Executives.
Compensation of Directors
We do not pay any directors’ fees.
Directors are reimbursed for the costs relating to attending Board and committee meetings. At December 31, 2012, Dr. Robbins held
options immediately exercisable for an aggregate of up to 87,500 shares of our common stock of which: (i) options for 7,500 shares
were granted on April 30, 2003 at an exercise price of $0.10 per share and expire on April 30, 2013; (ii) options for 50,000 shares
were granted on March 9, 2005 at an exercise price of $0.10 per share and expire on March 9, 2015; (iii) options for 5,000 shares
were granted on February 28, 2006 at an exercise price of $0.33 per share and expire on January 31, 2016; and (iv) options for
25,000 shares were granted on August 24, 2007 at an exercise price of $0.51 per share and expire on August 23, 2017.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The following table sets forth information
regarding the beneficial ownership of our common stock, our only class of voting securities, as of March 22, 2013 by:
|
·
|
each person known to us to be the beneficial owner of more than 5% of our outstanding shares;
|
|
·
|
each Named Executive named in the Summary Compensation Table above;
|
|
·
|
all of our directors and executive officers as a group.
|
Except as otherwise indicated, the persons
listed below have sole voting and investment power with respect to all shares of common stock owned by them. All information with
respect to beneficial ownership has been furnished to us by the respective stockholder. The address of record of each individual
listed in this table, except if set forth below, is c/o Infinite Group, Inc., 60 Office Park Way, Pittsford, New York 14534.
Name of Beneficial Owner (1)
|
|
Shares
of
Common Stock
Beneficially
Owned (2)
|
|
|
Percentage
of
Ownership
|
|
Allan M. Robbins
|
|
|
10,372,782
|
(4)
|
|
|
29.4
|
%
|
James Villa
|
|
|
5,607,996
|
(5)
|
|
|
17.8
|
%
|
William S. Hogan
|
|
|
852,083
|
(6)
|
|
|
3.2
|
%
|
James Witzel
|
|
|
1,057,896
|
(7)
|
|
|
3.9
|
%
|
All Directors and Officers (5 persons) as a group
|
|
|
17,896,534
|
(3)
|
|
|
41.9
|
%
|
|
|
|
|
|
|
|
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
Paul J. Delmore
|
|
|
|
|
|
|
|
|
One America Place
|
|
|
|
|
|
|
|
|
600 West Broadway, 28th Floor
|
|
|
|
|
|
|
|
|
San Diego, CA 92101
|
|
|
2,367,000
|
(8)
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
James D. Frost
|
|
|
1,930,500
|
(9)
|
|
|
7.0
|
%
|
c/o Infinite Group, Inc.
|
|
|
|
|
|
|
|
|
60 Office Park Way
|
|
|
|
|
|
|
|
|
Pittsford, New York 14534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David N. Slavny
|
|
|
2,208,750
|
(10)
|
|
|
8.0
|
%
|
c/o Infinite Group, Inc.
|
|
|
|
|
|
|
|
|
60 Office Park Way
|
|
|
|
|
|
|
|
|
Pittsford, New York 14534
|
|
|
|
|
|
|
|
|
|
(1)
|
Pursuant to the rules of the Securities and Exchange Commission, shares of common stock
include
shares for which the individual, directly or indirectly, has voting or shares voting or disposition power, whether or not they
are held for the individual’s benefit, and shares
which an individual or group has a right to acquire within 60 days
from March 22, 2013 pursuant to the exercise of options or warrants or upon the conversion of securities are deemed to be outstanding
for the purpose of computing the percent of ownership of such individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person shown in the table. On March 22, 2013, we had 25,961,883 shares
of common stock outstanding.
|
|
(2)
|
Assumes that all currently exercisable options or warrants or convertible notes owned by the individual
have been exercised.
|
|
(3)
|
Assumes that all currently exercisable options and convertible securities owned by members of the
group have been exercised and includes options granted to all of our executive officers whose beneficial ownership percentages
are less than 1%.
|
|
(4)
|
Includes 9,285,282 shares, which are issuable upon the conversion of the notes including principal
in the amount of $304,000 and accrued interest in the amount of $183,082 through March 22, 2013; and 87,500 shares subject to currently
exercisable options.
|
|
(5)
|
Includes 5,604,996 shares, which are issuable upon the conversion of notes including principal
in the amount of $228,324 and accrued interest in the amount of $52,076 through March 22, 2013.
|
|
(6)
|
Includes 808,333 shares subject to currently exercisable options.
|
|
(7)
|
Includes 240,562 shares, which are issuable upon the conversion of a note including principal in
the amount of $9,000 and accrued interest in the amount of $3,028 through March 22, 2013; and 742,333 shares subject to currently
exercisable options.
|
|
(8)
|
Includes 2,360,000 shares owned of record by Upstate Holding Group, LLC, an entity wholly-owned
by Mr. Delmore.
|
|
(9)
|
Includes 1,500,000 shares subject to currently exercisable options.
|
|
(10)
|
Includes 615,000 common shares held by David N. Slavny, our director of business development, 1,225,000
shares subject to currently exercisable options granted to Mr. Slavny, and 368,750 shares which are issuable upon the conversion
of notes payable to David N. and Leah Slavny in the principal amount of $59,000. Excludes 939,500 shares held by the David N. Slavny
Family Trust for which David N. Slavny disclaims beneficial interest.
|
Securities Authorized for Issuance Under Equity Compensation
Plans
We have stock option plans, which were
adopted by our Board and approved by our stockholders, covering an aggregate of 8,596,333 unexercised shares of our common stock
at December 31, 2012, consisting of both incentive stock options within the meaning of Section 422 of the U.S. Internal Revenue
Code of 1986, as amended (the Code) and non-qualified options. As of December 31, 2012, 1,141,333 options to purchase shares
remain unissued under the 2005 plan and no options are available to issue under the terms of the other prior plans. On February
3, 2009, our Board approved the 2009 stock option plan (2009 Plan), which authorizes options to purchase up to an aggregate of
4,000,000 common shares. Options issued to date are non-qualified options since the 2009 Plan has not been approved by stockholders.
The option plans are intended to qualify under Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). As of December 31, 2012, 563,000 options to purchase shares remain unissued under the 2009 Plan. Incentive stock
options are issuable only to our employees, while non-qualified options may be issued to non-employees, consultants, and others,
as well as to employees.
The option plans are administered by our
compensation committee, which determines those individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares of common stock that may be purchased under each option, and the option
price.
The per share exercise price of an incentive
or non-qualified stock option may not be less than the fair market value of the common stock on the date the option is granted.
The aggregate fair market value (determined as of the date the option is granted) of the shares of common stock for which incentive
stock options are first exercisable by any individual during any calendar year may not exceed $100,000. No person who owns, directly
or indirectly, at the time of the granting of an incentive stock option to him or her, more than 10% of the total combined voting
power of all classes of stock of Infinite Group, Inc. shall be eligible to receive any incentive stock option under the option
plans unless the option price is at least 110% of the fair market value of our common stock subject to the option, determined on
the date of grant. Non-qualified options are not subject to this limitation.
An optionee may not transfer an incentive
stock option, other than by will or the laws of descent and distribution, and during the lifetime of an optionee, the option will
be exercisable only by him or her. In the event of termination of employment other than by death or disability, the optionee will
have thirty (30) days after such termination during which to exercise the option. Upon termination of employment of an optionee
by reason of death or permanent total disability, the option remains exercisable for one year thereafter to the extent it was exercisable
on the date of such termination. No similar limitation applies to non-qualified options.
Options under the option plans must be
granted within 10 years from the effective date of each respective plan. Incentive stock options granted under the plan cannot
be exercised more than 10 years from the date of grant, except that incentive stock options issued to greater than 10% stockholders
are limited to four-year terms. All options granted under the plans provide for the payment of the exercise price in cash or by
delivery of shares of common stock already owned by the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment. Therefore, an optionee may be able to tender shares of
common stock to purchase additional shares of common stock and may theoretically exercise all of his stock options without making
any additional cash investment.
Any unexercised options that expire or
that terminate upon an optionee's ceasing to be affiliated with us become available once again for issuance.
The following table summarizes as of December
31, 2012 the (i) options granted under our plans and (ii) all other securities subject to contracts, options, warrants and rights
or authorized for future issuance outside 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)
|
|
|
3,455,000
|
|
|
$
|
.27
|
|
|
|
1,141,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 stock option plan that has not been approved by security holders (2)
|
|
|
3,437,000
|
|
|
$
|
.12
|
|
|
|
563,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,892,000
|
|
|
$
|
.20
|
|
|
|
1,704,333
|
|
___________________________
|
(1)
|
Consists of grants under our 1993, 1994, 1995, 1996, 1997, 1998, 1999, and 2005 Stock Option Plans
of which 3,455,000 are exercisable at December 31, 2012.
|
|
(2)
|
Consists of grants under our 2009 Plan of which 2,268,000 are exercisable at December 31, 2012.
|
Item 13. Certain Relationships and Related Transactions,
and Director Independence
Officers and Directors
We are obligated under various convertible
notes payable to Northwest Hampton Holdings, LLC (“Northwest”). James Villa, our acting CEO and President, is the sole
member of Northwest. At December 31, 2012, Northwest was the holder of convertible notes bearing interest at 6%, including principal
and accrued interest, of $278,820 which mature on January 1, 2016. At December 31, 2012, the principal and a portion of the interest
under the notes were convertible into shares of our common stock at a conversion price of $.05 per share (5,553,850 shares).
At December 31, 2012, Dr. Allan M. Robbins,
a member of our Board, was the holder of convertible notes bearing interest at 6%, including principal and accrued interest, of
$442,567 which mature on January 1, 2016 and a demand note bearing interest at 12% for $40,000. At December 31, 2012, the principal
and interest under the notes were convertible into shares of our common stock at a conversion prices of $.05 and $.11 per share,
respectively (9,214,978 shares).
At December 31, 2012, Mr. James Witzel,
our chief financial officer, was the holder of a convertible note bearing interest at 6%, including principal and accrued interest,
of $11,908 which matures on January 1, 2016. At December 31, 2012, the principal and interest under the note was convertible into
shares of our common stock at a conversion price of $.05 per share (238,166 shares).
The interest rates on the aforementioned
notes payable to Northwest, Dr. Robbins and Mr. Witzel (the “Notes”) are adjusted annually, on January 1
st
of
each year, to a rate equal to the prime rate in effect on December 31st of the immediately preceding year, plus one and one quarter
percent, but in no event less than 6% per annum. The Notes are secured by a security interest in all our assets.
Generally, upon notice, prior to the maturity
date, we can convert all or a portion of the outstanding principal on the Notes; provided, however, at no time can we convert an
amount that would result in a change of control and limit the use of our net operating loss carryforwards if the same amount were
converted by the note holder.
The Notes are not convertible into shares
of our common stock to the extent it would result in a change in control which would limit the use of our net operating loss carryforwards;
provided, however, this limitation will not apply if we close a transaction with another third party or parties that results in
a change of control which will limit the use of our net operating loss carryforwards.
Prior to any conversion, the holders of
the Notes are entitled to convert their Notes, on a pari passu basis and upon any such participation the requesting note holder
shall proportionately adjust his conversion request such that, in the aggregate, a change of control, which will limit the use
of our net operating loss carryforwards, does not occur; provided, however, the right to participate is only available to a noteholder
if his Note is then convertible into 5% or more of our common stock.
In 2010, 2009 and 2006, we issued three
demand notes to Dr. Robbins, in the principal amount of $40,000 with interest at 12% per annum (the “2010 Note”), $50,000
with interest at 10% per annum and $105,000 with interest at 18% per annum, respectively. At the election of the holder, the principal
of the 2010 Note may be converted into 363,636 shares of our common stock at $.11 per share. At December 31, 2012, the outstanding
principal balance on the 2010 Note remained unchanged and the principal balance remaining on the other two notes were $30,000 and
$20,000, respectively. The aggregate accrued interest on all the notes was $85,316.
During 2010, we issued a demand promissory
note to Mr. Villa in the principal amount of $50,000 with interest at 12% per annum. At December 31, 2011, $5,000 of principal
and $4,289 of accrued interest was outstanding under the note. In February 2012, all outstanding balances due under the note were
paid and the note was satisfied.
On October 28, 2011, we issued a demand
promissory note to Mr. Witzel in the principal amount of $23,000 with interest at 18% per annum. At December 31, 2011, the entire
principal amount and $352 of accrued interest was outstanding under the note. From January 2012 through June 2012, all outstanding
balances due under the note were paid and the note was satisfied.
Between June 1, 2012 and December 31, 2012,
we provided software development services to Sudo.Me Corporation, a New York State corporation (“Sudo”). These services
were provided on a “cost-plus” basis, but were provided on more favorable terms than our usual and customary rates
charged to our customers. At December 31, 2012, $71,302 was due and payable to us for such services and related equipment, representing
the aggregate billings rendered from inception. Subsequent to year end, $7,302 of the balance was paid. At December 31, 2012,
we had an allowance for doubtful accounts with respect to this receivable given the uncertainty as to its collectability in light
of Sudo’s financial condition. Each of Mr. Villa, our president and acting CEO and a director, and Dr. Robbins, a director,
is a lender to Sudo and, as a result of such loans, may have the ability to influence policy and/or control of Sudo. Neither
Mr. Villa nor Dr. Robbins is an equity holder in Sudo. Since December 31, 2012, we have continued to provide services to
Sudo on similar terms.
David N. Slavny
During 2005, we issued various notes to
David N. Slavny, our Director of Business Development. The notes were consolidated into one note of $185,000 with interest at 12%
per annum and further modified during 2008 such that the notes bear interest at 11% and principal matured on July 1, 2010. The
notes are secured by all of our assets. At December 31, 2008, the notes had a balance of $109,000. Subsequent to December 31, 2008,
the note balance was reduced to $59,000 and on February 6, 2009 the note was further modified such that principal and interest
are convertible into shares of our common stock at $.16 per share, which was the closing price of our common stock on the date
of the modification. At December 31, 2012, the balance of this note was $59,000 and is convertible into 368,750 shares of our common
stock.
Director Independence
Our Board has
determined that Dr. Robbins is “independent” in accordance with the NASDAQ’s independence standards. Our audit
and compensation committees consist of Mr. Villa and Dr. Robbins, of which only Dr. Robbins is sufficiently independent for compensation
committee purposes under NASDAQ’s standards and neither of them is sufficiently independent for audit committee purposes
under NASDAQ’s standards by virtue of their respective beneficial ownership of our common stock.
Item 14. Principal Accountant Fees and Services
The aggregate fees billed by our principal
accounting firm, Freed Maxick CPAs, P.C. for the years ended December 31, 2012 and 2011 are as follows:
|
|
2012
|
|
|
2011
|
|
Audit fees
|
|
$
|
84,282
|
|
|
$
|
80,500
|
|
Audit related fees
|
|
|
-
|
|
|
|
-
|
|
Total audit and audit related fees
|
|
$
|
84,282
|
|
|
$
|
80,500
|
|
Audit fees for 2012 and 2011 were for professional
services rendered for the audits of our annual consolidated financial statements and reviews of the financial statements included
in our Quarterly Reports on Form 10-Q. There were no tax or other non-audit related services provided by the independent accountants
for 2012 and 2011.
As a matter of policy, each permitted non-audit
service is pre-approved by the audit committee or the audit committee’s chairman pursuant to delegated authority by the audit
committee, other than de minimus non-audit services for which the pre-approval requirements are waived in accordance with the rules
and regulations of the SEC.
Audit Committee Pre-Approval Policies
and Procedures
The audit committee charter provides that
the audit committee will pre-approve audit services and non-audit services to be provided by our independent auditors before the
accountant is engaged to render these services. The audit committee may consult with management in the decision-making process,
but may not delegate this authority to management. The audit committee may delegate its authority to pre-approve services to one
or more committee members, provided that the designees present the pre-approvals to the full committee at the next committee meeting.
Item 15.
Exhibits, Financial Statement Schedules
|
(a)
|
The following documents are filed as part of this report:
|
(1) Financial Statements – See the Index to
the consolidated financial statements on page F-1.
(b)
Exhibits:
Exhibit
|
|
|
No.
|
|
Description
|
3.1
|
|
Restated Certificate of Incorporation of the Company. (1)
|
3.2
|
|
Certificate of Amendment of Certificate of Incorporation dated January 7, 1998. (3)
|
3.3
|
|
Certificate of Amendment of Certificate of Incorporation dated February 16, 1999. (4)
|
3.4
|
|
Certificate of Amendment of Certificate of Incorporation dated February 28, 2006. (6)
|
3.5
|
|
By-Laws of the Company. (1)
|
4.1
|
|
Specimen Stock Certificate. (1)
|
10.1
|
|
**Form of Stock Option Plan. (2)
|
10.2
|
|
Form of Stock Option Agreement. (1)
|
10.3
|
|
Promissory Note dated August 13, 2003 in favor of Carle C. Conway. (5)
|
10.4
|
|
Promissory Note dated January 16, 2004 in favor of Carle C. Conway. (5)
|
10.5
|
|
Promissory Note dated March 11, 2004 in favor of Carle C. Conway. (5)
|
10.6
|
|
Promissory Note dated December 31, 2003 in favor of Northwest Hampton Holdings, LLC. (5)
|
10.7
|
|
Modification Agreement No. 3 to Promissory Notes between Northwest Hampton Holdings, LLC and the Company dated October 1, 2005. (6)
|
10.8
|
|
Modification Agreement No. 3 to Promissory Notes between Allan Robbins and the Company dated October 1, 2005. (6)
|
10.9
|
|
Modification agreement to promissory notes between the Company and Carle C. Conway dated December 31, 2005. (6)
|
10.10
|
|
Promissory note dated December 31, 2005 in favor of David N. Slavny and Leah A. Slavny.(6)
|
10.11
|
|
Collateral security agreement between the Company and David N. Slavny and Leah A. Slavny dated December 31, 2005. (6)
|
10.12
|
|
Modification Agreement to Promissory Note between Northwest Hampton Holdings, LLC and the Company dated December 6, 2005. (6)
|
10.13
|
|
Collateral security agreement between the Company and Northwest Hampton Holdings, LLC dated February 15, 2006. (6)
|
10.14
|
|
Collateral security agreement between the Company and Allan Robbins dated February 15, 2006. (6)
|
10.15
|
|
Purchase and sale agreement between the Company and Amerisource Funding, Inc. dated May 21, 2004. (7)
|
10.16
|
|
Account modification agreement between the Company and Amerisource Funding, Inc. dated August 5, 2005. (7)
|
10.17
|
|
Promissory note dated June 13, 2008 in favor of Dan Cappa. (9)
|
10.18
|
|
Modification agreement to promissory notes between the Company and David N. Slavny and Leah A. Slavny dated February 6, 2009. (9)
|
10.19
|
|
**The 2009 Stock Option Plan. (9)
|
10.20
|
|
Promissory Note between Northwest Hampton Holdings, LLC and the Company dated September 30, 2009. (10)
|
10.21
|
|
Modification agreement to promissory notes between the Company and Carle C. Conway dated December 31, 2009. (10)
|
10.22
|
|
Modification agreement to promissory note between the Company and Dan Cappa dated December 31, 2009. (10)
|
10.23
|
|
Promissory Note between Northwest Hampton Holdings, LLC and the Company dated May 27, 2010. (11)
|
10.24
|
|
Promissory Note between Allan M. Robbins and the Company dated August 13, 2010. (12)
|
10.25
|
|
Modification agreement to promissory note between the Company and Dan Cappa dated December 31, 2010. (13)
|
10.26
|
|
Modification agreement to promissory note between the Company and Carle C. Conway dated December 31, 2010. (13)
|
10.27
|
|
Settlement Agreement between the Company and the PBGC, effective as of September 1, 2011. (14)
|
10.28
|
|
Trusteeship Agreement between the Company and the PBGC, effective as of November 1, 2011. (15)
|
10.29
|
|
Promissory note in favor of the PBGC in the principal amount of $300,000 (15)
|
10.30
|
|
Modification agreement to promissory note between the Company and Dan Cappa dated December 14, 2012. *
|
10.31
|
|
Modification agreement to promissory notes between the Company and Carle C. Conway dated December 31, 2012. *
|
14.1
|
|
Code of Ethics. (6)
|
23.1
|
|
Consent of Freed Maxick CPAs, P.C., independent registered public accounting firm*
|
31.1
|
|
Chief Executive Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*
|
31.2
|
|
Chief Financial Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*
|
32.1
|
|
Chief Executive Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.*
|
32.2
|
|
Chief Financial Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.*
|
101.INS
|
|
XBRL Instance Document ***
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document***
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document***.
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document***
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document***
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document***
|
_______________________
*Filed as an
exhibit hereto.
**Management contract or compensatory plan
or arrangement.
|
***
|
Furnished with this report. In accordance with Rule 406T of Regulation
S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference
into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set
forth by specific reference in such filing.
|
(1)
|
Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (File #33-61856) and incorporated herein by reference.
|
(2)
|
Incorporated by reference to the Company's 1993 Preliminary Proxy Statement.
|
(3)
|
Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
|
(4)
|
Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998.
|
(5)
|
Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002.
|
(6)
|
Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005.
|
(7)
|
Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006.
|
(8)
|
Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.
|
(9)
|
Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
|
(10)
|
Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
|
(11)
|
Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended June 30, 2010.
|
(12)
|
Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2010.
|
(13)
|
Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
|
(14)
|
Incorporated by reference to the Company's Current Report on Form 8-K filed on September 12, 2011.
|
(15)
|
Incorporated by reference to the Company's Current Report on Form 8-K filed on November 7, 2011.
|
(c) Information required by schedules
called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 29, 2013
|
Infinite Group, Inc.
|
|
|
|
|
By:
|
/s/ James Villa
|
|
|
James Villa, Acting Chief Executive Officer
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
/s/ James Villa
|
|
|
|
James Villa
|
|
Chairman of the Board , Acting Chief Executive Officer, and
|
March
29
, 2013
|
|
|
President
|
|
|
|
(principal executive officer)
|
|
|
|
|
|
/s/ James Witzel
|
|
|
|
James Witzel
|
|
Chief Financial Officer
|
March
29
, 2013
|
|
|
(principal financial and accounting officer)
|
|
|
|
|
|
/s/ Allan M. Robbins
|
|
|
|
Allan M. Robbins
|
|
Director
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March
29
, 2013
|
CONSOLIDATED
FINANCIAL
STATEMENTS
INFINITE GROUP, INC.
DECEMBER
31, 2012
with
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INFINITE GROUP, INC.
CONTENTS
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Page
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Report of Independent Registered Public Accounting Firm
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F-
1
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Consolidated Financial Statements:
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Consolidated Balance Sheets
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F-
2
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Consolidated Statements of Income and Comprehensive Income
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F-
3
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Consolidated Statements of Stockholders' Deficiency
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F-
4
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Consolidated Statements of Cash Flows
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F-
5
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Notes to Consolidated Financial Statements
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F-
6 - F-25
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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
Infinite Group, Inc.
We have audited the
accompanying consolidated balance sheets of Infinite Group, Inc. as of December 31, 2012 and 2011, and the related consolidated
statements of income and comprehensive income, stockholders' deficiency, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, 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. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of Infinite
Group, Inc. as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for the years then
ended in conformity with U.S. generally accepted accounting principles.
/s/ Freed Maxick CPAs, P.C.
Buffalo, New York
March 29, 2013
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
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|
December 31,
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|
2012
|
|
|
2011
|
|
ASSETS
|
|
|
|
|
|
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|
|
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|
|
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|
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Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
56,158
|
|
|
$
|
36,894
|
|
Accounts receivable, net of allowances of $70,000
|
|
|
585,322
|
|
|
|
1,023,326
|
|
Prepaid expenses and other current assets
|
|
|
22,127
|
|
|
|
21,204
|
|
Total current assets
|
|
|
663,607
|
|
|
|
1,081,424
|
|
|
|
|
|
|
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|
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Property and equipment, net
|
|
|
38,062
|
|
|
|
46,704
|
|
|
|
|
|
|
|
|
|
|
Deposits and other assets
|
|
|
4,318
|
|
|
|
15,924
|
|
|
|
|
|
|
|
|
|
|
|
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$
|
705,987
|
|
|
$
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1,144,052
|
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|
|
|
|
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
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Current liabilities:
|
|
|
|
|
|
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Accounts payable
|
|
$
|
281,017
|
|
|
$
|
566,980
|
|
Accrued payroll
|
|
|
356,164
|
|
|
|
379,666
|
|
Accrued interest payable
|
|
|
408,799
|
|
|
|
403,387
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|
Accrued retirement and pension
|
|
|
220,783
|
|
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|
659,650
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|
Accrued expenses - other
|
|
|
60,015
|
|
|
|
39,968
|
|
Current maturities of long-term obligations
|
|
|
22,867
|
|
|
|
32,360
|
|
Note payable
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|
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30,000
|
|
|
|
30,000
|
|
Notes payable - related parties
|
|
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149,000
|
|
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|
197,000
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|
Total current liabilities
|
|
|
1,528,645
|
|
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2,309,011
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Long-term obligations:
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Notes payable:
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|
|
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Banks and other
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1,544,593
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|
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1,559,108
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Related parties
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501,324
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|
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501,324
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Total liabilities
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|
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3,574,562
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|
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4,369,443
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Commitments and contingencies (Notes 10 and 11)
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0
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0
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Stockholders' deficiency:
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Common stock, $.001 par value, 60,000,000 shares authorized; 25,961,883 (25,961,883 - 2011) shares issued and outstanding
|
|
|
25,961
|
|
|
|
25,961
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|
Additional paid-in capital
|
|
|
30,164,403
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|
|
|
30,078,784
|
|
Accumulated deficit
|
|
|
(33,058,939
|
)
|
|
|
(33,330,136
|
)
|
Total stockholders’ deficiency
|
|
|
(2,868,575
|
)
|
|
|
(3,225,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
705,987
|
|
|
$
|
1,144,052
|
|
See notes to consolidated financial
statements.
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
|
|
Years Ended
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December 31,
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2012
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2011
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Sales
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$
|
8,725,886
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$
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9,163,780
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Cost of services
|
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6,375,501
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6,602,364
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Gross profit
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2,350,385
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2,561,416
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Costs and expenses:
|
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General and administrative
|
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|
1,118,397
|
|
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|
897,289
|
|
Defined benefit pension plan
|
|
|
(480,000
|
)
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|
103,822
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Selling
|
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1,120,135
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|
|
|
1,249,115
|
|
Total costs and expenses
|
|
|
1,758,532
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|
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|
2,250,226
|
|
|
|
|
|
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|
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Operating income
|
|
|
591,853
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|
311,190
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|
|
|
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Interest expense:
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
(52,385
|
)
|
|
|
(52,820
|
)
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Other
|
|
|
(268,271
|
)
|
|
|
(238,791
|
)
|
Total interest expense
|
|
|
(320,656
|
)
|
|
|
(291,611
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
271,197
|
|
|
|
19,579
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Retirement benefit adjustment
|
|
|
0
|
|
|
|
2,961,147
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
271,197
|
|
|
$
|
2,980,726
|
|
|
|
|
|
|
|
|
|
|
Net income per share – basic and diluted
|
|
$
|
.01
|
|
|
$
|
.00
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
25,961,883
|
|
|
|
26,357,773
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|
Weighted average shares outstanding – diluted
|
|
|
47,562,782
|
|
|
|
29,090,273
|
|
See notes to consolidated financial
statements.
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
DEFICIENCY
Years Ended December 31, 2012 and 2011
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|
|
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Accumulated
|
|
|
|
|
|
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Additional
|
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Other
|
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Common Stock
|
|
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Paid-in
|
|
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Accumulated
|
|
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Comprehensive
|
|
|
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|
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Shares
|
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Amount
|
|
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Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance - December 31, 2010
|
|
|
26,461,883
|
|
|
$
|
26,461
|
|
|
$
|
29,999,371
|
|
|
$
|
(33,299,715
|
)
|
|
$
|
(2,961,147
|
)
|
|
$
|
(6,235,030
|
)
|
Shares of common stock repurchased and retired
|
|
|
(500,000
|
)
|
|
|
(500
|
)
|
|
|
(24,500
|
)
|
|
|
(50,000
|
)
|
|
|
0
|
|
|
|
(75,000
|
)
|
Stock based compensation
|
|
|
0
|
|
|
|
0
|
|
|
|
103,913
|
|
|
|
0
|
|
|
|
0
|
|
|
|
103,913
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,579
|
|
|
|
0
|
|
|
|
19,579
|
|
Retirement benefit adjustment
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,961,147
|
|
|
|
2,961,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2011
|
|
|
26,961,883
|
|
|
$
|
25,961
|
|
|
$
|
30,078,784
|
|
|
$
|
(33,330,136
|
)
|
|
$
|
0
|
|
|
$
|
(3,225,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
0
|
|
|
|
0
|
|
|
|
85,619
|
|
|
|
0
|
|
|
|
0
|
|
|
|
85,619
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
271,197
|
|
|
|
0
|
|
|
|
271,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2012
|
|
|
25,961,883
|
|
|
$
|
25,961
|
|
|
$
|
30,164,403
|
|
|
$
|
(33,058,939
|
)
|
|
$
|
0
|
|
|
$
|
(2,868,575
|
)
|
See notes to consolidated financial
statements.
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
271,197
|
|
|
$
|
19,579
|
|
Adjustments to reconcile net income to net cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
85,619
|
|
|
|
103,913
|
|
Reduction of accrued retirement and pension
|
|
|
(480,000
|
)
|
|
|
(294,438
|
)
|
Depreciation
|
|
|
28,339
|
|
|
|
31,524
|
|
(Increase) decrease in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
438,004
|
|
|
|
(314,024
|
)
|
Prepaid expenses and other assets
|
|
|
10,683
|
|
|
|
(3,312
|
)
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(285,963
|
)
|
|
|
(84,996
|
)
|
Accrued expenses
|
|
|
1,957
|
|
|
|
171,934
|
|
Accrued pension obligations
|
|
|
41,133
|
|
|
|
364,531
|
|
Net cash provided (used) by operating activities
|
|
|
110,969
|
|
|
|
(5,289
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(10,515
|
)
|
|
|
(10,018
|
)
|
Net cash used by investing activities
|
|
|
(10,515
|
)
|
|
|
(10,018
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of notes payable
|
|
|
(33,190
|
)
|
|
|
(28,954
|
)
|
Repayments of notes payable - related parties
|
|
|
(48,000
|
)
|
|
|
0
|
|
Proceeds from notes payable
|
|
|
0
|
|
|
|
100,000
|
|
Proceeds from notes payable - related parties
|
|
|
0
|
|
|
|
23,000
|
|
Repurchase of shares of common stock
|
|
|
0
|
|
|
|
(75,000
|
)
|
Net cash provided (used) by financing activities
|
|
|
(81,190
|
)
|
|
|
19,046
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
19,264
|
|
|
|
3,739
|
|
|
|
|
|
|
|
|
|
|
Cash - beginning of year
|
|
|
36,894
|
|
|
|
33,155
|
|
|
|
|
|
|
|
|
|
|
Cash - end of year
|
|
$
|
56,158
|
|
|
$
|
36,894
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
315,168
|
|
|
$
|
198,856
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
0
|
|
|
$
|
0
|
|
See notes to consolidated financial
statements.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - PRINCIPLES OF CONSOLIDATION AND BUSINESS
The accompanying consolidated
financial statements include the financial statements of Infinite Group, Inc. (IGI), and each of its wholly owned subsidiaries.
Each subsidiary was inactive during the years presented in these financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation. The inactive subsidiaries are Infinite Photonics, Inc. (IP), Laser Fare, Inc.
(LF), and LF’s wholly-owned subsidiary, Mound Laser and Photonics Center, Inc. (MLPC); Express Tool, Inc. (ET); Materials
and Manufacturing Technologies, Inc. (MMT); Express Pattern (EP) and MetaTek, Inc. (MT) (collectively "the Company").
The Company operates
in one segment, the field of information technology (IT) consulting services, with all operations based in the United States. There
were no sales from customers in foreign countries during 2012 and 2011 and all assets are located in the United States. Certain
projects required employees to travel to foreign countries during 2012 and 2011.
NOTE 2. - MANAGEMENT PLANS
The
Company reported net income of $271,197 in 2012 and $19,579 in 2011 due in part to the reversal of the defined benefit pension
obligation; a stockholders’ deficit at December 31, 2012 and 2011; and a decline of 4.8% in the Company’s 2012 sales
compared with 2011. The Company’s business strategy is summarized as follows.
The Company plans include
continuing to provide cloud related IT managed services and solutions and continuing to expand into the commercial sector including
the SMB space. The Company also reviews potential acquisitions. The Company is committed to remaining on the leading edge of technologies
and trends in the IT service sector. The Company’s ability to succeed may depend on how successful it is in differentiating
itself from competition at a time when competition in these markets is on the rise.
The Company strategy
has been to bid for contract vehicles that facilitate Federal and State government procurement requirements which allow the Company
to compete further on task orders issued under the contract vehicles. The uncertainty in the Federal process along with a lack
of socio-economic advantage makes it difficult for the Company to compete in the government market. The Company’s strategy
is to establish partnerships to create a better competitive advantage.
In addition, the Company's
strategy is to build its business by delivering a wide range of IT solutions and services that address challenges common to many
U.S. Government agencies, state and local governments and commercial companies including SMBs. The Company believes that its
core strengths position the Company to respond to the long-term trends and changing demands of the IT markets.
The Company has established
several areas of specific focus with the objective of increasing its sales, which include the following:
|
·
|
Mobility and information security;
|
|
·
|
Program and project management;
|
|
·
|
Business continuity planning;
|
|
·
|
Business process development and management;
|
|
·
|
Consulting and engineering services; and
|
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. - MANAGEMENT PLANS – CONTINUED
|
·
|
Support services to software companies.
|
Defined Benefit Pension Plan Terminated
in 2011
On November 1, 2011,
in accordance with the terms of the Settlement Agreement, dated September 6, 2011 (the “Settlement Agreement”), between
the Company and the Pension Benefit Guaranty Corporation (the “PBGC”), the Company received from the PBGC the executed
Agreement for Appointment of Trustee and Termination of the Osley & Whitney, Inc. Retirement Plan (the "O&W Plan")
(the “Trusteeship Agreement”). The Trusteeship Agreement:
|
·
|
terminated the O&W Plan;
|
|
·
|
appointed the PBGC as the statutory trustee
of the O&W Plan; and
|
|
·
|
established November 30, 2001 as the termination
date for the O&W Plan.
|
On October 17, 2011,
in accordance with the Settlement Agreement, the Company: (i) purchased 500,000 shares of its common stock from the O&W Plan
for $130,000 (see note 7); (ii) issued a promissory note in favor of the PBGC for $300,000 bearing interest at 6% per annum amortizing
in quarterly payments over a seven year period (see note 6); and (iii) agreed to make future payments through December 31, 2017
out of the Company’s “Free Cash Flow,” as defined in the Settlement Agreement, not to exceed $569,999 (see note
6). The Settlement Agreement contains specific events of default and provisions for remedies upon default. The purchase price for
the 500,000 shares was funded by the Company using the proceeds from the placement of a convertible note in the principal amount
of $100,000 to a non-affiliated accredited investor on October 4, 2011 and $30,000 of the Company’s working capital. As a
result of the termination of the O&W Plan, the Company recorded a gain of $294,438.
On March 30, 2012,
the Company received the decision of United States Tax Court entered on March 27, 2012 (the "Decision") wherein the Court
determined that the Company did not have any liability for taxes, excise taxes or penalties for the taxable years 2006 or 2007
related to the O&W Plan. As a result, during 2012, the Company recorded a reduction of $480,000 in obligations previously accrued
and reflected related to excise taxes, including late fees and interest on unfunded O&W Plan contributions and recognized a
gain of $480,000.
Since the PBGC terminated
the O&W Plan as of November 30, 2001, the Company has no further obligations to the O&W Plan and the PBGC other than those
stated in the Settlement Agreement.
Improve Operations and Capital Resources
The Company's goal
is to increase sales and generate cash flow from operations on a consistent basis. The Company used ISO 9001-2008 practices as
a tool for improvement that has aided expense reduction and internal performance. Two leases for office space expired in 2012 and
2011 and were not renewed. The Company realized expense reductions associated with less travel and other selling expenses due to
maintaining fewer business development positions and utilizing more virtual meetings, webinars and conference calls. As a result
of the termination of the O&W Plan, the Company will no longer incur pension expense for the O&W Plan.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. - MANAGEMENT PLANS – CONTINUED
The Company believes
the capital resources available under its factoring line of credit, cash from additional related party loans and cash generated
by improving the results of its operations provide sources to fund its ongoing operations and to support the internal growth the
Company expects to achieve for at least the next 12 months. However, if the Company does not continue to maintain or improve the
results of its operations in future periods, the Company expects that additional working capital will be required to fund its business.
Although the Company has no assurances, the Company believes that related parties, who have previously provided working capital,
will continue to provide working capital loans on similar terms, as in the past, as may be necessary to fund its on-going operations
for at least the next 12 months.
If the Company experiences
significant growth in its sales, the Company believes that this may require it to increase its financing line, finance additional
accounts receivable, or obtain additional working capital from other sources to support its sales growth. There is no assurance
that in the event the Company needs additional funds that adequate additional working capital will be available or, if available,
will be offered on acceptable terms.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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 $70,000 for doubtful accounts was reasonably stated at December 31, 2012 and 2011.
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.
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.
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.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – CONTINUED
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 generally equal to 20% of the total accounts receivable invoice sold to the Purchaser. The fee for the first
30 days is 1% and additional fees are charged against the average daily balance of net outstanding funds at the prime rate, which
was 3.25% per annum as of December 31, 2012 and 2011. 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, 2012, the Company sold
approximately $7,797,000 ($7,152,000 - 2011) of its accounts receivable to the Purchaser. As of December 31, 2012, $781,818
($912,112 - 2011) of these receivables remained outstanding. Additionally, as of December 31, 2012, the Company had approximately
$183,000 available under the financing line with the financial institution ($315,000 – 2011). After deducting estimated
fees and advances from the Purchaser, the net receivable from the Purchaser amounted to $146,125 at December 31, 2012 ($172,260
- 2011), 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 totaled approximately $174,300 for the year ended December 31, 2012 ($160,900 - 2011). These financing line fees are classified
on the statements of income 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.
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 2012 and 2011.
Revenue Recognition
-
The Company’s revenues are generated under both time and material and fixed price agreements. Consulting 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. 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.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – CONTINUED
During 2012, sales
to one client, including sales under subcontracts for services to several entities, accounted for 65.1% of total sales (65.5% -
2011) and 59.5% of accounts receivable (42.5% - 2011) at December 31, 2012. Sales to another client, which consisted of sales
under subcontracts, accounted for 22.1% of sales in 2012 (19.2% - 2011) and 19.8% of accounts receivable at December 31, 2012 (29.4%
- 2011).
Equity Instruments
-
For equity instruments issued to consultants and vendors in exchange for goods and services the Company follows the provisions
of FASB ASC 718 “
Compensation – Stock Compensation
.” The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or
vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity
instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
Stock Options -
The Company recognizes compensation expense related to stock based payments over the requisite service period based on 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 and its wholly owned subsidiaries file consolidated federal income tax returns. 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 of 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 reviews
tax positions taken to determine if it is more likely than not that the position would be sustained upon examination resulting
in an uncertain tax position. The Company did not have any material unrecognized tax benefit at December 31, 2012 or 2011. The
Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December
31, 2012 and 2011, the Company recognized no interest and penalties.
The Company files U.S.
federal tax returns and tax returns in various states. The tax years 2007 through 2011 remain open to examination by the taxing
jurisdictions to which the Company is subject.
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 year, 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.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – CONTINUED
The following table
sets forth the computation of basic and diluted earnings per share as of December 31, 2012 and 2011:
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
Share
|
|
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
19,579
|
|
|
|
26,357,773
|
|
|
$
|
.00
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
0
|
|
|
|
2,732,500
|
|
|
|
|
|
Diluted earnings per share - income available to common stockholders with assumed conversions
|
|
$
|
19,579
|
|
|
|
29,090,273
|
|
|
$
|
.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
271,197
|
|
|
|
25,961,883
|
|
|
$
|
.01
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options and convertible notes payable
|
|
|
57,369
|
|
|
|
21,600,899
|
|
|
|
|
|
Diluted earnings per share - income available to common stockholders with assumed conversions
|
|
$
|
328,566
|
|
|
|
47,562,782
|
|
|
$
|
.01
|
|
For the years ended
December 31, 2012 and 2011, convertible debt and options to purchase 3,146,500 and 23,772,101 shares of common stock, respectively,
that could potentially dilute basic earnings per share were excluded from the calculation of diluted net income per share because
the exercise prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.
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, which is defined as
unobservable inputs in which little or no market data exists, 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).
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – CONTINUED
The carrying amounts
of cash, accounts receivable and accounts payable and accrued expenses are reasonable estimates of their fair value due to their
short maturity. Based on the borrowing rates currently available to the Company for loans similar to its term debt and notes payable,
the fair value approximates its carrying amount.
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.
Defined Benefit
Pension Plan
- The Company recognizes the funded status of the defined benefit postretirement plan in its balance sheet and
recognizes changes in that funded status in comprehensive income according to FASB ASC 715 “
Compensation – Retirement
Benefits
.”
Comprehensive Income
-
The Company accounts for comprehensive income under FASB ASC 220 “
Comprehensive Income
,” which
establishes standards for reporting and measuring of all changes in equity that result from transactions, other events and circumstances
from non-owner sources. The Company reported the retirement benefit adjustment as a component of comprehensive income (loss)
in the consolidated statements of income and comprehensive income for the year ended
December 31,
2011
.
Reclassifications
-
The Company reclassifies certain prior year amounts to conform to the current year’s presentation.
Recent Accounting Pronouncements
Presentation of
Comprehensive Income -
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, “Comprehensive Income
(Topic 220) – Presentation of Comprehensive Income.” This ASU requires all nonowner changes in stockholders’
equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.
The amendments are effective for interim and annual periods beginning on or after December 15, 2011. However, ASU 2011-12 has deferred
the specific requirement within ASU 2011-05 to present on the face of the financial statements items that are reclassified from
accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive
income. Entities should continue to report reclassifications out of accumulated comprehensive income consistent with the presentation
requirements in effect before ASU 2011-05. The Company has adopted the presentation of a single continuous statement of comprehensive
income. This change did not have a material impact on the consolidated financial statements.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. - PROPERTY AND EQUIPMENT
Property and equipment
consists of:
|
|
Depreciable
|
|
December 31,
|
|
|
|
Lives
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
3 to 5 years
|
|
$
|
10,881
|
|
|
$
|
29,386
|
|
Equipment
|
|
3 to 10 years
|
|
|
129,960
|
|
|
|
201,243
|
|
Furniture and fixtures
|
|
5 to 7 years
|
|
|
9,424
|
|
|
|
11,984
|
|
Leasehold improvements
|
|
3 years
|
|
|
1,224
|
|
|
|
3,286
|
|
|
|
|
|
|
151,489
|
|
|
|
245,899
|
|
Accumulated depreciation
|
|
|
|
|
(113,427
|
)
|
|
|
(199,195
|
)
|
|
|
|
|
$
|
38,062
|
|
|
$
|
46,704
|
|
Depreciation
expense was $28,339 and $31,524 for the years ended December 31, 2012 and 2011, respectively.
NOTE 5. - NOTES PAYABLE – CURRENT
Note payable at December
31, 2012 and 2011 consists of an unsecured demand note payable of $30,000 with interest at 10%.
Notes payable - related
parties consist of:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Convertible demand note payable to employee, 11% (A)
|
|
$
|
59,000
|
|
|
$
|
59,000
|
|
Demand note payable to director, 18%, unsecured
|
|
|
20,000
|
|
|
|
40,000
|
|
Convertible demand note payable to director, 12%, unsecured (B)
|
|
|
40,000
|
|
|
|
40,000
|
|
Demand note payable to director, 10%, unsecured
|
|
|
30,000
|
|
|
|
30,000
|
|
Demand note payable to officer and director, 12%, unsecured
|
|
|
0
|
|
|
|
5,000
|
|
Demand note payable to officer, 18%, unsecured
|
|
|
0
|
|
|
|
23,000
|
|
|
|
$
|
149,000
|
|
|
$
|
197,000
|
|
(A) Convertible
demand note payable to employee, 11%
- At December 31, 2012 and 2011, the Company was obligated to an employee for $59,000
with interest at 11%. The note is secured by a subordinate lien on all of the Company's assets. The principal and accrued interest
are convertible at the option of the holder into shares of common stock at $.16 per share.
(B) Convertible
demand note payable to director, 12%,
- At December 31, 2012 and 2011, the Company was obligated to a director for $40,000
with interest at 12%. The note is unsecured and the principal is convertible at the option of the holder into shares of common
stock at $.11 per share.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. - LONG-TERM OBLIGATIONS
Notes Payable - Banks and Other
Term notes payable - banks and other consist
of:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Note payable, 10%, secured, due January 1, 2015
|
|
$
|
265,000
|
|
|
$
|
265,000
|
|
Convertible term note payable,12%, secured, due January 1, 2016
|
|
|
175,000
|
|
|
|
175,000
|
|
Convertible notes payable, 6%, due January 1, 2016
|
|
|
150,000
|
|
|
|
150,000
|
|
Term note payable - PBGC, 6%, secured
|
|
|
285,000
|
|
|
|
297,000
|
|
Obligation to PBGC based on free cash flow
|
|
|
569,999
|
|
|
|
569,999
|
|
Convertible term note payable, 7%, secured, due October 3, 2016
|
|
|
100,000
|
|
|
|
100,000
|
|
Term notes payable - banks, secured
|
|
|
22,461
|
|
|
|
34,469
|
|
|
|
|
1,567,460
|
|
|
|
1,591,468
|
|
Less current maturities
|
|
|
22,867
|
|
|
|
32,360
|
|
|
|
$
|
1,544,593
|
|
|
$
|
1,559,108
|
|
Note payable, 10%,
secured, due January 1, 2015 -
During the years ended December 31, 2004 and 2003, the Company issued secured notes payable
aggregating $265,000. All of these borrowings bear interest at 10% and are due, as modified during 2012, on January 1, 2016. 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 all other accounts receivable.
Convertible term
note payable, 12%, secured, due January 1, 2016
-
The Company entered into a secured loan agreement during 2008 for
working capital. The loan bears interest at 12%, which is payable monthly and is due, as modified during 2012, on January 1, 2016.
During 2009, the note was modified for its conversion into common shares at $.25 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.
Convertible notes
payable, 6%, due January 1, 2016
-
At December 31, 2012, the Company was obligated to unrelated third parties for $150,000
($150,000 - 2011). The principal is convertible at the option of the holder into shares of common stock at $.05 per share. The
notes bear interest at 6.0% at December 31, 2012 (6.0% - 2011). 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.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. - LONG-TERM
OBLIGATIONS – CONTINUED
Term note payable
- PBGC, 6%, secured
-
On October 17, 2011, in accordance with the Settlement Agreement, the Company issued a secured
promissory note in favor of the PBGC for $300,000 bearing interest at 6% per annum amortizing in quarterly payments over a seven
year period with a balloon payment of $75,000 in 2015 (the “PBGC Note”). The note is due on September 30, 2018 with
a balloon payment of $144,000. See note 10 for further information related to the O&W Plan termination.
Obligation to PBGC
based on free cash flow
- On October 17, 2011, in accordance with the Settlement Agreement, the Company became obligated to
make annual future payments to the PBGC through December 31, 2017 equal to a portion of the Company’s “Free Cash Flow”
as defined in the Settlement Agreement, not to exceed $569,999. The annual obligation is contingent upon the Company earning free
cash flow in excess of defined amounts which vary by year. The annual amount is due 15 days after the issuance of the Company’s
audited financial statements relating to the previous year. There are no amounts due in 2013 based on the calculation of
free cash flow for the year ended December 31, 2012. The Settlement Agreement contains specific events of default
and provisions for remedies upon default. See note 10 for further information related to the O&W Plan termination.
Convertible term
note payable, 7%, secured
-
In accordance with the Settlement Agreement, the Company repurchased 500,000 shares of its
common stock from the O&W Plan for $130,000 which was funded from the proceeds of a convertible note in the principal amount
of $100,000 to a non-affiliated accredited investor on October 4, 2011 and $30,000 of the Company's working capital. The note bears
interest at the rate of 7% per annum, payable monthly, matures on October 3, 2016 and is secured by a subordinate lien on all of
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 $.10 per share, which was the price of the Company's common stock on the closing date of the agreement.
Term notes payable
- banks, secured
-
The Company renewed a loan agreement during 2010 for the secured financing of a vehicle. The loan
had a balance of $11,667 at December 31, 2012, ($17,038 – 2011), bears interest at 5.5% and is due in aggregate monthly installments
of approximately $515 through December 2014. The Company entered into capital lease agreements during 2012 and 2010 for the secured
financing of office and technology equipment. The loans have a balance of $10,794 at December 31, 2012, ($17,431 – 2011)
bear interest at rates ranging from 12.6% to 14.9% and are due in average monthly installments of $1,616 through February 2013
and $318 through August 2015.
Notes Payable - Related Parties
Related parties
- convertible notes payable, 6%, due January 1, 2016
-
The Company has various notes payable to related parties totaling
$501,324 at December 31, 2012 and 2011, which mature on January 1, 2016 with principal and accrued interest convertible, except
for interest on one note for $25,000 which is not convertible, at the option of the holder into shares of common stock at $.05
per share. The notes bear interest at 6.0% at December 31, 2012 (6.0% - 2011). The interest rate will be adjusted annually, on
January 1
st
of each year, to a rate equal to the prime rate in effect on December 31
st
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, except that
one note for $25,000 has a fixed interest rate of 6%.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. - LONG-TERM OBLIGATIONS –
CONTINUED
The Company executed
collateral security agreements with the note holders providing for a subordinate security interest in all of the Company’s
assets. Generally, upon notice, prior to the note maturity date, the Company can prepay all or a portion of the outstanding notes.
The Notes are convertible
into shares of common stock subject to the following limitations. The Notes are not convertible to the extent that shares of common
stock issuable upon the proposed conversion would result in a change in control of the Company which would limit the use of its
net operating loss carryforwards; provided, however, if the Company closes a transaction with another third party or parties that
results in a change of control which will limit the use of its net operating loss carryforwards, then the foregoing limitation
shall lapse.
Prior to any conversion
by a requesting note holder, each note holder holding a note which is then convertible into 5% or more of the Company’s common
stock shall be entitled to participate on a pari passu basis with the requesting note holder and upon any such participation the
requesting note holder shall proportionately adjust his conversion request such that, in the aggregate, a change of control, which
will limit the use of the Company’s net operating loss carryforwards, does not occur.
Minimum future annual
payments of long-term obligations as of December 31, 2012 are as follows:
2013
|
|
$
|
22,867
|
|
2014
|
|
|
21,187
|
|
2015
|
|
|
354,407
|
|
2016
|
|
|
938,324
|
|
2017
|
|
|
581,999
|
|
Thereafter
|
|
|
150,000
|
|
Total long-term obligations
|
|
$
|
2,068,784
|
|
NOTE 7. - STOCKHOLDERS'
DEFICIENCY
Preferred Stock
-
The Company’s certificate of incorporation authorizes its board of directors 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 December 31, 2012 and 2011 there were no preferred shares issued or outstanding.
Common Stock -
During the year ended December 31, 2011, in accordance with the settlement agreement with the PBGC and in connection with the termination
of the O&W Plan, the Company purchased 500,000 shares of its common stock from the O&W Plan for $130,000 of which $75,000
was recorded as retirement of shares of common stock, which included $50,000 recorded as an adjustment to accumulated deficit because
it was the amount in excess of the original amount recorded at issuance. The excess over fair value of the shares of common stock
on the date of closing of $55,000 was expensed in 2011.
Warrants
-
On March 3, 2006, the Company engaged the services of a consultant, an accredited investor, and issued the consultant a
warrant to acquire shares of the Company’s common stock exercisable at $.30 per share. The balance of 320,000 shares under
the terms of the warrant expired on March 2, 2011.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. - STOCKHOLDERS'
DEFICIENCY – CONTINUED
On May 1, 2006, the
Company engaged the services of a consultant and issued the consultant a warrant to acquire 50,000 shares of the Company’s
common stock exercisable at $.35 per share which warrant expired unexercised on April 30, 2011.
On April 5, 2007, the
Company engaged the services of a consultant for a term of one year and issued a warrant to acquire 100,000 shares of its common
stock, exercisable at $.50 per share, which expired unexercised on April 6, 2012.
On April 5, 2007, the
Company engaged the services of a consultant, an accredited investor, to assist it with business development for a term of one
year through April 4, 2008 and issued it a warrant to acquire 100,000 shares of its common stock, exercisable at $.50 per share,
which expired on April 4, 2012. During 2007, the consultant vested in 100,000 shares.
The following is a summary
of warrant activity for the years ended December 31, 2012 and 2011:
|
|
Number of
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at December 31, 2010
|
|
|
470,000
|
|
|
$
|
.35
|
|
Expired
during 2011
|
|
|
(370,000
|
)
|
|
$
|
.31
|
|
Outstanding at December
31, 2011
|
|
|
100,000
|
|
|
$
|
.50
|
|
Expired
during 2012
|
|
|
(100,000
|
)
|
|
$
|
.50
|
|
Outstanding at December
31, 2012
|
|
|
0
|
|
|
|
|
|
NOTE 8. - STOCK OPTION PLANS
The Company’s
board of directors and stockholders have approved stock option plans adopted in 1993, 1994, 1995, 1996, 1997, 1998, 1999, and 2005,
which have authority to grant options to purchase up to an aggregate of 4,596,333 common shares at December 31, 2012 (4,608,833
- 2011). No further grants may be made from the 1993, 1994, 1995, 1996, 1997, 1998, and 1999 plans. As of December 31, 2012,
1,141,333 options to purchase shares remain unissued under the 2005 plan. Such options may be designated at the time of grant as
either incentive stock options or nonqualified stock options.
On February 3, 2009,
the Company’s board of directors approved the 2009 stock option plan, which grants options to purchase up to an aggregate
of 4,000,000 common shares. As of December 31, 2012, 563,000 options to purchase shares remain unissued under the 2009 plan.
Options issued to date are nonqualified since the Company has decided not to seek stockholder approval of the 2009 Plan.
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.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. - STOCK OPTION PLANS –
CONTINUED
Volatility is based
on data used by other companies in the IT services industry and overall greater market volatility of companies during recent periods.
The expected life of the options was assumed to be 5.75 years 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, 2012 and 2011.
|
|
2012
|
|
2011
|
Risk-free interest rate
|
|
.83% - 1.10%
|
|
1.16% - 2.46%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected stock price volatility
|
|
75%
|
|
75%
|
Expected life of options
|
|
5.75 years
|
|
5.75 years
|
Stock Option Plans
-
The Company grants stock options to its key employees and independent service providers as it deems appropriate. Qualified
options are exercisable as long as the optionee continues to be an employee of the Company and for thirty days subsequent to employee
termination.
The following is a
summary of stock option activity, including qualified and non-qualified options for the years ended December 31, 2012 and 2011:
|
|
Number of
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2010
|
|
|
6,414,500
|
|
|
$
|
.22
|
|
|
|
|
|
|
|
Granted
|
|
|
1,786,500
|
|
|
$
|
.10
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,186,500
|
)
|
|
$
|
.20
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(125,000
|
)
|
|
$
|
.13
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
6,889,500
|
|
|
$
|
.20
|
|
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
$
|
.19
|
|
|
|
|
|
|
|
Expired
|
|
|
(168,500
|
)
|
|
$
|
.11
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(136,500
|
)
|
|
$
|
.12
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
6,884,500
|
|
|
$
|
.20
|
|
|
5.5 years
|
|
$
|
610,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
5,715,500
|
|
|
$
|
.21
|
|
|
4.9 years
|
|
$
|
479,000
|
|
At December 31, 2012,
there was approximately $58,000 of total unrecognized compensation cost related to outstanding non-vested options. This cost is
expected to be recognized over a weighted average period of approximately one year. The total fair value of shares vested during
the year ended December 31, 2012 was approximately $93,000.
The weighted average
fair value of options granted was $.12 and $.06 per share for the years ended December 31, 2012 and 2011, 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.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. - STOCK OPTION PLANS –
CONTINUED
Directors’
Stock Option Plan -
In April 1993, the Company’s board of directors and stockholders adopted a non-discretionary
outside directors' stock option plan that provides for the grant to non-employee directors of non-qualified stock options to purchase
up to 50,000 shares of common stock. No options were issued during 2012 and 2011 and no new options are issuable under the terms
of this plan. During 2011, 10,000 options expired. At December 31, 2012, there were 7,500 (7,500 - 2011) options outstanding to
directors under this plan, all of which are exercisable. These options are exercisable at $.10 per share and expire in 2013.
NOTE 9. - INCOME TAXES
The components of income
tax expense (benefit) follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,259,000
|
|
|
|
2,050,000
|
|
State
|
|
|
(172,000
|
)
|
|
|
598,000
|
|
|
|
|
1,087,000
|
|
|
|
2,648,000
|
|
Change in valuation allowance
|
|
|
(1,087,000
|
)
|
|
|
(2,648,000
|
)
|
|
|
$
|
0
|
|
|
$
|
0
|
|
During the year ended
December 31, 2011, the Company recorded a decrease to the deferred tax asset related to the termination of its defined pension
benefit liability. A portion of this decrease, approximately $1,182,000, was recorded through other comprehensive income offset
by the reversal of the related valuation allowance.
At December 31, 2012,
the Company had federal net operating loss carryforwards of approximately $6,500,000 and various state net operating loss carryforwards
of approximately $4,000,000 which expire from 2018 through 2032. These carryforwards exclude federal net operating loss carryforwards
from inactive subsidiaries of approximately $6,600,000, as well as net operating loss carryforwards from states that the Company
does not presently operate in of approximately $2,200,000. 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 Revenues Code and similar state
provisions. The annual limitation may result in the expiration of the net operating loss carryforwards before utilization.
At December 31, 2012,
a net deferred tax asset, representing the future benefit attributed primarily to the available net operating loss carryforwards
and defined pension plan expenses, in the amount of approximately $3,043,000, had been fully offset by a valuation allowance because
management believes that the regulatory 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.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. - INCOME TAXES – CONTINUED
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,427,000
|
|
|
$
|
3,510,000
|
|
Defined benefit pension liability
|
|
|
340,000
|
|
|
|
385,000
|
|
Property and equipment
|
|
|
1,000
|
|
|
|
14,000
|
|
Reserves and accrued expenses payable
|
|
|
275,000
|
|
|
|
222,000
|
|
Gross deferred tax asset
|
|
|
3,043,000
|
|
|
|
4,131,000
|
|
Deferred tax asset valuation allowance
|
|
|
(3,043,000
|
)
|
|
|
(4,131,000
|
)
|
Net deferred tax asset
|
|
$
|
0
|
|
|
$
|
0
|
|
The
differences between the U.S. statutory federal income tax rate and the effective income tax rate in the accompanying consolidated
statements of income are as follows.
|
|
December 31,
|
|
|
|
2011
|
|
|
2011
|
|
Statutory U.S. federal tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes
|
|
|
(63.6
|
)
|
|
|
3,054.8
|
|
Stock-based compensation and warrants
|
|
|
.0
|
|
|
|
140.4
|
|
Expired stock-based compensation and warrants
|
|
|
4.4
|
|
|
|
106.6
|
|
Defined benefit pension termination
|
|
|
(50.1
|
)
|
|
|
277.9
|
|
Other permanent non-deductible items
|
|
|
1.2
|
|
|
|
16.5
|
|
Change in valuation allowance
|
|
|
(400.8
|
)
|
|
|
(13,522.3
|
)
|
Expired net operating loss carryforward
|
|
|
474.8
|
|
|
|
9,888.7
|
|
Other
|
|
|
.1
|
|
|
|
3.4
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
NOTE 10. - EMPLOYEE RETIREMENT AND
PENSION PLANS
Retirement Plan
-
Through December 31, 2012, the Company offered a simple IRA plan as a retirement plan for eligible employees. Employees
are eligible to participate in the plan if they earn at least $5,000 of compensation from the Company during the year. Eligible
employees may contribute a percentage of their compensation up to a maximum of $11,500 for 2012 and 2011. The Company can elect
to make a discretionary contribution to the Plan. For the years ended December 31, 2012 and 2011 the Company elected to make a
matching contribution equal to the employee’s contribution up to a limit of 3% of the employee’s compensation for the
year. The Company match for the year ended December 31, 2012 was $62,775 ($53,830 – 2011). The accrued liability for the
simple IRA plan, including interest, was $220,783 and $159,650, as of December 31, 2012 and 2011, respectively.
Effective, January
1, 2013, the Company began offering a defined benefit 401(k) plan in place of the simple IRA plan. For 2013, 401(k) employee contribution
limits are $17,500 plus a catch up
contribution
for those over age 50 of $5,500. The Company
can elect to make a discretionary contribution to the Plan.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. - EMPLOYEE RETIREMENT AND PENSION
PLANS – CONTINUED
Defined Benefit
Plan
-
The Company acted as sponsor for a contributory defined benefit pension plan, the O&W Plan, that was terminated
by the PBGC on November 1, 2011. The O&W Plan covered all salaried and hourly employees at Osley & Whitney, Inc. (O&W)
that were scheduled to work at least 1,000 hours per year. During the year ended December 31, 2001, the Company discontinued the
operations of O&W and on December 30, 2002 sold all of the common stock of O&W to a third party but continued to act as
sponsor for the plan. The termination of the employees' services earlier than expected resulted in a plan curtailment, accounted
for in accordance with former Statement of Financial Standards Statement 88 in 2001. No future benefits will be earned by plan
participants. As a result, the accumulated benefit obligation (the actuarial present value using the current salary level of the
benefits earned to date by the Plan participant) and projected benefit obligation (the actuarial present value using the salary
level at retirement age of the benefits earned to date by the Plan participant) are the same amount. The Plan remained in existence
to pay benefits as participants qualified until it was terminated during 2011.
The Company recognizes
interest, penalties, and professional fees related to the defined benefit pension plan in defined benefit plan expense if they
are associated with the O&W Plan.
Background
Prior to December 30,
2002, the Company owned 100% of the common stock of O&W. On December 30, 2002, the Company sold 100% of the O&W common
stock to a third party, but continued to act as the sponsor of the O&W Plan. Although the Company continued to act as the sponsor
of the O&W Plan after the sale, during 2007 management determined that it had no legal obligation to do so.
During 2007, the Company
submitted information to the Department of Treasury (Treasury) advocating that it had no legal obligation to act as the sponsor
of the O&W Plan to ascertain whether the Treasury concurred or disagreed with this position.
At December 31, 2011,
the Company had accrued amounts related to excise taxes, including late fees and interest, on unfunded contributions of approximately
$480,000 due to the Treasury, which is included in current liabilities - accrued retirement and pension.
O&W Plan Terminated
in 2011
During
2011, the Company entered into a settlement agreement with the PBGC with the objective of terminating the O&W Plan. On September
6, 2011, the Company received notification from the PBGC that it had executed a Settlement Agreement with the Company, effective
September 1, 2011 and issued a Notice of Determination (the “PBGC Determination”) that the O&W Plan had not met
the minimum funding standard required under section 412 of the Internal Revenue Code and would be unable to pay benefits when due,
which PBGC Determination was a condition precedent to the Company’s obligations under the Settlement Agreement.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. - EMPLOYEE
RETIREMENT AND PENSION PLANS – CONTINUED
On October 17, 2011,
in accordance with the Settlement Agreement, the Company:
|
·
|
purchased 500,000 shares of its common
stock from the O&W Plan for $130,000 (See note 7.);
|
|
·
|
issued a secured promissory note in favor
of the PBGC for $300,000 bearing interest at 6% per annum amortizing in quarterly payments over a seven year period (See note 6.);
|
|
·
|
agreed to make annual future payments
through December 31, 2017 equal to a portion of the Company’s “Free Cash Flow” as defined in the Settlement Agreement,
not to exceed $569,999. Each annual payment is contingent upon the Company earning "Free Cash Flow" in excess of defined
amounts which vary by year. No payment was due for 2012; and
|
|
·
|
recorded a gain of $294,438 and a reduction
of accumulated other comprehensive loss of $2,961,147.
|
The Settlement Agreement
contains specific events of default and provisions for remedies upon default. The purchase price for the 500,000 shares was funded
from the proceeds of the placement by the Company of a convertible note in the principal amount of $100,000 (the “Convertible
Note”) to a non-affiliated accredited investor on October 4, 2011 and $30,000 of the Company's working capital.
On November 1, 2011,
in accordance with the terms of the Settlement Agreement, the Company received from the PBGC the executed Trusteeship Agreement.
The Trusteeship Agreement:
|
·
|
terminated the O&W Plan;
|
|
·
|
appointed the PBGC as the statutory trustee
of the O&W Plan; and
|
|
·
|
established November 30, 2001 as the termination
date for the O&W Plan.
|
Tax Court Ruling Received
in 2012
On
March 30, 2012, the Company received the decision of United States Tax Court entered on March 27, 2012 (the "Decision")
wherein the Court determined that the Company did not have any liability for taxes, excise taxes or penalties for the taxable years
2006 or 2007 related to the O&W Plan. As a result, during 2012, the Company recorded a reduction of $480,000 in obligations
previously accrued and reflected related to excise taxes, including late fees and interest on unfunded O&W Plan contributions.
Since the PBGC terminated
the O&W Plan as of November 30, 2001 and the United States Tax Court decided on March 27, 2012 that no excise taxes are due
as stated herein, the Company has no further obligations to the O&W Plan, the PBGC and the Treasury other than those stated
in the Settlement Agreement with the PBGC which are reflected in the accompanying consolidated financial statements.
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. - EMPLOYEE
RETIREMENT AND PENSION PLANS – CONTINUED
2011 Defined Benefit
Plan
During 2011, the PBGC
assumed the obligation to pay benefits in connection with the termination of the O&W Plan and, as a result, the Company recorded
a gain of $294,438. Defined benefit pension plan expense for 2011 of $103,822 associated with the O&W Plan consisted of periodic
pension costs of $246,436, legal and professional fees of $32,500 and accrued interest and fees on unpaid excise taxes of $119,324,
offset by the gain of $294,438. At December 31, 2011, the Company continued to carry current liabilities of $500,000 related to
the O&W Plan and long-term obligations to the PBGC of $569,999 and issued a promissory note in favor of the PBGC for $300,000.
(See note 6.)
The measurement dates
used to determine the pension measurements for the pension plan was December 31, 2011. Net periodic pension cost recorded in the
accompanying statements of operations includes the following components of expense (benefit) for the period through the O&W
Plan termination date in 2011:
Interest cost
|
|
$
|
203,635
|
|
Expected return on plan assets
|
|
|
(90,575
|
)
|
Service cost
|
|
|
31,499
|
|
Actuarial loss
|
|
|
101,877
|
|
Net periodic pension cost
|
|
$
|
246,436
|
|
The following sets
forth the funded status of the Plan and the amounts shown in the accompanying balance sheet at December 31, 2011:
Projected benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
5,160,059
|
|
Interest cost
|
|
|
203,635
|
|
Actuarial loss
|
|
|
101,877
|
|
Benefits paid
|
|
|
(375,612
|
)
|
Termination of the O&W Plan
|
|
|
(5,089,959
|
)
|
Projected benefit obligation at end of year
|
|
$
|
0
|
|
|
|
|
|
|
Plan assets at fair value:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
1,601,276
|
|
Actual return of plan assets
|
|
|
137,696
|
|
Benefits paid
|
|
|
(375,612
|
)
|
Expenses paid
|
|
|
(34,882
|
)
|
Transfer of assets to PBGC due to
|
|
|
|
|
termination of the O&W Plan
|
|
|
(1,328,478
|
)
|
Fair value of plan assets at end of year
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Funded status (deficit)
|
|
$
|
(3,558,783
|
)
|
Unrecognized actuarial loss
|
|
|
(2,961,147
|
)
|
|
|
|
(6,519,930
|
)
|
|
|
|
|
|
Termination of the O&W Plan
|
|
|
(6,519,930
|
)
|
Accrued pension cost
|
|
$
|
0
|
|
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. - EMPLOYEE
RETIREMENT AND PENSION PLANS – CONTINUED
The major actuarial assumptions used in
the calculation of the pension obligation follow (2012 assumptions are not applicable since the O&W Plan was terminated by
the PBGC):
|
|
2011
|
|
Discount rate
|
|
|
5.95
|
%
|
Expected return on plan assets
|
|
|
8.90
|
%
|
Rate of increase in compensation
|
|
|
N/A
|
|
The expected long-term
rate of return on Plan assets assumption is determined from the Plan’s asset allocation using historical returns over the
past several years and the Plan’s investment philosophy. The discount rate assumption is based on published pension liability
indices and reflects the current interest rate environment.
The investment strategy
was to manage the assets of the Plan to generate sufficient returns to meet the long-term liabilities while maintaining adequate
liquidity to pay current benefits. This strategy was implemented by holding equity investments while investing a portion of the
assets in fixed income debt securities to match the long-term nature of the liabilities. An independent fee based investment management
company made all investment decisions subject to the Plan’s investment strategy. The assets were held by a separate trust
company as custodian for the Plan. For equity investments, the manager implemented its defined process that focuses on the merits
of individual companies allowing it to find opportunities across the globe. The process included identifying industry sector groups
that met the investment strategy, profiling investment alternatives, establishing buy and sell targets based on strategy and strict
pricing disciplines, and accepting only those investments that meet the strategy, pricing and Plan objectives. Investments were
monitored on an ongoing basis to assure they continue to meet the strategy, pricing and Plan objectives. As of December 31, 2011,
with the execution of the Settlement Agreement with the PBGC the Plan was terminated and the PBGC was appointed the trustee of
the Plan.
NOTE 11. - COMMITMENTS
Lease Commitments
-
The Company leases its headquarters facilities under an operating lease agreement that expires in April 2015. Previously,
the Company also leased a branch office facility under an operating lease which expired in May 2012. Rent expense under operating
leases for the year ended December 31, 2012 was approximately $31,500 ($97,000 - 2011). Future minimum payments required under
the lease are $69,500 through April 2015.
NOTE 12. - RELATED PARTY ACCOUNTS
RECEIVABLE AND ACCRUED INTEREST PAYABLE
Accrued Interest
Payable –
Included in accrued interest payable is accrued interest payable to related parties of $317,287 at December
31, 2012 ($281,433 - 2011).
Accounts Receivable
–
Certain officers or directors of the Company have made loans to a customer of the Company and can influence the management
of this company. Included in accounts receivable are amounts due from this related party of $71,302 at December 31, 2012 ($0 -
2011).
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. - SUPPLEMENTAL CASH FLOW
INFORMATION
Noncash investing and
financing transactions, including non-monetary exchanges, for the years ended December 31, 2012 and 2011 follow:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Purchase of equipment through long-term obligations
|
|
$
|
9,182
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
Issuance of note payable and other consideration to
|
|
|
|
|
|
|
|
|
PBGC in satisfaction of accrued pension obligation
|
|
|
|
|
|
|
|
|
according to the Settlement Agreement
|
|
$
|
0
|
|
|
$
|
869,999
|
|
NOTE 14. - SUBSEQUENT EVENTS
Subsequent
to year end and through March 29, 2013, the Company issued 1,500,000 common stock options to independent consultants with exercise
prices of $.15 and $.155 according to the terms of each stock option agreement. At issuance, 200,000 shares immediately vested.
The balance of the options vest based on each independent consultant meeting specific sales performance criteria.
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