Note 2. Management Plans - Capital Resources
The
Company reported net losses of $114,000
and
$578,151 for the nine months ended September 30, 2018 and 2017,
respectively, and stockholders’ deficiencies of $4,152,564
and $4,038,564 at September 30, 2018 and December 31, 2017,
respectively. Accordingly
, and due to
current 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 June 30, 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 September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
Managed support
services
|
$
1,224,138
|
$
1,219,370
|
$
3,657,509
|
$
3,764,613
|
Cybersecurity
projects and software
|
295,138
|
290,325
|
865,449
|
896,965
|
Other IT consulting
services
|
51,066
|
76,583
|
143,604
|
137,856
|
Total
sales
|
$
1,570,342
|
$
1,586,278
|
$
4,666,562
|
$
4,799,434
|
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
either based on an allocation of the transaction price to each
performance obligation based on a relative standalone selling price
of the products sold.
●
In substantially all agreements, a 50% to 75% down payment is
required before work is initiated. Down payments received are
deferred until revenue is recognized. 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 nine months ended September 30, 2018, sales to one client,
including sales under subcontracts for services to several
entities, accounted for 71.4% of total sales (69.6% - 2017) and
27.9% of accounts receivable at September 30, 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 at January 1, 2019.
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 8.85% at September 30, 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 nine months ended September 30, 2018, the Company sold
approximately $3,890,000 ($3,695,000 - September 30, 2017) of its
accounts receivable to the Purchaser. As of September 30, 2018,
approximately $389,000 ($4,486 - December 31, 2017) of these
receivables remained outstanding. Additionally, as of September 30,
2018, the Company had approximately $97,000 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 $38,904, at September 30, 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 $40,007 for the nine months ended September 30, 2018
($35,944 - September 30, 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:
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
Numerator for basic
and diluted net loss per share:
|
|
|
|
Net
income (loss)
|
$
16,000
|
$
(188,000
)
|
$
(114,000
)
|
$
(578,151
)
|
Denominator for
basic and diluted net loss per share:
|
|
|
|
|
Weighted average
common shares outstanding
|
29,061,883
|
29,105,361
|
29,061,883
|
29,076,535
|
Basic and diluted
net income (loss) per share
|
$
.00
|
$
(.01
)
|
$
.00
|
$
(.02
)
|
|
|
|
|
|
Anti-dilutive
shares excluded from net loss share calculation
|
28,530,252
|
28,033,096
|
28,530,252
|
28,033,096
|
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. Notes Payable - Related Parties
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%.
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
September 30, 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 September 30, 2018.
Note 7. Stock Option Plans and Agreements
The
Company has approved stock options plans and agreements covering up
to an aggregate of 8,273,000 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 nine months ended September 30, 2018. The following
assumptions were used for the nine months ended September 30,
2017.
Risk-free interest
rate
|
1.50% - 1.58
%
|
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 $25,198 for the nine months
ended September 30, 2018 and 2017, respectively.
At
September 30, 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 nine months
ended September 30, 2018.
A
summary of all stock option activity for the nine months ended
September 30, 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
|
(406,000
)
|
$
.26
|
|
|
Outstanding at
September 30, 2018
|
7,625,000
|
$
.09
|
3.5
years
|
$
0
|
|
|
|
|
|
At September 30,
2018 - vested or
|
|
|
|
|
expected to vest
and exercisable
|
6,687,000
|
$
.07
|
3.9
years
|
$
0
|
Note 8. Related Party Accounts Receivable and Accrued Interest
Payable
Accrued
Interest Payable - Included in accrued interest payable is accrued
interest payable to related parties of $141,097 at September 30,
2018 ($104,862 - December 31, 2017).
Note 9. Subsequent Event
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 Perspecta, Inc.); 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. We sell
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 and Nine Months Ended September 30, 2018
and 2017
The
following tables compares our statements of operations data for the
three and nine months ended September 30, 2018 and 2017. The trends
suggested by this table are not indicative of future operating
results.
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
1,570,342
|
100.0
%
|
$
1,586,278
|
100.0
%
|
$
(15,936
)
|
(1.0
)%
|
Cost of
sales
|
1,005,542
|
64.0
|
1,133,202
|
71.4
|
(127,660
)
|
(11.3
)
|
Gross
profit
|
564,800
|
36.0
|
453,076
|
28.6
|
111,724
|
24.7
|
General and
administrative
|
261,401
|
16.6
|
290,142
|
18.3
|
(28,741
)
|
(9.9
)
|
Selling
|
223,367
|
14.2
|
288,093
|
18.2
|
(64,726
)
|
(22.5
)
|
Total costs and
expenses
|
484,768
|
30.9
|
578,235
|
36.5
|
(93,467
)
|
(16.2
)
|
Operating income
(loss)
|
80,032
|
5.1
|
(125,159
)
|
(7.9
)
|
205,191
|
163.9
|
Interest
expense
|
(64,032
)
|
(4.1
)
|
(62,841
)
|
(4.0
)
|
1,191
|
1.9
|
Net income
(loss)
|
$
16,000
|
1.0
%
|
$
(188,000
)
|
(11.9
)%
|
$
204,000
|
(108.5
)%
|
|
|
|
|
|
|
|
Net income (loss)
per share - basic and diluted
|
$
.00
|
|
$
(.01
)
|
|
$
.01
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
4,666,562
|
100.0
%
|
$
4,799,434
|
100.0
%
|
$
(132,872
)
|
(2.8
)%
|
Cost of
sales
|
3,063,893
|
65.7
|
3,395,436
|
70.7
|
(331,543
)
|
(9.8
)
|
Gross
profit
|
1,602,669
|
34.3
|
1,403,998
|
29.3
|
198,671
|
14.2
|
General and
administrative
|
848,735
|
18.2
|
867,097
|
18.1
|
(18,362
)
|
(2.1
)
|
Selling
|
677,677
|
14.5
|
931,840
|
19.4
|
(254,163
)
|
(27.3
)
|
Total costs and
expenses
|
1,526,412
|
32.7
|
1,798,937
|
37.5
|
(272,525
)
|
(15.1
)
|
Operating income
(loss)
|
76,257
|
1.6
|
(394,939
)
|
(8.2
)
|
471,196
|
119.3
|
Interest
expense
|
(190,257
)
|
(4.1
)
|
(183,212
)
|
(3.8
)
|
7,045
|
3.8
|
Net
loss
|
$
(114,000
|
( 2.4
)%
|
$
(578,151
)
|
(12.0
)%
|
$
464,151
|
(80.3
)%
|
|
|
|
|
|
|
|
Net loss per share
- basic and diluted
|
$
.00
|
|
$
(.02
)
|
|
$
.02
|
|
Sales
Our
managed service and virtualization project and software license
sales comprised approximately 79% of our sales in 2018 and 2017.
Our 2018 commercial sales to SMEs, were approximately 18% of our
total sales as compared to approximately 17% 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 decreased by
approximately 22% for the nine months ended September 30, 2017 to
2018. Our virtualization sales increased by 11.1% for the three
months ended September 30, 2018 as compared to the three months
ended September 30, 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 by 24.7% for the three months ended September
30, 2018 as compared to 2017 and 14.2% for the comparable nine
month periods. Sales decreased 1.0% and 2.8% for the three and nine
months ended September 30, 2018 and 2017, respectively. We improved
our gross profit margin from our managed services
due to
less contractor use. This
offset decreased gross profit
margin from our virtualization projects. Other IT services
contributed gross profit through improved utilization of our
employees.
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 decreased by
relatively small amounts for the periods due to reductions in
professional fees and employee compensation.
Selling
Expenses
The
decrease in selling expenses is due to the reduction of employee
salaries and benefits totaling approximately $93,000 and $247,000
for the three and nine months ended September 30, 2018,
respectively. We revised our Nodeware and commercial SME marketing
efforts to using more on-line and internet based marketing and
selling techniques. We engaged a new marketing and lead generation
consulting group in April 2018 resulting in consulting and third
party marketing expenses increasing by $35,400 for the nine months
ended September 30, 2018.
Operating
Income (Loss)
The
improvement in our operating income (loss) is principally
attributable to an improved gross margin and decreases in selling
expenses for the three and nine months ended September 30, 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. The prime rate
increased from 4.5% at December 31, 2017 to 5.25% on September 27,
2018. The interest rate changes increased our financing costs under
our accounts receivable financing line and our line of credit
payable to a related party.
Net
Income (Loss)
The
decrease is attributable to the items discussed above for the three
and nine months ended September 30, 2018 as compared to
2017.
Liquidity and Capital Resources
At
September 30, 2018, we had cash of $3,643 available for working
capital needs and planned capital asset expenditures. During 2018,
we financed our business activities principally through cash flows
provided by operations, sales with recourse of our accounts
receivable and borrowings from related parties. 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 September
30, 2018, we had financing availability, based on eligible accounts
receivable, of approximately $97,000 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 agreements (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 September 30, 2018, we had approximately
$34,000 of availability under the LOC Agreements.
At
September 30, 2018, we had a working capital deficit of
approximately $2,748,000 and a current ratio of .10.
At
September 30, 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 September 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 $82,000 at September 30,
2018.
We
borrowed $20,000 from the unsecured line of credit financing
agreement with a related party during the first quarter of 2018.
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
September 30, 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 September 30,
2018.
The
following table sets forth our cash flow information for the
periods presented:
|
Nine
Months Ended September 30,
|
|
|
|
Net cash used by
operating activities
|
$
(158,751
)
|
$
(105,597
)
|
Net cash used by
investing activities
|
0
|
(5,608
)
|
Net cash provided
by financing activities
|
88,660
|
82,871
|
Net decrease in
cash
|
$
(70,091
)
|
$
(28,334
)
|
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 $114,000 for 2018 was offset in part by non-cash expenses
and credits of $15,315. In addition, a decrease in accounts
receivable and other assets of $201,926 was offset by decreases in
accounts payable and accrued expenses of $261,992 resulting in a
use of funds of $158,751.
We
market Webroot and Nodeware to our IT channel partners who resell
to their customers. We are making investments in expanding our
sales of cyber security and virtualization 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 nine months ended
September 30, 2018. We expect to continue to invest in computer
hardware and software to update our technology to support our
business.
Cash
Flows Provided by Financing Activities
Cash
provided by financing activities was $88,660 for the nine months
ended September 30, 2018 consisting of $90,000 in borrowings from
related parties offset by principal payments of $1,340 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 September
30, 2018, we had financing availability, based on eligible accounts
receivable, of approximately $97,000 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 least the next 12 months. However,
substantial doubt about our ability to continue as a going concern
has not been alleviated. If we experience significant growth in
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.