Note 2. Management Plans - Capital Resources
The
Company reported net losses of $87,000 and $195,151 for the three
months ended March 31, 2018 and 2017, respectively, and
stockholders’ deficiencies of $4,125,564 and $4,038,564 at
March 31, 2018 and December 31, 2017, respectively. Accordingly,
and due to working capital deficiencies, there is substantial doubt
about the Company’s ability to continue as a going concern
and
this substantial doubt has not been alleviated
.
The
Company's goal is to increase sales and generate cash flow from
operations on a consistent basis. The Company uses a formal
financial review and budgeting process as a tool for improvement
that has aided expense reduction and internal performance. The
Company’s business plans require improving the results of its
operations in future periods.
The
Company believes the capital resources available under its
factoring line of credit, cash from additional related party and
third-party loans and cash generated by improving the results of
its operations provide sources to fund its ongoing operations and
to support the internal growth of the Company. Although the Company
has no assurances, the Company believes that related parties, who
have previously provided working capital, and third parties will
continue to provide working capital loans on similar terms, as in
the past, as may be necessary to fund its on-going operations for
at least the next 12 months. If the Company experiences significant
growth in its sales, the Company believes that this may require it
to increase its financing line, finance additional accounts
receivable, or obtain additional working capital from other sources
to support its sales growth.
Note
3. Summary of Significant Accounting Policies
There
are several accounting policies that the Company believes are
significant to the presentation of its financial statements. These
policies require management to make complex or subjective judgments
about matters that are inherently uncertain. Note 3 to the
Company’s audited financial statements for the year ended
December 31, 2017 presents a summary of significant accounting
policies as included in the Company's Annual Report on Form 10-K as
filed with the SEC.
Reclassifications
- The Company reclassifies amounts in its
financial statements to comply with recently adopted accounting
pronouncements.
Fair Value of Financial Instruments
- The carrying amounts
reported in the balance sheets for cash, accounts receivable,
accounts payable, and accrued expenses approximate fair value
because of the immediate short-term maturity of these financial
instruments. The carrying value of notes payable and convertible
notes payable approximates the fair value based on rates currently
available from financial institutions and various
lenders.
Revenue -
Effective January 1, 2018, the Company adopted
Topic 606 using the modified retrospective approach and applied the
guidance to those contracts which were not completed as of January
1, 2018. Adoption of Topic 606 did not impact the timing of revenue
recognition in the Company’s financial statements for the
current or prior periods. Accordingly, no adjustments have been
made to opening accumulated deficit or prior period
amounts.
The Company’s total
revenue recognized from contracts from customers was comprised of
three major services: Managed support services, Cybersecurity
projects and software and Other IT consulting services. The
categories depict how the nature, amount, timing and uncertainty of
revenue and cash flows are affected by economic factors. There were
no material unsatisfied performance obligations at March 31, 2018
or 2017 for contracts with an expected original duration of more
than one year. The following table summarizes the revenue
recognized by the major services:
|
Three
Months Ended March 31,
|
|
|
|
Managed support
services
|
$
1,270,182
|
$
1,300,147
|
Cybersecurity
projects and software
|
283,056
|
325,181
|
Other IT consulting
services
|
41,280
|
21,700
|
Total
sales
|
$
1,594,518
|
$
1,647,028
|
Managed support services
Managed
support services consist of revenue primarily from our subcontracts
for services to its end clients, principally a major establishment
of the U.S. Government for which we manage one of the
nation’s largest physical and virtual Microsoft Windows
environments.
●
We generate revenue primarily from these subcontracts through fixed
price service and support agreements. Revenues are earned and
billed weekly and are generally paid within 45 days. The revenues
are recognized at time of service.
Cybersecurity projects and software
Cybersecurity
projects and software revenue includes the selling of licenses of
Nodeware™ and third-party software, principally
Webroot™ as well as performing cybersecurity assessments and
testing.
●
Nodeware™ and Webroot™ software offerings consist of
fees generated from the use of the respective software by our
customers. Revenue is recognized on a ratable basis over the
contract term beginning on the date that our service is made
available to the customer. Substantially all customers are billed
in the month of the service and is cancellable upon notice per the
respective agreements. Substantially all payments are
electronically billed, and the billed amounts are paid to the
Company instantaneously via an online payment platform. If payments
are made in advance, revenues related to the term associated with
our software licenses is recognized ratably over the contractual
period.
●
Some of our customers have the option to purchase additional
subscription and support services at a stated price. These options
generally do not provide a material right as they are priced at our
standalone selling price.
●
Cybersecurity assessments and testing services are considered
distinct performance obligations when sold stand alone or with
other products. These contracts generally have terms of one year or
less. For substantially all these contracts, revenue is recognized
when the specific performance obligation is satisfied. If the
contract has multiple performance obligations, the revenue is
recognized
when the
performance obligations are satisfied. Depending on the nature of
the service, the amounts recognized are based on an allocation of
the transaction price to each performance obligation which is based
on a relative standalone selling price of the products
sold.
●
In substantially all agreements, a 50% to 75% down payment is
required before work is initiated. Down payments received are
deferred until revenue is recognized. Upon completion of
performance obligation of service, payment terms are 30
days.
Other IT consulting services
Other
IT consulting services consists of services such as project
management and general IT consulting services.
●
We generate revenue via fixed price service agreements. These
are based on periodic billings of a fixed dollar amount for
recurring services of a similar nature performed according to the
contractual arrangements with clients. The revenues are
recognized at time of service.
Based
on historical experience, the Company believes that collection is
reasonably assured.
During
the three months ended March 31, 2018, sales to one client,
including sales under subcontracts for services to several
entities, accounted for 69.9% of total sales (67.9% - 2017) and
36.7% of accounts receivable at March 31, 2018 (
67.5% - December
31, 2017).
Recent Accounting Pronouncements Not Yet Adopted -
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). 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 of January 1, 2019 by 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.
Note 4. Sale of Certain Accounts Receivable
The
Company has available a financing line with a financial institution
(the Purchaser), which enables the Company to sell accounts
receivable to the Purchaser with full recourse against the Company.
Pursuant to the provisions of FASB ASC 860, the Company reflects
the transactions as a sale of assets and establishes an accounts
receivable from the Purchaser for the retained amount less the
costs and fees of the transaction and less any anticipated future
loss in the value of the retained asset.
The
retained amount is 10% of the total accounts receivable invoice
sold to the Purchaser. The fee is charged at prime plus 3.6%
(effective rate of 8.35% at March 31, 2018) against the average
daily outstanding balance of funds advanced. The estimated future
loss reserve for each receivable included in the estimated value of
the retained asset is based on the payment history of the accounts
receivable customer and is included in the allowance for doubtful
accounts, if any. As collateral, the Company granted the Purchaser
a first priority interest in accounts receivable and a blanket
lien, which may be junior to other creditors, on all other
assets.
The
financing line provides the Company the ability to finance up to
$2,000,000 of selected accounts receivable invoices, which includes
a sublimit for one of the Company’s customers of $1,500,000.
During the three months ended March 31, 2018, the Company sold
approximately $1,526,000 ($1,242,000 - March 31, 2017) of its
accounts receivable to the Purchaser. As of March 31, 2018,
approximately $315,000 ($4,486 - December 31, 2017) of these
receivables remained outstanding. Additionally, as of March 31,
2018, the Company had approximately $102,000 available under the
financing line with the financial institution ($376,000 - December
31, 2017). After deducting estimated fees, allowance for bad debts
and advances from the Purchaser, the net receivable from the
Purchaser amounted to $31,500, at March 31, 2018 ($449 - December
31, 2017), and is included in accounts receivable in the
accompanying balance sheets.
There
were no gains or losses on the sale of the accounts receivable
because all were collected. The cost associated with the financing
line totaled $12,576 for the three months ended March 31, 2018
($11,208 - March 31, 2017). These financing line fees are
classified on the statements of operations as interest
expense.
Note 5. Earnings per Share
Basic
earnings per share is based on the weighted average number of
common shares outstanding during the periods presented. Diluted
earnings per share is based on the weighted average number of
common shares outstanding, as well as dilutive potential common
shares which, in the Company’s case, comprise shares issuable
under convertible notes payable and stock options. The treasury
stock method is used to calculate dilutive shares, which reduces
the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options and warrants assumed
to be exercised. In a loss period, the calculation for basic and
diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.
The
following table sets forth the computation of basic and diluted
loss per share for the three months ended:
|
Three
Months Ended March 31,
|
|
|
|
Numerator for basic
and diluted net loss per share:
|
|
|
Net
loss
|
$
(87,000
)
|
$
(195,151
)
|
Denominator for
basic and diluted net loss per share:
|
|
|
Weighted average
common shares outstanding
|
29,061,883
|
29,061,883
|
Basic and diluted
net loss per share
|
$
.00
|
$
(.01
)
|
|
|
|
Anti-dilutive
shares excluded from net loss share calculation
|
28,402,990
|
28,470,795
|
Certain common shares issuable under stock options and convertible
notes payable have been omitted from the diluted net loss per share
calculation because their inclusion is considered anti-dilutive
because the exercise prices were greater than the average market
price of the common shares or their inclusion would have been
anti-dilutive.
Note 6. Software Purchase
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.
The asset cost of $180,000 was fully amortized by December 31,
2017.
Note 7. Notes Payable - Related Parties
The
Company borrowed $20,000 from the unsecured line of credit
financing agreement with a related party during the first quarter.
The LOC Agreement was entered into on September 17, 2017 and
provides for working capital of up to $75,000 with interest at 6%
due quarterly through January 2, 2023. The balance is $70,000 at
March 31, 2018.
A 7% note payable of $25,000 due to a related party matured on
March 31, 2018 and is classified as a current liability in the
accompanying balance sheet at March 31, 2018.
Note 8. Stock Option Plans and Agreements
The
Company has approved stock options plans and agreements covering up
to an aggregate of 8,348,000 shares of common stock. Such options
may be designated at the time of grant as either incentive stock
options or nonqualified stock options. Stock based compensation
consists of charges for stock option awards to employees, directors
and consultants.
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. No options were
granted for the three months ended March 31, 2018. The following
assumptions were used for the three months ended March 31,
2017.
Risk-free interest
rate
|
1.50
%
|
Expected dividend
yield
|
0
%
|
Expected stock
price volatility
|
100
%
|
Expected life of
options
|
|
The
Company recorded expense for options issued to employees and
independent service providers of $0 and $7,120 for the three months
ended March 31, 2018 and 2017, respectively.
At
March 31, 2018, there was approximately $7,300 of total
unrecognized compensation cost related to non-vested options. That
cost is expected to be recognized over a weighted average period of
approximately one year. No options vested during the three months
ended March 31, 2018.
A
summary of all stock option activity for the three months ended
March 31, 2018 follows:
|
Number
of Options Outstanding
|
Weighted
Average Exercise Price
|
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
Outstanding at
December 31, 2017
|
8,031,000
|
$
.10
|
|
|
Expired
|
(281,000
)
|
$
.23
|
|
|
Outstanding at
March 31, 2018
|
7,750,000
|
$
.09
|
|
$
1,300
|
|
|
|
|
|
At March 31, 2018 -
vested or
|
|
|
|
|
expected to vest
and exercisable
|
6,812,000
|
$
.07
|
|
$
1,300
|
Note 9. Related Party Accounts Receivable and Accrued Interest
Payable
Accrued
Interest Payable - Included in accrued interest payable is accrued
interest payable to related parties of $114,806 at March 31, 2018
($104,862 - December 31, 2017).
Note 10. Subsequent Event
On July
12, 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 fourth quarter of 2018, the Company concluded that they
have been legally released from a liability. Accordingly, a gain on
settlement of debt in the amount of $83,250 has been recorded,
representing the $30,000 principal balance, as well as $53,250 of
accrued interest.
On May
7, 2019, the Company entered into a note payable agreement for up
to $500,000 with a related party. The note has an interest rate of
7.5% and is due on August 31, 2026. The Company borrowed $200,000
which remains outstanding. 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 for a total
expense of $14,250.
************
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This
discussion contains forward-looking statements, the accuracy of
which involves risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking
statements for many reasons including, but not limited to, those
discussed under the heading “Forward Looking
Statements” above and elsewhere in this report. We disclaim
any obligation to update information contained in any
forward-looking statements.
The
following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction
with our financial statements and the notes thereto appearing
elsewhere in this report.
Business
Headquartered
in Pittsford, New York, Infinite Group, Inc. is a provider of
managed IT and virtualization services and a developer and provider
of cybersecurity tools and solutions to private businesses and
government agencies. As part of these services we:
●
design, develop and
market solutions and products that solve and simplify network
cybersecurity needs of small and medium sized enterprises (SMEs),
government agencies, and certain large commercial enterprises. We
are a master distributor for Webroot, a cloud based security
platform solution, where we market to and provide support for over
350 reseller partners across North America;
●
provide level 2
Microsoft and Hewlett Packard server and software-based managed
services supporting enterprise customers through our partnership
with DXC Technology Company (DXC); and
●
are an Enterprise
Level sales and professional services partner with VMware selling
virtualization licenses and solutions and providing virtualization
services support to commercial and government customers including
the New York State and Local Government and Education (SLED)
entities and the New York State Office of General Services (NYS
OGS). These activities take place in our virtualization sales
organization in conjunction with support from our professional
services organization (PSO).
Business Strategy
Our strategy is to build our business by designing, developing, and
marketing IT security based products and solutions that fill
technology gaps in cybersecurity. We sell our proprietary product,
Nodeware, which 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. 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.
Our
cybersecurity services business provides services and technical
resources to support both our channel partners and end
customers.
Our
goal is to expand our VMware business in both the public and
commercial sector by building VMware license sales volume and
services concurrently.
We are
working to expand our managed services business with our current
federal enterprise customer and its customers.
Results of Operations
Comparison of the Three Months Ended March 31, 2018 and
2017
The
following table compares our statements of operations data for the
three months ended March 31, 2018 and 2017. The trends suggested by
this table are not indicative of future operating
results.
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
1,594,518
|
100.0
%
|
$
1,647,028
|
100.0
%
|
$
(52,510
)
|
(3.2
)%
|
Cost of
sales
|
1,079,154
|
67.7
|
1,168,531
|
70.9
|
(89,377
)
|
(7.6
)
|
Gross
profit
|
515,364
|
32.3
|
478,497
|
29.1
|
36,867
|
7.7
|
General and
administrative
|
299,486
|
18.8
|
296,804
|
18.0
|
2,682
|
0.9
|
Selling
|
241,198
|
15.1
|
317,054
|
19.3
|
(75,856
)
|
(23.9
)
|
Total costs and
expenses
|
540,684
|
33.9
|
613,858
|
37.3
|
(73,174
)
|
(11.9
)
|
Operating
loss
|
(25,320
)
|
(1.6
)
|
(135,361
)
|
(8.2
)
|
110,041
|
(81.3
)
|
Interest
expense
|
(61,680
)
|
(3.9
)
|
(59,790
)
|
(3.6
)
|
1,890
|
3.2
|
Net
loss
|
$
(87,000
)
|
(5.5
)%
|
$
(195,151
)
|
(11.8
)%
|
$
108,151
|
(55.4
)%
|
|
|
|
|
|
|
|
Net loss per share
- basic and diluted
|
$
.00
|
|
$
(.01
)
|
|
$
.01
|
|
Sales
Our
managed service and virtualization project and software license
sales comprised approximately 81% of our sales in 2018 and
approximately 79% in 2017. Our 2018 commercial sales to SMEs, were
approximately 17% of our total sales as compared to approximately
16% for 2017.
Sales
of virtualization subcontract projects have continued to decrease
since 2015 because VMware has continued to assign fewer projects to
us. Our virtualization subcontract project sales decrease of
approximately 15% from 2017 to 2018 was offset in part by sales
growth of approximately 5% from our commercial SME businesses
during the three months ended March 31, 2018 as compared to 2017.
Our goal is to expand our VMware business in both the public and
commercial sector by building VMware license sales volume and
services concurrently directly with customers rather than relying
on subcontract project services. Sales of Nodeware through our
channel partners and other IT projects comprised the balance of our
sales.
Cost
of Sales and Gross Profit
Cost of
sales principally represents the cost of employee services related
to our IT Services Group. In smaller amounts, we also incurred cost
of sales for third party software licenses for our commercial SME
partners. As virtualization project sales decreased, related
personnel cost of sales also decreased.
Our
gross profit improved although sales decreased by $52,510 or 3.2 %.
This was due to gross profit earned by our commercial SME business,
which resells Webroot licenses and other IT projects.
General
and Administrative Expenses
General
and administrative expenses include corporate overhead such as
compensation and benefits for executive, administrative and finance
personnel, rent, insurance, professional fees, travel, and office
expenses. General and administrative expenses was relatively
unchanged for the periods.
Selling
Expenses
The
decrease in selling expenses is due to the reduction of employee
salaries and benefits totaling approximately $42,100. We also
reduced our use of a marketing consultants by approximately
$17,000. We revised our Nodeware and commercial SME marketing
efforts to using more on-line and internet based marketing
techniques.
Operating
Loss
The
reduction in our operating loss is principally attributable to an
improved gross margin and decreases in selling expenses for the
three months ended March 31, 2018 as compared to 2017.
Interest
Expense
The
increase in interest expense is principally attributable to a net
increase in long-term debt to fund our operations.
Net
Loss
The
decrease is attributable to the items discussed above for the three
months ended March 31, 2018 as compared to 2017.
Liquidity and Capital Resources
At
March 31, 2018, we had cash of $17,015 available for working
capital needs and planned capital asset expenditures. During 2018,
we financed our business activities principally through cash flows
provided by operations and sales with recourse of our accounts
receivable. Our primary source of liquidity is cash provided by
collections of accounts receivable and our factoring line of
credit.
We
maintain an accounts receivable financing line of credit with an
independent financial institution that allows us to sell selected
accounts receivable invoices to the financial institution with full
recourse against us in the amount of $2,000,000, including a
sublimit for one major client of $1,500,000. This provides us with
the cash needed to finance certain of our on-going costs and
expenses. At March 31, 2018, we had financing availability, based
on eligible accounts receivable, of approximately $102,000 under
this line. We pay fees based on the length of time that the invoice
remains unpaid.
We
entered into unsecured lines of credit financing agreement (the
“LOC Agreements”) with three related parties. The LOC
Agreements provide for working capital of up to $400,000 through
January 1, 2020, $100,000 through July 31, 2022 and $75,000 through
January 2, 2023. At March 31, 2018, we had approximately $33,000 of
availability under the LOC Agreements.
At
March 31, 2018, we had a working capital deficit of approximately
$2,730,000 and a current ratio of .10.
At
March 31, 2018, we have current notes payable of $362,500 to third
parties, which includes convertible notes payable of $290,000. Also
included is $12,500 in principal amount of a note payable due on
June 30, 2016 but not paid. This note was issued in payment of
software we purchased in February 2016 and secured by a security
interest in the software. To date, the holder has not taken any
action to collect the amount past due on this note or to enforce
the security interest in the software.
We have
current maturities of long-term obligations of approximately
$246,000 to the Pension Benefit Guaranty Corporation (the PBGC)
with all principal due by September 15, 2018, which the due date
has not been extended. We have maturities of our long-term notes to
third parties of $265,000 due on January 1, 2018, which has not
been renewed or amended and $175,000 due on August 31, 2018.
Previously, we have extended certain notes totaling $440,000 with
certain lenders.
We have
a note payable of $25,000 due to our Chief Operating Officer which
matured on March 31, 2018 and a note payable of $20,000 to a
related party which matured on December 31, 2017. We plan to
renegotiate the terms of the notes payable, seek funds to repay the
notes or use a combination of both alternatives.
On July
12, 2018, we borrowed $70,000 from an officer of the Company under
the terms of an unsecured demand promissory note with interest at
6%. The balance of this note is $12,000 at March 31,
2018.
We
borrowed $20,000 from the unsecured line of credit financing
agreement with a related party during the first quarter. The LOC
Agreement was entered into on September 17, 2017 and provides for
working capital of up to $75,000 with interest at 6% due quarterly
through January 2, 2023. The balance is $70,000 at March 31,
2018.
We
cannot provide assurance that we will be able to repay current
notes payable or obtain extensions of maturity dates for long-term
notes payable when they mature or that we will be able to repay or
otherwise refinance the notes at their scheduled
maturities.
We have
maturities of our long-term debt to related parties in the amount
of approximately $524,000 due on January 1, 2020 and for $9,000 due
on January 1, 2021.
We have
long-term obligations to third parties of $264,000 due on January
1, 2020 and $500,000 due on December 31, 2021.
We have
an unsecured line of credit financing agreement with our Chief
Operating Officer. It provides for working capital of up to
$100,000 with an interest rate of prime plus 1.5% due quarterly
through July 31, 2021. The balance is $90,000 at March 31,
2018.
The
following table sets forth our cash flow information for the
periods presented:
|
Three
Months Ended March 31,
|
|
|
|
Net cash used by
operating activities
|
$
(76,049
)
|
$
(4,385
)
|
Net cash used by
investing activities
|
0
|
(1,506
)
|
Net cash provided
(used) by financing activities
|
19,330
|
(7,789
)
|
Net decrease in
cash
|
$
(56,719
)
|
$
(13,680
)
|
Cash
Flows Used by Operating Activities
Our
operating cash flow is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect
from our clients in a timely manner, and our ability to manage our
vendor payments. We bill our clients weekly or monthly after
services are performed, depending on the contract terms. Our net
loss of $87,000 for 2018 was offset in part by non-cash expenses
and credits of $2,488. In addition, a decrease in accounts
receivable and other assets of $205,452, an increase in accrued
payroll and other expenses payable of $157,239 was offset by
decreases in accounts payable of $356,577 resulting in a use of
funds of $76,049.
We are
marketing Webroot and Nodeware to our IT channel partners who
resell to their customers. We are making investments in expanding
our virtualization sales of projects and VMware licenses to
commercial and SLED customers. Due to the lengthy lead times
typically needed to generate these new sales, we do not expect to
realize a return from our sales and marketing personnel for one or
more quarters. As a result, we may continue to experience operating
losses from these investments in personnel until sufficient sales
are generated. We expect to fund the cost for the new sales
personnel from our operating cash flows and incremental borrowings,
as needed.
Cash
Flows Used by Investing Activities
No cash
was used by investing activities during the three months ended
March 31, 2018. 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
provided by financing activities was $19,330 for the three months
ended March 31, 2018 consisting of $20,000 in borrowings from a
related party offset by principal payments of $670 to a related
party.
Credit Resources
We maintain an accounts receivable financing line of credit from an
independent financial institution that allows us to sell selected
accounts receivable invoices to the financial institution with full
recourse against us in the amount of $2,000,000, including a
sublimit for one major client of $1,500,000. This provides us with
the cash needed to finance certain costs and expenses. At March 31,
2018, we had financing availability, based on eligible accounts
receivable, of approximately $102,000 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 and third-party loans
and cash generated by improving the results of our operations
provide sources to fund the ongoing operations and to support our
internal growth. Although we cannot give any assurances, we believe
that related parties, who have previously provided working capital,
and third parties will continue to provide working capital loans on
similar terms, as in the past, as may be necessary to fund our
on-going operations for at leastthe next 12 months. However,
substantial doubt about our ability to continue as a going concern
has not been alleviated. If we experience significant growth in
sales, we believe that this may require us to increase our
financing line, finance additional accounts receivable, or obtain
additional working capital from other sources to support the sales
growth.
We
anticipate financing growth from acquisitions of other businesses,
if any, and our longer-term internal growth through one or more of
the following sources: cash from collections of accounts
receivable; additional borrowing from related and third parties;
issuance of equity; use of our existing accounts receivable credit
facility; or a refinancing of our accounts receivable credit
facility.