FINANCIAL STATEMENTS
INFINITE GROUP, INC.
DECEMBER 31, 2017
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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Financial Statements:
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Balance
Sheets
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F-2
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Statements of
Operations
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F-3
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Statements of
Changes in Stockholders' Deficiency
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F-4
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Statements of Cash
Flows
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F-5
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Notes to Financial Statements
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F-6 -
F-17
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Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders
Infinite
Group, Inc.
Opinion on the Financial Statements
We
have audited the accompanying balance sheets of Infinite
Group
, Inc. (the Company) as of December 31, 2017 and 2016,
the related statements of operations, changes in
stockholders’ deficiency and cash flows for the years then
ended, and the related notes to the financial statements
(collectively, the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016,
and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally
accepted in the United States of America.
Going Concern
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring
losses from operations, has negative working capital, a
stockholders’ deficiency, and will be dependent on obtaining
future financing. This raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in
regard to these matters also are described in Note 2. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Freed Maxick CPAs, P.C.
We have not been able to determine the specific year that we began
serving as the Company’s auditor; however, we are aware that
we have served as the Company’s auditor since at least
1995.
Rochester, New York
July 3, 2019
INFINITE
GROUP, INC.
BALANCE
SHEETS
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Current
assets:
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Cash
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$
73,734
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$
42,436
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Accounts
receivable, net of allowances of $30,000 and $70,000 as of December
31, 2017 and 2016, respectively
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479,294
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243,477
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Prepaid expenses
and other current assets
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4,325
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16,076
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Total current
assets
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557,353
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301,989
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Property
and equipment, net
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18,349
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26,079
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Software,
net
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0
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105,000
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Deposits
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6,667
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8,985
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Total
assets
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$
582,369
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$
442,053
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LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
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Current
liabilities:
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Accounts
payable
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$
864,931
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$
346,701
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Accrued
payroll
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178,065
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219,454
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Accrued interest
payable
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773,367
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671,437
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Accrued
retirement
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234,886
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225,720
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Accrued expenses -
other
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63,109
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81,754
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Current maturities
of long-term obligations
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686,000
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836,999
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Current maturities
of long-term obligations - related parties
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29,660
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0
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Notes
payable
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362,500
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368,279
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Notes payable -
related parties
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32,000
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0
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Total current
liabilities
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3,224,518
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2,750,344
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Long-term
obligations:
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Notes
payable:
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Banks and
other
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737,780
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1,150,225
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Related
parties
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658,635
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534,326
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Total
liabilities
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4,620,933
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4,434,895
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Commitments (Note
13)
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Stockholders'
deficiency:
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Common stock, $.001
par value, 60,000,000 shares authorized; issued and outstanding:
29,061,883 shares
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29,061
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29,061
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Additional paid-in
capital
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30,591,896
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30,562,618
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Accumulated
deficit
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(34,659,521
)
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(34,584,521
)
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Total
stockholders’ deficiency
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(4,038,564
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(3,992,842
)
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Total
liabilities and stockholders’ deficiency
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$
582,369
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$
442,053
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INFINITE
GROUP, INC.
STATEMENTS
OF OPERATIONS
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Sales
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$
6,386,919
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$
7,095,577
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Cost of
sales
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4,441,225
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5,005,626
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Gross
profit
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1,945,694
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2,089,951
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Costs
and expenses:
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General and
administrative
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1,148,870
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1,218,040
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Selling
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1,194,763
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946,740
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Total costs and
expenses
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2,343,633
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2,164,780
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Operating
loss
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(397,939
)
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(74,829
)
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Other income - (see
Note 8)
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569,999
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0
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Interest
expense:
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Related
parties
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(56,788
)
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(55,332
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Other
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(190,272
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(194,839
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Total interest
expense
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(247,060
)
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(250,171
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Net
loss
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$
(75,000
)
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$
(325,000
)
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Net
loss per share – basic and diluted
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$
.00
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$
(.01
)
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Weighted
average shares outstanding – basic and diluted
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29,061,883
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28,358,331
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INFINITE
GROUP, INC.
STATEMENTS
OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Years Ended December 31, 2017 and 2016
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Balance
- December 31, 2015
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26,561,883
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$
26,561
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$
30,476,095
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$
(34,259,521
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$
(3,756,865
)
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Stock based
compensation
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0
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0
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36,803
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0
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36,803
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Shares issued as
new loan fee
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2,500,000
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2,500
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35,000
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0
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37,500
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Stock options
issued as loan extension fee
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0
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0
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14,720
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0
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14,720
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Net
loss
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0
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0
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0
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(325,000
)
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(325,000
)
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Balance
- December 31, 2016
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29,061,883
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$
29,061
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$
30,562,618
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$
(34,584,521
)
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$
(3,992,842
)
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Stock based
compensation
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0
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0
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15,238
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0
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15,238
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Stock options
issued as loan fees
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0
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0
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14,040
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0
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14,040
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Net
loss
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0
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0
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0
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(75,000
)
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(75,000
)
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Balance
- December 31, 2017
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29,061,883
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$
29,061
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$
30,591,896
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$
(34,659,521
)
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$
(4,038,564
)
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INFINITE
GROUP, INC.
STATEMENTS
OF CASH FLOWS
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Cash
flows from operating activities:
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Net
loss
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$
(75,000
)
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$
(325,000
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Adjustments to
reconcile net loss to net cash
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used in
operating activities:
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Stock based
compensation
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29,278
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36,803
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Depreciation and
amortization
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142,212
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91,621
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Allowance for bad
debts
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(40,000
)
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0
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Other
income
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(569,999
)
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0
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(Increase) decrease
in assets:
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Accounts
receivable
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(195,817
)
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(126,467
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Prepaid expenses
and other assets
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14,069
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(5,114
)
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Increase (decrease)
in liabilities:
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Accounts
payable
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518,230
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(154,887
)
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Accrued
expenses
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41,896
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96,006
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Accrued
retirement
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9,166
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8,807
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Net
cash used in operating activities
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(125,965
)
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(378,231
)
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Cash
flows from investing activities:
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Purchases of
property and equipment
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(5,608
)
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(8,383
)
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Net
cash used in investing activities
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(5,608
)
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(8,383
)
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Cash
flows from financing activities:
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Proceeds from note
payable
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0
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500,000
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Repayments of notes
payable
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(5,779
)
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(54,268
)
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Proceeds from notes
payable - related parties
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172,000
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0
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Repayments of notes
payable - related parties
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(3,350
)
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(30,192
)
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Net
cash provided by financing activities
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162,871
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415,540
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Net
increase in cash
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31,298
|
28,926
|
|
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Cash - beginning of
year
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42,436
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13,510
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Cash
- end of year
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$
73,734
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$
42,436
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
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Cash payments
for:
|
|
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Interest
|
$
122,543
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$
139,228
|
|
|
|
Income
taxes
|
$
0
|
$
0
|
INFINITE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1.
-
BASIS OF
PRESENTATION
The
accompanying financial statements consist of the financial
statements of Infinite Group, Inc. (the Company).
The
Company operates in one segment, the field of information
technology (IT) consulting services, with all operations based in
the United States. There were no significant sales from customers
in foreign countries during 2017 and 2016. All assets are located
in the United States.
NOTE 2. - MANAGEMENT PLANS
The
Company reported operating losses of $397,939 in 2017 and $74,829
in 2016, net losses of $75,000 in 2017 and $325,000 in 2016, and
stockholders’ deficiencies of $4,038,564 and $3,992,842 at
December 31, 2017 and 2016, respectively. Accordingly, there is
substantial doubt about the Company’s ability to continue as
a going concern.
The
Company’s mission is to drive shareholder value by developing
and bringing to market automated, cost effective, and innovative
cybersecurity technologies. The Company’s strategy is to
build its business by designing, developing, and marketing IT
security-based products and solutions that fill technology gaps in
cybersecurity.
The
Company brought one product to market and intends to bring other
proprietary products and solutions to market through a channel of
partners and distributors. The products and solutions are designed
to simplify the security needs in customer and partner
environments, with a focus on Small Business Enterprises (SMEs).
The Company enables its partners by providing recurring
revenue-based business models that use its automated plug and play
solutions. Products may be sold as standalone solutions or
integrated into existing environments to further automate the
management of security and related IT functions. The
Company’s ability to succeed depends on how successful it is
in differentiating itself in the market at a time when competition
in these markets is on the rise. The Company works with its
partner, Webroot, to increase its base of channel partners and to
increase sales of Webroot’s cloud-based endpoint security
solution, with the objective of growing its recurring revenue
model.
The
Company’s cybersecurity services business is conducted within
its professional services organization (PSO). The Company provides
services and technical resources to support both its channel
partners and end customers. The Company’s goal is to expand
its VMware business in both the local government and commercial
sector by building VMware license sales volume and services
concurrently.
The
Company is working to expand its managed services business with its
current federal enterprise customer and its customers.
Nodeware -
In May 2016, the
Company filed a provisional patent application for its proprietary
product, Nodeware. In May 2017, the Company filed a utility
patent application for Nodeware. The patent application is ready
for examination by the U.S. patent application examiner.
The
Company launched Nodeware in November 2016. Nodeware is an
automated vulnerability management solution that enhances security
by proactively identifying, monitoring, and addressing potential
vulnerabilities on networks, creating a safeguard against hackers
and ransomware with simplicity and affordability. Customers have
the option to purchase Nodeware or Nodeware Plus to accommodate the
varying network needs of their organizations. Nodeware provides a
value-based solution designed for SMEs with single subnet or
several subnets, whereas Nodeware Plus can accommodate larger
organizations with more advanced network needs.
Nodeware assesses
vulnerabilities in a computer network using scanning technology to
capture a comprehensive view of the security exposure of a network
infrastructure. Users receive alerts and view network information
through a proprietary dashboard. Continuous and automated internal
scanning and external on demand scanning are available within this
offering.
Nodeware 2.0 was
released to the market during 2017 providing the same solution with
a set of new features, such as credentialed vulnerability scanning.
This scans the customer’s system without requiring an agent,
providing a more comprehensive view of customer vulnerabilities.
This level of access often results in the discovery of more missing
patches or vulnerabilities that can then be addressed by following
instructions available within the Nodeware interface.
Nodeware
creates an opportunity for resellers, including managed service
providers, managed security service providers, distributors, and
value-added resellers. The Company sells Nodeware in the commercial
sector through its channel partners and agents.
Technology and Product Development -
The
Company’s goal is to position its products and solutions to
enable vertical integration with other solutions. The Company has a
technology and product development strategy aligned with its
business strategy.
Cybersecurity Services -
The Company
provides cybersecurity consulting services to channel partners and
direct customers across different vertical markets (banking,
healthcare, manufacturing, etc.). Its cybersecurity projects use
Nodeware to create a living document that a customer can use to go
forward on a path of continuous improvement for its overall IT
security. The Company validates overall network security with the
goal of maintaining the integrity of confidential client
information, preserving the continuity of services, and minimizing
potential data damage from attempted threats and
incidents.
Continue to 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 uses a formal
financial review and budgeting process as a tool for improvement
that has aided expense reduction and internal performance. The
Company’s business plans require improving the results of its
operations in future periods.
During
2017, the Company borrowed $32,000 from related parties under the
terms of demand notes.
During
2017, the Company originated lines of credit with related parties
totaling $175,000 and borrowed $140,000. At December 31, 2017, the
Company had $35,000 available under these financing
agreements.
During
2016, the Company raised $500,000 of additional working capital to
build the infrastructure and to market its new Nodeware
cybersecurity product.
On
September 30, 2016, the Company extended the scheduled maturity of
its $400,000 unsecured line of credit financing agreement (the
“LOC Agreement”) with a member of its board of
directors (“Board”) from December 31, 2017 to January
1, 2020. The Company also extended the maturity dates of notes
payable of $146,300 and $264,000 from January 1, 2017 to January 1,
2020.
In
August 2016, the Company completed a revised financing agreement
with its financial institution resulting in a reduction of its
financing costs and an increase in its advance rate.
The
Company believes the capital resources available under its
factoring line of credit, cash from additional related party and
third-party loans and cash generated by improving the results of
its operations provide sources to fund its ongoing operations and
to support the internal growth of the Company. Although the Company
has no assurances, the Company believes that related parties, who
have previously provided working capital, and third parties will
continue to provide working capital loans on similar terms, as in
the past, as may be necessary to fund its on-going operations for
at least the next 12 months, however substantial doubt about the
Company’s ability to continue as a going concern has not been
alleviated. If the Company experiences significant growth in its
sales, the Company believes that this may require it to increase
its financing line, finance additional accounts receivable, or
obtain additional working capital from other sources to support its
sales growth.
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 $30,000 for doubtful accounts was reasonably stated
at December 31, 2017 ($70,000 – 2016).
Concentration of Credit Risk
-
Financial instruments that potentially
subject the Company to concentration of credit risk consist of cash
accounts in financial institutions. The cash accounts occasionally
exceed the federally insured deposit amount; however, management
does not anticipate nonperformance by financial institutions.
Management reviews the financial viability of these institutions on
a periodic basis.
Loan Origination Fees
-
The Company capitalizes the costs of
loan origination fees and amortizes the fees as interest expense
over the contractual life of each agreement. During 2016, the
Company adopted ASU 2015-03 “Simplifying the Presentation of
Debt Issuance Costs” (see Note 8).
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.
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. Through August 28, 2016, the retained amount was equal to
15% of the total accounts receivable invoice sold to the Purchaser.
The fee was charged at prime plus 4% against the average daily
outstanding balance of funds advanced. On August 29, 2016, the
Company completed a revised financing agreement with the Purchaser.
The retained amount was revised to 10% of the total accounts
receivable invoice sold to the Purchaser. The fee is charged at
prime plus 3.6% (effective rate of 8.1% at December 31, 2017)
against the average daily outstanding balance of funds
advanced.
The
estimated future loss reserve for each receivable included in the
estimated value of the retained asset is based on the payment
history of the accounts receivable customer and is included in the
allowance for doubtful accounts, if any. As collateral, the Company
granted the Purchaser a first priority interest in accounts
receivable and a blanket lien, which may be junior to other
creditors, on all other assets.
The
financing line provides the Company the ability to finance up to
$2,000,000 of selected accounts receivable invoices, which includes
a sublimit for one of the Company’s customers of
$1,500,000. During the year ended December 31, 2017, the
Company sold approximately $4,611,000 ($5,924,000 - 2016) of its
accounts receivable to the Purchaser. As of December 31,
2017, $4,486 ($328,390 - 2016) of these receivables remained
outstanding. Additionally, as of December 31, 2017, the
Company had approximately $376,000 available under the financing
line with the financial institution ($143,000 - 2016). After
deducting estimated fees and advances from the Purchaser, the net
receivable from the Purchaser amounted to $449 at December 31, 2017
($31,462 - 2016) and is included in accounts receivable in the
accompanying balance sheets as of that date.
There
were no gains or losses on the sale of the accounts receivable
because all were collected. The cost associated with the financing
line was approximately $47,600 for the year ended December 31, 2017
($67,000 - 2016). These financing line fees are classified on the
statements of operations as interest expense.
Property and Equipment
-
Property and equipment are recorded at
cost and are depreciated over their estimated useful lives for
financial statement purposes. The cost of improvements to leased
properties is amortized over the shorter of the lease term or the
life of the improvement. Maintenance and repairs are charged to
expense as incurred while improvements are
capitalized.
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 2017 and
2016.
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.
The
Company sells licenses of Nodeware and third-party software,
principally Webroot. Substantially all customers are invoiced
monthly at fixed rates for license fees.
The
Company sells VMware software and service credits. Sales are
recorded upon receipt of the software or credits by the customer.
The Company does not take title to the software or credits.
Accordingly, the Company accounts for these as agent sales and
reduces its sales amount by the related cost of sales.
During
2017, sales to one client, including sales under subcontracts for
services to several entities, accounted for 69.6% of total sales
(63.3% - 2016) and 67.5% of accounts receivable at December 31,
2017 (22.0% - 2016). Sales to another client, which consisted
principally of sales under subcontracts, accounted for 8.5% of
sales in 2017 (22.0% - 2016) and 14.7% of accounts receivable at
December 31, 2017 (28.5% - 2016).
Sales and Cost of Sales -
The Company
designates certain sales of third party software and project
credits as agent sales where the Company does not have the
performance obligation to deliver the software or credits to the
end user. Accordingly, cost of sales is recorded as a reduction of
sales and only the gross profit is included in sales in the
accompanying statements of operations. For the years ended December
31, 2017 and 2016, the Company designated agent sales of $1,216,360
and $317,789, respectively. The related accounts receivables and
accounts payable are recorded on a gross basis in the accompanying
balance sheets.
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 accounts for
income tax expense in accordance with FASB ASC 740 “Income
Taxes.” Deferred taxes are provided on an asset and liability
method whereby deferred tax assets are recognized for deductible
temporary differences, operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of
enactment.
The
Company periodically reviews tax positions taken to determine if it
is more likely than not that the position would be sustained upon
examination. The Company did not have any material unrecognized tax
benefit at December 31, 2017 or 2016. The Company recognizes
accrued interest and penalties related to unrecognized tax benefits
in tax expense. During the years ended December 31, 2017 and 2016,
the Company recognized no interest and penalties.
The
Company files U.S. federal tax returns and tax returns in various
states. The tax years 2014 through 2017 remain open to examination
by the taxing jurisdictions to which the Company is
subject.
The Tax
Cuts and Jobs Act (the “Tax Act”) was enacted on
December 22, 2017. In accordance with generally accepted accounting
principles, the Company has accounted for the impact of the
provisions in the Tax Act during the year ended December 31,
2017.
Fair Value of Financial Instruments
-
The Company has determined
the fair value of debt and other financial instruments using a
valuation hierarchy. The hierarchy, which prioritizes the inputs
used in measuring fair value, consists of three
levels.
Level 1
uses observable inputs such as quoted prices in active
markets;
Level 2
uses inputs other than quoted prices in active markets that are
either directly or indirectly observable; and
Level 3
is defined as unobservable inputs in which little or no market data
exist and requires the Company to develop its own
assumptions.
The
hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level
3 measurements).
The
carrying amounts of cash, accounts receivable and accounts payable
and accrued expenses are reasonable estimates of their fair value
due to their short maturity. Based on the borrowing rates currently
available to the Company for loans similar to its term debt and
notes payable, the fair value approximates the carrying
amounts.
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 options and notes assumed to be exercised. In
a loss year, the calculation for basic and diluted earnings per
share is the same, as the impact of potential common shares is
anti-dilutive.
The
following table sets forth the computation of basic and diluted
loss per share as of December 31, 2017 and 2016:
|
|
|
|
|
Numerator
for basic and diluted net loss per share:
|
|
|
Net
loss
|
$
(75,000
)
|
$
(325,000
)
|
Denominator
for basic and diluted net loss per share:
|
|
|
Weighted
average common shares outstanding
|
29,061,883
|
28,358,331
|
Basic
and diluted net loss per share
|
$
.00
|
$
(.01
)
|
|
|
|
Anti-dilutive
shares excluded from net loss per share
|
28,559,924
|
28,645,507
|
Certain
common shares issuable under stock options and convertible notes
payable have been omitted from the diluted net loss per share
calculation because their inclusion is considered anti-dilutive
because the exercise prices were greater than the average market
price of the common shares or their inclusion would have been
anti-dilutive.
Equity Investments
-
The Company accounts for investments in equity
securities of other entities under the cost method of accounting if
investments in voting equity interests of the investee are less
than 20%. The equity method of accounting is used if the
Company’s investment in voting stock is greater than or equal
to 20% but less than a majority. In considering the
accounting method for investments less than 20%, the Company also
considers other factors such as its ability to exercise significant
influence over operating and financial policies of the
investee. If certain factors are present, the Company
could account for investments for which it has less than a 20%
ownership under the equity method of
accounting.
Reclassifications
-
The Company reclassifies amounts in
its prior year financial statements to conform to the current
year’s presentation. For 2016, the Company reclassified
$317,789 of agent sales by reducing sales and cost of
sales.
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.
Recently Issued Accounting Pronouncements
-
In May 2014, the FASB issued
Accounting
Standards Update (ASU) No.
2014-09, “Revenue from Contracts with Customers” (Topic
606) which provides new accounting guidance on revenue from
contracts with customers. The guidance requires an entity to
recognize the amount of revenue to which it expects to be entitled
for the transfer of promised goods or services to customers. The
updated guidance will replace most existing revenue recognition
guidance in U.S. GAAP when it becomes effective. This guidance is
effective for fiscal years and interim periods within those fiscal
years beginning after December 15, 2017 and will be required to be
applied retrospectively. Additional ASUs have been issued to amend
or clarify this ASU as follows:
●
ASU
No. 2016-12 “Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients” was
issued in May 2016. ASU No. 2016-12 amends the new revenue
recognition standard to clarify the guidance on assessing
collectability, presenting sales taxes, measuring noncash
consideration, and certain transition matters.
●
ASU
No. 2016-10 “Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing” was
issued in April 2016. ASU No. 2016-10 addresses implementation
issues identified by the FASB-International Accounting Standards
Board Joint Transition Resource Group for Revenue
Recognition.
●
ASU
No. 2016-08 “Revenue from Contracts with Customers (Topic
606) - Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)” was issued in March
2016. ASU No. 2016-08 requires an entity to
determine whether the nature of its promise to provide goods or
services to a customer is performed in a principal or agent
capacity and to recognize revenue in a gross or net manner based on
its principal/agent designation.
The
adoption will not have a significant impact on the financial
statements.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic
842).
Topic 842 (as
amended by ASU’s 2018-01, 10, 11 and 20) amended guidance for
lease arrangements to increase transparency and comparability by
providing additional information to users of financial statements
regarding an entity's leasing activities.
The revised guidance seeks to
achieve this objective by requiring reporting entities to recognize
lease assets and lease liabilities on the balance sheet for
substantially all lease arrangements.
The new leasing standard is
effective for fiscal years, and for interim periods within those
fiscal years, beginning after December 15, 2018 (January 1, 2019
for the Company).
Early
adoption is permitted. The original guidance required application
on a modified retrospective basis to the earliest period
presented.
ASU 2018-11,
Targeted improvements to ASC 842, includes an option to not restate
comparative periods in transition and elect to use the effective
date of ASC 842 as the date of initial application of
transition.
The Company
adopted the new standard on the effective date applying the new
transition method allowed under ASU 2018-11 and will add
approximately $266,000 to long-term assets, $69,000 to short-term
liabilities and $197,000 to long-term liabilities.
In
March 2016, the FASB issued ASU 2016-09, “Compensation -
Stock Compensation (Topic 718)”, which identifies areas for
simplification involving several aspects of accounting for
share-based payment transactions, including the income tax
consequences, classification of awards as either equity or
liabilities, an option to recognize gross stock compensation
expense with actual forfeitures recognized as they occur, as well
as certain classifications on the statement of cash flows. ASU
2016-09 is effective for public companies for annual and interim
periods beginning after December 15, 2016. The Company adopted the
new accounting standard in the first quarter of 2017 and will
maintain its policy to estimate forfeitures expected to occur to
determine stock-based compensation expense. There was no impact to
the Company’s retained earnings as a result of adopting this
new accounting standard.
NOTE 4.
-
PROPERTY AND
EQUIPMENT
Property and
equipment consists of:
|
|
|
|
Depreciable
Lives
|
|
|
Software
|
3
years
|
$
34,934
|
$
34,934
|
Equipment
|
3 to 10
years
|
129,229
|
123,621
|
Furniture and
fixtures
|
5 to 7
years
|
17,735
|
17,735
|
|
181,898
|
176,290
|
Accumulated
depreciation
|
|
(163,549
)
|
(150,211
)
|
|
$
18,349
|
$
26,079
|
Depreciation
expense was $13,338 and $21,044 for the years ended December 31,
2017 and 2016, respectively.
NOTE 5.
-
SOFTWARE
On
February 6, 2015, the Company purchased all rights to cyber
security network vulnerability assessment reporting software (the
“Software”). Under the purchase agreement, the Company
agreed to pay the Seller the base purchase price of $180,000, of
which $100,000 was paid in cash at the closing and the remaining
$80,000 of which was paid by delivery at the closing of the
Company’s secured promissory note. As security for its
obligations under the promissory note, the Company granted the
Seller a security interest in the Software. After April 7, 2015,
the note accrues interest at 10% per annum. The remaining balance
of $20,000 was payable on the note on June 30, 2016 but was not
paid then although the balance was subsequently reduced by $7,500.
To date, the Seller has not taken any action to collect the amount
past due on the note or to enforce the security interest in the
Software. At December 31, 2017, the total principal amount payable
under the note is $12,500 with accrued interest payable of $8,465.
At December 31, 2017, the asset cost of $180,000 was fully
amortized.
NOTE 6.
-
LOAN
FEES
On
December 1, 2014, the Company entered into an unsecured line of
credit financing agreement with a member of its Board. The Company
paid an origination fee consisting of (i) 600,000 shares of its
common stock valued at $30,000 and (ii) an immediately exercisable
option to purchase 600,000 shares of its common stock at an
exercise price of $.05 valued at $23,400 using the Black-Scholes
option-pricing model, which was fully expensed through December 31,
2017.
On September 30, 2016, the note
maturity date was extended from December 31, 2017 to January 1,
2020. As consideration for extending the maturity date, the Company
granted the lender an option to purchase 800,000 common shares at
$.04 per share with an estimated fair value of $14,720
using
the Black-Scholes option-pricing model, which will be amortized
ratably over the next two years.
On March 14, 2016, the Company entered into
an unsecured financing agreement with a third-party lender
(“2016 Note Payable”). In consideration for providing
the financing, the Company paid the lender a fee consisting of
2,500,000 shares of its common stock valued at $37,500 on the date
of the agreement based upon the closing bid quotation of its common
stock on the OTC Bulletin Board on that date. These deferred
financing fees are being amortized ratably through
2021.
On July
18, 2017, the Company entered into an unsecured line of credit
financing agreement with an officer and member of its Board. In
consideration for providing the financing, the lender was granted
an option to purchase 400,000 shares of common stock at $.04 per
share
with an estimated fair value of
$9,960
using the Black-Scholes option-pricing model. The
option expires on July 17, 2022.
On
September 21, 2017, the Company entered into an unsecured line of
credit financing agreement with a related party. In consideration
for providing the financing, the lender was granted an option to
purchase 400,000 shares of common stock at $.04 per share
with an estimated fair value of
$4,080
using the Black-Scholes option-pricing model. The
option expires on January 2, 2023.
The
unamortized deferred financing costs are recorded as a reduction of
the principal owed and are expensed over the life of the debt or
the extension period. At December 31, 2017, the Company has
deferred financing costs of $52,220 less accumulated amortization
expenses of $11,280 with a net carrying value of $40,940 ($64,814 -
2016).
NOTE 7. - NOTES PAYABLE – CURRENT
Notes
payable consist of:
|
|
|
|
|
Note payable, 10%,
unsecured (A)
|
$
30,000
|
$
30,000
|
Note payable, 10%,
secured by Software (B)
|
12,500
|
12,500
|
Demand note payable
to former director, 10%, unsecured
|
30,000
|
30,000
|
Convertible demand
note payable to former director, 12%, unsecured (C)
|
40,000
|
40,000
|
Convertible notes
payable, 6% (D)
|
150,000
|
150,000
|
Convertible term
note payable, 7%, secured (E)
|
100,000
|
100,000
|
Convertible demand
note payable to former employee, 11% (F)
|
0
|
5,779
|
|
$
362,500
|
$
368,279
|
(B)
Note payable, 10%, secured by Software
-
During 2015, the Company issued a note in connection with the
purchase of Software (see Note 5).
(C)
Convertible demand note payable to former
director, 12%
,
unsecured
- At December 31, 2017 and
2016, the Company was obligated 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.
(D)
Convertible notes payable, 6% -
At
December 31, 2017, the Company was obligated to unrelated third
parties for $150,000 ($150,000 - 2016). The principal is unsecured
and convertible at the option of the holders into shares of common
stock at $.05 per share. The notes bear interest at 6.0% at
December 31, 2017 (6.0% - 2016). 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.
(E)
Convertible term note payable, 7%,
secured
-
The note
bears interest at the rate of 7% per annum, payable monthly, and is
secured by a subordinate lien on all the Company’s assets.
The note's principal is convertible at the option of the holder
into shares of the Company’s common stock at $.10 per share,
which was the price of the Company's common stock on the closing
date of the agreement.
(F)
Convertible demand note payable to former
employee, 11% -
This note was repaid during 2017. At
December 31, 2016, the Company was obligated for $5,779 with
interest at 11%. The note was secured by a subordinate lien on the
Company's assets. The principal and accrued interest were
convertible at the option of the holder into shares of common stock
at $.16 per share.
Notes
payable - related parties consist of:
|
|
|
|
|
Demand note payable
to director, 6%, unsecured
|
$
20,000
|
$
0
|
Demand notes
payable to officer and director, 6%, unsecured
|
12,000
|
0
|
|
$
32,000
|
$
0
|
NOTE 8. - LONG-TERM OBLIGATIONS
Notes Payable - Banks and Other -
Term notes payable - banks
and other consist of:
|
|
|
|
|
2016 note payable,
6%, unsecured, due December 31, 2021
|
$
500,000
|
$
500,000
|
Convertible note
payable, 6%, due January 1, 2020
|
264,000
|
264,000
|
Note payable, 10%,
secured, due January 1, 2018
|
265,000
|
265,000
|
Convertible term
note payable,12%, secured, due August 31, 2018
|
175,000
|
175,000
|
Term note payable -
PBGC, 6%, secured
|
246,000
|
246,000
|
Obligation to PBGC
based on free cash flow
|
0
|
569,999
|
|
1,450,000
|
2,019,999
|
Less deferred
financing costs
|
26,220
|
32,775
|
|
1,423,780
|
1,987,224
|
Less current
maturities
|
686,000
|
836,999
|
|
$
737,780
|
$
1,150,225
|
2016 note payable, 6%, unsecured, due December
31, 2021
-
On March 14, 2016, the Company entered into
an unsecured financing agreement with a third-party lender. At
December 31, 2016, the Company was obligated for $500,000.
Borrowings bear interest at 6% with interest payments due
quarterly. Principal is due on December 31, 2021. Principal and
interest may become immediately due and payable upon the occurrence
of customary events of default. In consideration for providing the
financing, the Company paid the lender a fee of 2,500,000 shares of
its common stock valued at $37,500 on the date of the agreement
based upon the closing bid quotation of its common stock on the OTC
Bulletin Board on that date. These deferred financing costs are
recorded as a reduction of the principal owed and are amortized
over the life of the debt. The balance of the note payable was
$467,225 at December 31, 2016 consisting of principal due of
$500,000 offset by deferred financing costs of $32,775. The lender
has piggy back registration rights for these shares. The
Company’s Chief Executive Officer and President agreed to
guarantee the loan obligations if he is no longer an
“affiliate” of the Company as defined by Securities and
Exchange Commission rules.
Convertible note payable, 6%, due January 1,
2020 -
This note has the same terms as item (C) of Note 7
except it matures on January 1, 2020.
Note payable, 10%, secured, due January 1,
2018
-
During the years ended
December 31, 2004 and 2003, the Company issued secured notes
payable aggregating $265,000. These borrowings bear interest at 10%
and are due, as modified on January 1, 2018. This note has not been
further extended. The notes are secured by a first lien on accounts
receivable that are not otherwise used by the Company as collateral
for other borrowings and by a second lien on accounts
receivable.
Convertible term note payable, 12%, secured,
due August 31, 2018
-
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 on August 31, 2018 for an aggregate
of $175,000. 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.
Term note payable
-
PBGC, 6%, secured
-
On October 17, 2011, in accordance with of the Settlement Agreement
dated September 6, 2011 (the “Settlement Agreement”),
the Company issued a secured promissory note in favor of the
Pension Benefit Guaranty Corporation (the “PBGC”) for
$300,000 bearing interest at 6% per annum due in scheduled
quarterly payments over a seven-year period with a balloon payment
of $219,000 due on September 15, 2018.
Obligation to PBGC based on free cash
flow
-
On October 17,
2011, in accordance with the Settlement Agreement with the PBGC
related to the termination of a defined benefit retirement plan of
a former subsidiary of the Company, 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 was contingent upon the Company
earning free cash flow in excess of defined amounts. No amounts
have been owed or paid on this obligation as of December 31, 2017
or 2016. At December 31, 2017, the Company had no further
obligation to make payments. Accordingly, the Company wrote off the
balance and recorded other income of $569,999.
Notes Payable - Related Parties
Notes
payable - related parties consist of:
|
|
|
|
|
Convertible notes
payable, 6%
|
$
155,300
|
$
155,300
|
Note payable,
$400,000 line of credit, 7.35%, unsecured
|
382,715
|
386,065
|
Convertible note
payable, 7%, due March 31, 2018
|
25,000
|
25,000
|
Note payable,
$100,000 line of credit, 6%, unsecured
|
90,000
|
0
|
Note payable,
$75,000 line of credit, 6%, unsecured
|
50,000
|
0
|
|
703,015
|
566,365
|
Less deferred
financing costs
|
14,720
|
32,039
|
|
688,295
|
534,326
|
Less current
maturities
|
29,660
|
0
|
|
$
658,635
|
$
534,326
|
Convertible notes payable, 6% -
The
Company has various notes payable to related parties totaling
$155,300 of which $146,300 matures on January 1, 2020 and $9,000
matures on January 1, 2021. Principal and accrued interest are
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,
2017. The rate is adjusted annually, on January 1
st
of each year, 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.
The
Company executed collateral security agreements with the note
holders providing for a subordinate security interest in all the
Company’s assets. Generally, upon notice, prior to the note
maturity date, the Company can prepay all or a portion of the
outstanding notes.
The
Notes are convertible into shares of common stock subject to the
following limitations. The Notes are not convertible to the extent
that shares of common stock issuable upon the proposed conversion
would result in a change in control of the Company which would
limit the use of its net operating loss carryforwards; provided,
however, if the Company closes a transaction with another third
party or parties that results in a change of control which will
limit the use of its net operating loss carryforwards, then the
foregoing limitation shall lapse. Prior to any conversion by a
requesting note holder, each note holder holding a note which is
then convertible into 5% or more of the Company’s common
stock shall be entitled to participate on a pari passu basis with
the requesting note holder and upon any such participation the
requesting note holder shall proportionately adjust his conversion
request such that, in the aggregate, a change of control, which
will limit the use of the Company’s net operating loss
carryforwards, does not occur.
Note payable, $400,000 line of credit, 7.35%,
unsecured -
On December 1, 2014, the Company entered into an
unsecured line of credit financing agreement with a member of its
Board. The LOC Agreement provides for working capital of up to
$400,000 through January 1, 2020. The Company is required to
provide the lender with a report stating the use of proceeds for
each pending draw under the line of credit. Borrowings of $100,000
or more bear interest at the prime rate plus 2.85% (effective rate
of 7.35% at December 31, 2017).
Principal and interest are due monthly using an
amortization schedule that requires principal payments of $8,000
annually and a balloon payment of the remaining balance at
maturity.
The balance of the note payable was $367,995 at
December 31, 2017 ($354,026 - 2016) consisting of principal due of
$382,715 ($386,065 - 2016) offset by deferred financing costs of
$14,720 ($32,069 – 2016).
Convertible note payable, 6%, due March 31,
2018 -
On February 12, 2015, the Company borrowed $25,000
from a Company officer. The note is unsecured and matures on March
31, 2018 with principal convertible at the option of the holder
into shares of common stock at $.10 per share.
Note payable, $100,000 line of credit, 6%,
unsecured -
On July 18, 2017, the Company entered into an
unsecured line of credit financing agreement with an officer and
member of its Board. The LOC Agreement provides for working capital
of up to $100,000 with interest at 6% due quarterly through July 1,
2022. In consideration for providing the financing, the lender was
granted an option to purchase 400,000 shares of common stock at
$.04 per share. The option expires on July 17, 2022.
Note payable, $75,000 line of credit, 6%,
unsecured -
On September 21, 2017, the Company entered into
an unsecured line of credit financing agreement with a related
party. The LOC Agreement provides for working capital of up to
$75,000 with interest at 6% due quarterly through January 2, 2023.
In consideration for providing the financing, the lender was
granted an option to purchase 400,000 shares of common stock at
$.04 per share. The option expires on January 2, 2023.
Long-Term
Obligations
As of
December 31, 2017, minimum future annual payments of long-term
obligations and amortization of deferred financing costs are as
follows:
|
|
|
|
|
|
|
|
2018
|
$
723,020
|
$
7,360
|
$
715,660
|
2019
|
8,000
|
7,360
|
640
|
2020
|
772,995
|
0
|
772,995
|
2021
|
599,000
|
26,220
|
572,780
|
2022
|
0
|
0
|
0
|
2023
|
50,000
|
0
|
50,000
|
Total long-term
obligations
|
$
2,153,015
|
$
40,940
|
$
2,112,075
|
NOTE 9. - STOCKHOLDERS' DEFICIENCY
Preferred Stock -
The Company’s
certificate of incorporation authorizes its Board to issue up to
1,000,000 shares of preferred stock. The stock is issuable in
series that may vary as to certain rights and preferences, as
determined upon issuance, and has a par value of $.01 per share. As
of December 31, 2017, and 2016, there were no preferred shares
issued or outstanding.
Common Stock -
On March 14, 2016, as payment of a fee under the
2016 Note Payable,
the Company issued 2,500,000 shares of
its common stock valued at $.015 per share or $37,500. The value is
based upon the closing bid quotation of common stock on the OTC
Bulletin Board on the date of the agreement.
2005 Plan -
The Company’s Board
and stockholders approved a stock option plans adopted in 2005,
which has authority to grant options to purchase up to an aggregate
of 1,146,000 common shares at December 31, 2017 (1,283,000
-
2016).
2009 Plan -
During 2009, the
Company’s Board approved the 2009 stock option plan, which
grants options to purchase up to an aggregate of 4,000,000 common
shares of which 578,000 common shares are available for grant at
December 31, 2017 (1,283,000
-
2016). Options issued to date
are nonqualified since the Company has decided not to seek
stockholder approval of the 2009 Plan.
NOTE 10. - STOCK OPTION PLANS AND AGREEMENTS
The
Company grants stock options to its key employees and independent
service providers as it deems appropriate. Options expire from five
to ten years after the grant date.
Option Agreements -
The Company's Board
approved stock option agreements with consultants and a member of
the Board of which options for an aggregate of 1,663,000 common
shares are outstanding at December 31, 2017 with an average
exercise price of $.20 per share. At December 31, 2017, options for
725,000 shares are vested and options for 938,000 shares vest based
on board authorization.
Loan Fees -
On December 1, 2014, as
payment of a portion of an origination fee under the LOC Agreement,
the Company issued options to purchase 600,000 shares of its common
stock at an exercise price of $.05, all of which were immediately
vested. On September 30, 2016, as payment for an extension of the
maturity date under the LOC Agreement, the Company issued options
to purchase 800,000 shares of its common stock at an exercise price
of $.04, all of which were immediately vested.
On July
18, 2017, the Company entered into an unsecured line of credit
financing agreement with an officer and member of its Board. In
consideration for providing the financing of up to $100,000, the
lender was granted an option to purchase 400,000 shares of common
stock at $.04 per share which was valued at $9,960. The option
expires on July 17, 2022.
On
September 21, 2017, the Company entered into an unsecured line of
credit financing agreement with a related party. In consideration
for providing the financing of up to $75,000, the lender was
granted an option to purchase 400,000 shares of common stock at
$.04 per share which was valued at $4,080. The option expires on
January 2, 2023.
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model based on the following
assumptions. Volatility is based on the Company’s historical
volatility. The expected life of the options was determined using
the simplified method for plain vanilla options as stated in FASB
ASC 718 to improve the accuracy of this assumption while
simplifying record keeping requirements until more detailed
information about the Company’s exercise behavior is
available. The risk-free rate for the life of the option is based
on the U.S. Treasury yield curve in effect at the time of
grant.
The
following assumptions were used for the years ended December 31,
2017 and 2016.
|
|
|
Risk free interest
rate
|
1.50%
to 2.00%
|
.71% to
1.50%
|
Expected dividend
yield
|
0%
|
0
%
|
Expected stock
price volatility
|
100
%
|
100
%
|
Expected life of
options
|
|
2.50 to 5.75
years
|
The
following is a summary of stock option activity, including
qualified and non-qualified options for the years ended December
31, 2017 and 2016:
|
Number
of Options Outstanding
|
Weighted
Average Exercise Price
|
Remaining
Contractual Term
|
Aggregate
Intrinsic Value
|
Outstanding at
December 31, 2015
|
8,443,500
|
$
.16
|
|
|
Granted
|
3,353,000
|
$
.09
|
|
|
Expired
|
(2,856,833
)
|
$
.17
|
|
|
Forfeited
|
(356,667
)
|
$
.05
|
|
|
Outstanding at
December 31, 2016
|
8,583,000
|
$
.12
|
|
|
Granted
|
1,080,000
|
$
.04
|
|
|
Expired
|
(169,500
)
|
$
.41
|
|
|
Forfeited
|
(1,462,500
)
|
$
.15
|
|
|
Outstanding
at December 31, 2017
|
8,031,000
|
$
.10
|
4.1 years
|
$
500
|
|
|
|
|
|
Vested
or expected to vest and exercisable at December 31,
2017
|
7,093,000
|
$
.08
|
4.5
years
|
$
500
|
At
December 31, 2017, there was approximately $7,300 of total
unrecognized compensation cost related to outstanding non-vested
options, which excludes non-vested options for which the option
expense cannot be presently quantified. 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, 2017 was approximately $39,000.
The
weighted average fair value of options granted was $.03 and $.02
per share for the years ended December 31, 2017 and 2016,
respectively. The exercise price for all options granted equaled or
exceeded the market value of the Company’s common stock on
the date of grant.
NOTE 11. - INCOME TAXES
The
components of income tax expense (benefit) consists of the
following:
|
|
|
|
|
Deferred:
|
|
|
Federal
|
$
1,218,000
|
$
(44,000
)
|
State
|
(60,000
)
|
(9,000
)
|
|
1,158,000
|
(53,000
)
|
Change in valuation
allowance
|
(1,158,000
)
|
53,000
|
|
$
0
|
$
0
|
At
December 31, 2017, the Company had federal net operating loss
carryforwards of approximately $8,200,000 ($7,500,000 - 2016) and
various state net operating loss carryforwards of approximately
$3,300,000 ($2,800,000 - 2016) which expire from 2018 through
2037. These carryforwards exclude federal net operating loss
carryforwards from inactive subsidiaries and net operating loss
carryforwards from states that the Company does not presently
operate in. Utilization of the net operating loss
carryforwards may be subject to a substantial annual limitation due
to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. The annual limitation
may result in the expiration of the net operating loss
carryforwards before utilization.
At
December 31, 2017, a net deferred tax asset, representing the
future benefit attributed primarily to the available net operating
loss carryforwards and defined benefit plan expenses in the amount
of approximately $2,326,000 ($3,484,000 - 2016), had been fully
offset by a valuation allowance because management believes that
the statutory limitations on utilization of the operating losses
and concerns over achieving profitable operations diminish the
Company’s ability to demonstrate that it is more likely than
not that these future benefits will be realized before they
expire.
The
following is a summary of the Company's temporary differences and
carryforwards which give rise to deferred tax assets and
liabilities.
|
|
|
|
|
Deferred tax assets
(liabilities):
|
|
|
Net
operating loss carryforwards
|
$
1,957,000
|
$
2,735,000
|
Defined
benefit pension liability
|
69,000
|
324,000
|
Reserves
and accrued expenses payable
|
300,000
|
425,000
|
Gross
deferred tax asset
|
2,326,000
|
3,484,000
|
Deferred tax asset
valuation allowance
|
(2,326,000
)
|
(3,484,000
)
|
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 statements of
operations are as follows:
|
|
|
|
|
Statutory U.S.
federal tax rate
|
34.0
%
|
34.0
%
|
Change in valuation
allowance
|
1,543.7
|
(16.2
)
|
Expired stock-based
compensation
|
(3.2
)
|
(19.1
)
|
State
taxes
|
80.2
|
2.8
|
Revaluation of
deferred taxes for Federal rate change
|
(1,647.8
)
|
0.0
|
Other permanent
non-deductible items
|
(6.9
)
|
(1.5
)
|
Effective income
tax rate
|
0.0
%
|
0.0
%
|
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act makes broad and complex changes
to the U.S. tax code, including, but not limited to, (1) reducing
the U.S. federal corporate tax rate from 35% to 21%; (2)
eliminating the corporate alternative minimum tax (AMT) and
changing how existing AMT credits can be realized; (3) changing
rules related to usage and limitation of net operating loss
carryforwards created in tax years beginning after December 31,
2017; (4) generally eliminating U.S. federal income taxes on
dividends from foreign subsidiaries for tax years beginning after
December 31, 2017; and (5) implementing a territorial tax system
and imposing a transition toll tax on deemed repatriated earnings
of foreign subsidiaries.
On
December 22, 2017, the SEC staff issued Staff Accounting Bulletin
No. 118 to address the application of U.S. GAAP in situations when
a registrant does not have the necessary information available,
prepared, or analyzed (including computations) in reasonable detail
to complete the accounting for certain income tax effects of the
Tax Reform Act. The Company has recognized the provisional tax
impacts related to the revaluation of deferred tax assets and
liabilities and included these amounts in its financial statements
for the year ended December 31, 2017. As of December 31, 2017, the
Company has completed most of its accounting for the tax effects of
the Act. If revisions are needed as new information becomes
available, the final determination of the deemed re-measurement of
the deferred assets and liabilities or other applicable provisions
of The Act will be completed as additional information becomes
available, but no later than one year from the enactment of the
2017 Tax Act.
The
deferred U.S. income tax expense for 2017 primarily represents a
one-time, non-cash expense of $1,236,000 relating to the
revaluation of deferred tax assets offset by a reduction of the
valuation allowance in an equal amount. This resulted in a net zero
effect on the provision for income tax.
NOTE 12. - EMPLOYEE RETIREMENT PLANS
Simple IRA Plan
-
Through December 31, 2012, the Company
offered a simple IRA plan as a retirement plan for eligible
employees who earned at least $5,000 of annual compensation.
Eligible employees could elect to contribute a percentage of their
compensation up to a maximum of $11,500. The accrued liability for
the simple IRA plan, including interest, was $234,886 and $225,720,
as of December 31, 2017 and 2016, respectively.
401(k) Plan -
Effective January 1, 2013,
the Company began offering a defined contribution 401(k) plan in
place of the simple IRA plan. For 2017, 401(k) employee
contribution limits are $18,000 plus a catch-up contribution for
those over age 50 of $6,000. The Company can elect to make a
discretionary contribution to the Plan. No discretionary
contribution was approved for 2017 or 2016.
NOTE 13. - COMMITMENTS
Lease Commitments
-
Beginning on August
1, 2016, the Company leases its headquarters facility under an
operating lease agreement that expires on June 30, 2022. The
Company has the right to terminate the lease upon six months prior
notice after three years of occupancy. Rent expense is $80,000
annually during the first year of the lease term and increases by
1.5% annually thereafter.
NOTE 14. - RELATED PARTY ACCRUED INTEREST PAYABLE
Accrued Interest Payable
-
Included in accrued interest payable is accrued interest payable to
related parties of $104,862 at December 31, 2017 ($81,347 - 2016).
During 2016, the Company reclassified amounts due to a director and
an employee from accrued interest-related parties to accrued
interest payable-other at the time each resigned his position with
the Company. The related notes payable were similarly
reclassified.
NOTE 15. - SUPPLEMENTAL CASH FLOW INFORMATION
On
April 13, 2016, as payment of a fee under the 2016 Note Payable,
the Company issued 2,500,000 shares of its common stock valued on
the date of execution of this agreement at $.015 per share for
$37,500 (See Note 9).
NOTE 16. - SUBSEQUENT EVENTS
During the third quarter of 2018, the Company
borrowed $70,000 from an officer of the Company under the terms of
an unsecured demand promissory note with interest at 6%.
During the second quarter of 2019, the Company
entered into a note payable agreement for up to $500,000 with a
related party.
The note
has an interest rate of 7.5% and is due on August 31,
2026.
The amount
outstanding is $200,000.
As consideration for providing
this financing, the Company granted a stock option to purchase a
total of 2,500,000 common shares at an exercise price of $.02 or a
total expense of $14,250.