Item 1A. Risk Factors
In
addition to the other information provided in our reports, you
should consider the following factors carefully in evaluating our
business and us. Additional risks and uncertainties not presently
known to us, which we currently deem immaterial or that are similar
to those faced by other companies in our industry or business in
general, such as competitive conditions, may also impair our
business operations. If any of the following risks occur, our
business, financial condition, or results of operations could be
materially adversely affected.
Risks Related to our Industry
System security risks, data protection breaches, cyberattacks, and
systems integration issues could disrupt our internal operations or
IT services provided to customers, and any such disruption could
reduce our revenue, increase our expenses, damage our
reputation.
We sell
cybersecurity services, third-party software as well as our
internally developed software, Nodeware. As a result, we have
been and will be a target of cyber-attacks designed to impede the
performance of our products, penetrate our network security or the
security of our cloud platform or our internal systems, or that of
our customers, misappropriate proprietary information and/or cause
interruptions to our services. For example, because Nodeware is a
network vulnerability management tool, a successful cyber-attack on
us may be perceived as a victory for the cyber attacker, thereby
increasing the likelihood that we may be a target of more
cyber-attacks, even absent financial motives. Further, if our
systems are breached as a result of third-party action, employee
error or misconduct, attackers could learn critical information
about how our primary product operates to help protect our
customers’ IT infrastructures from cyber risk, thereby making
our customers more vulnerable to cyber-attacks. In addition, if
actual or perceived breaches of our network security occur, they
could adversely affect the market perception of our Nodeware
product, negatively affecting our reputation, and may expose us to
the loss of our proprietary information or information belonging to
our customers, investigations or litigation and possible liability,
including injunctive relief and monetary damages. Such security
breaches could also divert the efforts of our technical and
management personnel. In addition, such security breaches could
impair our ability to operate our business and provide products to
our customers. If this happens, our reputation could be harmed, our
revenue could decline, and our business could suffer. We
monitor our network continuously with our Nodeware product as well
as other cybersecurity software.
We are
not aware of or identified an incident leading to a breach of our
internal or external facing systems. We have implemented
several proactive policies and procedures to mitigate any internal
incidents from outside forces. This includes deploying additional
monitoring software, phishing training, creating an internal
incident response team, and additional awareness through internal
communications around typical attempts that outside forces use.
While we have seen phishing attempts sent to certain email
addresses, we have mitigated those through the aforementioned
steps. Our internal security team has blocked the associated
addresses and/or domains of the senders and has enhanced email
security features to identify external emails. Overall, our
internal security posture continues to evolve as the market
evolves. We have a cyber insurance policy which will cover
certain expenses related to an attack, such as certain business
interruption costs associated with an incident.
We depend on prime contracts or subcontracts with the federal,
state and local governments for a substantial portion of our sales,
and our business would be seriously harmed if the government ceased
doing business with us or our prime contractors or significantly
decreased the amount of business it does with us or our prime
contractors.
We
derived approximately 70% of our sales in 2020 from contracts as
either a prime contractor or a subcontractor from government
contracts. We expect that we will continue to derive a substantial
portion of our sales for the foreseeable future from work performed
under government contracts, as we have in the past, and from
marketing efforts focused on commercial enterprises. If we or our
prime contractors were suspended or prohibited from contracting
with federal, state or local governments, or if our reputation or
relationship with the federal, state or local governments and
commercial enterprises were impaired, or if any of the foregoing
otherwise ceased doing business with us or our prime contractors or
significantly decreased the amount of business it does with us or
our prime contractors, our business, prospects, financial condition
and operating results would be materially adversely
affected.
Our business could be adversely affected by changes in budgetary
priorities of the federal, state and local
governments.
Because
we derive a significant portion of our sales from contracts with
federal, state and local governments, we believe that the success
and development of our business will continue to depend on our
successful participation in their contract programs. Changes in
federal, state and local government budgetary priorities could
directly affect our financial performance. A significant decline in
government expenditures, a shift of expenditures away from programs
which call for the types of services that we provide or a change in
government contracting policies, could cause U.S. Governmental
agencies as well as state and local governments to reduce their
expenditures under contracts, to exercise their right to terminate
contracts at any time without penalty, not to exercise options to
renew contracts or to delay or not originate new contracts. Any of
those actions could seriously harm our business, prospects,
financial condition or operating results. Moreover, although our
contracts with governmental entities may contemplate that our
services will be performed over a period of several years,
government entities usually must approve funds for a given program
each government fiscal year and may significantly reduce or
eliminate funding for a program. Significant reductions in these
appropriations could have a material adverse effect on our
business. Additional factors that could have a serious adverse
effect on our government contracting business include, but may not
be limited to:
●
changes in
government programs or requirements;
●
budgetary
priorities limiting or delaying government spending generally, or
by specific departments or agencies and changes in fiscal policies
or available funding, including potential governmental
shutdowns;
●
reductions in the
government's use of technology solutions firms;
●
a decrease in the
number of contracts reserved for small businesses, or small
business set asides, which could result in our inability to compete
directly for these prime contracts; and
●
curtailment of the
government uses of IT or related professional
services.
Risks Related to our Business and Financial Condition
Our results of operations may be negatively impacted by the
coronavirus outbreak.
In
December 2019, the 2019 novel coronavirus surfaced in China and the
virus has now spread to other countries, including the United
States and infections have been reported globally. The impacts of
the outbreak are unknown and rapidly evolving.
To
date, the outbreak has not had a material adverse impact on our
operations. However, the future impact of the outbreak is highly
uncertain and cannot be predicted and there is no assurance that
the outbreak will not have a material adverse impact on our
business, operations and the market for our securities. The extent
of the impact, if any, will depend on future developments,
including actions taken to contain the coronavirus. There can be no
assurance that our personnel will not be impacted by these pandemic
diseases and ultimately see our workforce productivity reduced or
incur increased medical costs / insurance premiums as a result of
these health risks.
In
addition, a significant outbreak of coronavirus could result in a
widespread global health crisis that could adversely affect global
economies and financial markets resulting in an economic
downturn.
We rely on one customer for a large portion of our
revenues.
We depend on one customer for a large portion of our revenue.
During 2020, sales to one customer, including sales under
subcontracts, accounted for 61.2% of total sales and 38.8% of
accounts receivable at December 31, 2020. The loss of this customer
could have a significant impact on our revenues and harm our
business and results of operations.
We are highly leveraged, which increases our operating deficit and
makes it difficult for us to grow.
At
December 31, 2020, we had current liabilities of approximately $3.1
million and long-term liabilities of $1.6 million and
stockholders’ deficiency of $3,105,770. We had a working
capital deficit of approximately $2.1 million and a current ratio
of .35. Working capital shortages may impair our business
operations and growth strategy, and accordingly, our business,
operations.
If we acquire businesses or business assets and do not successfully
integrate the acquisitions, our results of operations could be
adversely affected.
We may
grow our business by acquiring or investing in companies and
businesses and assets that we feel have synergy and will complement
our business plan. As such, we periodically evaluate potential
business combinations and investments in other companies and
assets. We may be unable to profitably manage businesses and assets
that we may acquire or invest in. We may fail to integrate these
businesses and assets successfully without incurring substantial
expenses, delays or other problems that could negatively impact our
results of operations.
Our investments in cybersecurity and other business initiatives may
not be successful.
We have
invested in and continue to invest in cybersecurity capabilities to
add new products and services to address the needs of our clients,
including our newly introduced product, Nodeware. Our investments
may not be successful or increase our revenues. If we are not
successful in creating value from our investments by increasing
sales, our financial condition and prospects could be
harmed.
If we fail to adequately manage the size of our business, it could
have a severe negative impact on our financial results or stock
price.
Our management believes that to be successful we must appropriately
manage the size of our business. This may mean reducing costs and
overhead in certain economic periods, and selectively growing in
periods of economic expansion. In addition, we will be required to
implement operational, financial and management information
procedures and controls that are efficient and appropriate for the
size and scope of our operations. The management skills and systems
currently in place may not be adequate and we may not be able to
manage any significant reductions or growth
effectively.
We may have difficulties in managing our growth.
Our
future growth depends, in part, on our ability to expand, train and
manage our employee base and provide support to an expanded client
base. We must also enhance and implement new operating and software
systems to accommodate our growth and expansion of IT product and
service offerings. If we cannot manage growth effectively, it could
have a material adverse effect on our results of operations,
business and financial condition. In addition, acquisitions,
investments and expansion involve substantial infrastructure costs
and working capital. We cannot provide assurance that we will be
able to integrate acquisitions, if any, and expansions efficiently.
Similarly, we cannot provide assurance that any investments or
expansion will enhance our profitability. If we do not achieve
sufficient sales growth to offset increased expenses associated
with our expansion, our results will be adversely
affected.
We depend on the continued services of our key
personnel.
Our
future success depends, in part, on the continuing efforts of our
senior executive officers. The loss of any of these key employees
may materially adversely affect our business.
Our future success depends on our ability to continue to retain and
attract qualified employees.
We
believe that our future success depends upon our ability to
continue to train, retain, effectively manage and attract highly
skilled technical, managerial, sales and marketing personnel. This
includes skills for our new initiatives in cybersecurity. Employee
turnover is generally high in the IT services industry. If our
efforts in these areas are not successful, our costs may increase,
our sales efforts may be hindered, and the quality of our client
service may suffer. Although we invest significant resources in
recruiting and retaining employees, there is often significant
competition for certain personnel in the IT services industry. From
time to time, we experience difficulties in locating enough highly
qualified candidates in desired geographic locations, or with
required specific expertise.
Risks Related to our Common Stock
The price of our common stock may be adversely affected by the
possible issuance of shares to third parties upon conversion of
outstanding notes.
We have four convertible notes outstanding to third parties that
are convertible into shares of common stock at prices ranging from
$.05 to $.25 per share. If these notes were converted into common
stock, the holders would receive approximately 5,025,000 shares of
our common stock or approximately 14.7% of our common stock outstanding as of March 25,
2021.
Our stock price is volatile and could be further affected by events
not within our control.
The
trading price of our common stock has been volatile and will
continue to be subject to volatility in the trading markets and
other factors.
The
closing market price for our common stock varied between a low of
$.03 and a high of $.15 in 2020. This volatility may affect the
price at which a stockholder could sell its shares of common stock,
and the sale of substantial amounts of our common stock could
adversely affect the price of our common stock. Our stock price is
likely to continue to be volatile and subject to significant price
and volume fluctuations in response to market and other factors,
including variations in our quarterly operating results and
announcement by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, or capital
commitments.
Our common stock is currently
quoted on the Over The Counter (OTC) Bulletin Board. Because there
is a limited public market for our common stock, a stockholder may
not be able to sell shares when he or she wants.
We cannot assure you that an active
trading market for our common stock will ever
develop.
There
is limited trading in our common stock, and we cannot assure you
that an active public market for our common stock will ever
develop. The lack of an active public trading market means that a
stockholder may not be able to sell shares of common stock when
wanted, thereby increasing market risk. Until our common stock is
listed on an exchange, we expect that the shares will continue to
be quoted on the OTC Bulletin Board. However, an investor may find
it difficult to obtain accurate quotations regarding the common
stock’s market value. In addition, if we failed to meet the
criteria set forth in SEC regulations, various requirements would
be imposed by law on broker-dealers who sell our securities to
persons other than established customers and accredited investors.
Consequently, such regulations may deter broker-dealers from
recommending or selling our common stock, which may further affect
the shares liquidity. Moreover, our ability to obtain future
financing may be adversely affected by the consequences of our
common stock trading on the OTC Bulletin Board.
Our common stock may be considered a “penny stock” and
may be difficult to buy or sell.
The
Securities and Exchange Commission (SEC) has adopted regulations
which generally define “penny stock” to be an equity
security that has a market or exercise price of less than $5.00 per
share, subject to specific exemptions. The market price of our
common stock is currently below $5.00 per share and therefore may
be designated as a “penny stock” according to SEC
rules. This designation requires any broker or dealer selling these
securities to disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and
determine that the purchaser is reasonably suitable to purchase the
securities. These rules may restrict the ability of brokers or
dealers to accept our share certificates into a customer account
and may affect the ability of our stockholders to sell their
shares.
PART III
Item 10. Directors, Executive Officers, and Corporate
Governance
Set forth below are the names, ages and positions of our executive
officers and directors.
|
Name
|
|
Position
|
|
|
James Villa
(1)
|
63
|
Chief Executive
Officer
|
2003
|
|
Donald W. Reeve
(1)
|
74
|
Chairman of the
Board
|
2013
|
|
Andrew
Hoyen
|
50
|
President and Chief
Operating Officer
|
2014
|
|
Richard
Glickman
|
59
|
VP Finance and
Chief Accounting Officer
|
2019
|
________________________
(1) Member of the audit and compensation committees.
Each director is elected for a period of one year and serves until
his successor is duly elected and qualified. Officers are elected
by and serve at the will of our Board.
Background
The
principal occupation of each of our directors and executive
officers for at least the past five years is as
follows:
James Villa is our Chief Executive Officer and a director.
He became a director on July 1, 2008, our President on February 25,
2010 and our Chief Executive Officer on January 21, 2014. He is
also chairman of the audit and compensation committees. Mr. Villa
was our Acting Chief Executive Officer from December 31, 2010 to
January 21, 2014. Mr. Villa brings to the Board his experience with
us since 2003 as well as professional experience gained from his
services to a variety of public and privately held middle market
businesses.
Donald W. Reeve became a director on December 31, 2013. He
became Chairman of the Board on August 20, 2019. Since January
2013, he has been the principal partner at ReTech Services, LLC, a
management consulting practice. Since August 2013, Mr. Reeve has
been providing consulting services to us on a part time basis
without cash compensation. Previously, Mr. Reeve was Senior Vice
President and Chief Information Officer for Wegmans Food Markets, Inc. (Wegmans)
from May 1986 until his retirement in August 2012. In that
position, he managed an information technology staff of
approximately 300 professionals with responsibilities for
development, application and support services of computer
technology. Prior to May 1986 and since 1970, he held various
positions of increasing responsibility for Wegmans. He attended
Monroe Community College and SUNY Empire State College, earned an
associate's degree at Rochester Business Institute and is a veteran
of the U.S. Army. Mr. Reeve brings to the Board the experience of
managing the IT requirements for a growing company in a competitive
environment. Mr. Reeve provides strategic guidance to the Board and
our management as we continue to enter various commercial IT
markets.
Andrew Hoyen is our current
President and Chief Operating Officer. He was initially appointed
Chief Administrative Officer and Senior Vice President of Business
Development on October 1, 2014. In January 2016, he was appointed
Chief Operating Officer. On July 18, 2017, he was elected to the
board of directors In
September 2020 , he was named President in addition to his role as
Chief Operating Officer. Mr. Hoyen is responsible for
developing and implementing our strategic direction through
improved operations, sales and marketing, product development, and
overall collaboration across the enterprise. Previously, since
2011, he was Vice President of National Accounts at Toyota Material
Handling North America. Prior to that, from 2002 to 2011, he served
in several executive roles in operations, service and sales at
Eastman Kodak Company and their spin-off, Carestream Health. His
last position at Carestream Health was Vice President of Sales and
Service for the Northeast Region. He holds a Bachelor of Science
degree in biotechnology from Worcester Polytechnic Institute, a
Master of Public Health degree from State University of New York at
Albany and a Master of Business Administration degree from
Rochester Institute of Technology.
Committees of the Board of Directors
Our
Board has an audit committee and a compensation committee. The
audit committee reviews the scope and results of the audit and
other services provided by our independent registered public
accounting firm and our internal controls. The compensation
committee is responsible for the approval of compensation
arrangements for our officers and the review of our compensation
plans and policies. Each committee is comprised of Mr. Villa and
Mr. Reeve.
Audit Committee Financial Expert
Our
audit committee is comprised of Mr. Villa, as chairman, and Mr.
Reeve. The Board has determined that Mr. Villa qualifies as our
audit committee financial expert, as that term is defined in Item
407(d)(5) of Regulation S-K. Neither Mr. Villa nor Mr. Reeve is
independent for audit committee purposes under the definition
contained in Section 10A(m)(3) of the Exchange Act.
Code of Ethics
We have adopted a code of business conduct and ethics that applies
to our principal executive officer, principal financial officer and
other persons performing similar functions, as well as all
employees and directors. This code of business conduct and ethics is posted on
our website at www.igicybersecurity.com under Business Conduct
Guidelines.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our officers and directors, and
persons who own more than ten percent of a registered class of our
equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than
ten-percent stockholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely
on review of the copies of such forms furnished to us, or written
representations that no Forms 5 were required, we believe that all
required Section 16(a) filings were timely made for the year ended
December 31, 2020. With respect to any of our former directors,
officers, and greater than ten-percent stockholders, we have no
knowledge of any known failure to comply with the filing
requirements of Section 16(a).
Item 11. Executive Compensation
The
Summary Compensation Table below includes, for each of the years
ended December 31, 2020 and 2019, individual compensation for
services to Infinite Group, Inc. paid to: (i) our Chief Executive
Officer, our Chief Financial Officer and (ii) the next most highly
paid executive officers whose total compensation exceeded $100,000
for the year ended December 31, 2020 (together, the Named
Executives).
|
Name and Principal
Position
|
Year
|
|
|
|
|
James
Villa
|
2020
|
$238,664
|
$0
|
$238,664
|
|
Chief Executive
Officer
|
2019
|
$223,401
|
$5,575
|
$228,976
|
|
Andrew
Hoyen
|
2020
|
$225,078
|
$0
|
$225,078
|
|
President and Chief
Operating Officer
|
2019
|
$214,251
|
$8,875
|
$223,126
|
|
Richard
Glickman
|
2020
|
$114,235
|
$1,783
|
$116,018
|
|
VP Finance and
Chief Accounting Officer
|
2019
|
$97,308
|
$3,325
|
$100,633
|
_________________
* The
amounts in this column reflect the grant date fair value for stock
option awards granted during the year and do not reflect whether
the recipient has realized a financial gain from such awards such
as by exercising stock options. The fair value of the stock option
awards was determined using the Black-Scholes option pricing model.
See Note 3 to the financial statements in this report regarding
assumptions underlying valuation of equity awards.
Stock Options
The following table provides information with respect to the value
of all unexercised options previously awarded to our Named
Executives as of December 31, 2020.
|
Name
|
Number
of Securities Underlying Unexercised Options
-
Exercisable
|
Number of Securities Underlying Unexercised
Options - Unexercisable
|
|
Option Expiration Date
|
|
James
Villa
|
500,000
|
-
|
$.115
|
1/20/2024
|
|
|
500,000
|
-
|
$.04
|
9/29/2021
|
|
|
250,000
|
-
|
$.05
|
12/22/2024
|
|
|
250,000
|
|
$.12
|
11/16/2025
|
|
|
|
|
|
|
|
Andrew
Hoyen
|
250,000
|
-
|
$.02
|
6/1/2026
|
|
|
500,000
|
-
|
$.04
|
9/29/2021
|
|
|
400,000
|
-
|
$.04
|
7/31/2022
|
|
|
100,000
|
-
|
$.04
|
7/17/2022
|
|
|
200,000
|
-
|
$.04
|
12/09/2024
|
|
|
250,000
|
-
|
$.05
|
12/22/2024
|
|
|
|
|
|
|
|
Richard
Glickman
|
200,000
|
-
|
$.02
|
7/23/2024
|
|
|
50,000
|
-
|
$.04
|
12/9/2024
|
|
|
25,000
|
-
|
$.12
|
7/12/2025
|
Employment Agreements
We do
not have any employment agreements with any of the Named
Executives.
Compensation of Directors
Effective
August 13, 2019, we established that in connection with rendering
services as a Board of Directors, each non-management Director may
receive compensation, as applicable to each Director, if approved
by the Board. Directors are reimbursed for the costs relating to
attending Board and committee meetings.
Effective
August 20, 2019, the Board resolved to compensate Donald W. Reeve
$12,000 annually as Chairman of the Board.
At
December 31, 2020, Donald W. Reeve held exercisable options
for:
●
600,000 shares of
our common stock at an exercise price of $.05 per share which
expires on November 30, 2024;
●
500,000 shares of
common stock at an exercise price of $.15 per share which expires
on September 4, 2023; and
●
800,000 shares of
common stock at an exercise price of $.04 per share which expires
on September 29, 2021; and
●
250,000 shares of
common stock at an exercise price of $.05 per share which expires
on December 22, 2024.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial
ownership of our common stock, our only class of voting securities,
as of March 24, 2021 by:
●
each
person known to us to be the beneficial owner of more than 5% of
our outstanding shares;
●
each
Named Executive named in the Summary Compensation Table above;
and
●
all
directors and executive officers as a group.
Except as otherwise indicated, the persons listed below have sole
voting and investment power with respect to all shares of common
stock owned by them. All information with respect to beneficial
ownership has been furnished to us by the respective stockholder.
The address of record of each individual listed in this table,
except if set forth below, is c/o Infinite Group, Inc., 175
Sully’s Trail, Suite 202, Pittsford, New York
14534.
|
Name of Beneficial Owner (1)
|
Shares
of Common Stock Beneficially Owned (1)
|
|
|
|
Richard
Glickman
|
315,000
|
(3)
|
1.1%
|
|
Andrew
Hoyen
|
2,136,734
|
(4)
|
6.9%
|
|
Donald
W. Reeve
|
2,981,460
|
(5)
|
9.6%
|
|
James
Villa
|
7,198,326
|
(6)
|
20.3%
|
|
All
Directors and Officers (4 persons) as a group
|
12,631,520
|
(2)
|
31.7%
|
|
|
|
|
|
|
5% Stockholders:
|
|
|
|
|
Paul J.
Delmore
|
|
|
|
|
One America
Place
|
|
|
|
|
600 West Broadway,
28th Floor
|
|
|
|
|
San
Diego, CA 92101
|
2,545,151
|
(8)
|
8.8%
|
|
|
|
|
|
|
Harry A.
Hoyen
|
2,900,000
|
(9)
|
9.1%
|
|
Marblehead, OH
43440
|
|
|
|
|
|
|
|
|
|
James
Leonardo
|
2,500,000
|
|
8.6%
|
|
435
Smith Street
|
|
|
|
|
Rochester,
New York 14608
|
|
|
|
|
|
|
|
|
|
Allan M.
Robbins
|
1,500,000
|
(10)
|
5.1%
|
|
44 Hampstead
Drive
|
|
|
|
|
Webster, NY
14580
|
|
|
|
|
|
|
|
|
|
James
Witzel
|
1,760,678
|
(7)
|
5.8%
|
|
12677
Dundee Lane
|
|
|
|
|
Naples
, FL 34120
|
|
|
|
|
(1)
|
Pursuant
to the rules of the Securities and Exchange Commission, shares of
common stock include shares for which
the individual, directly or indirectly, has voting or shares voting
or disposition power, whether or not they are held for the
individual’s benefit, and shares which an individual
or group has a right to acquire within 60 days from March 25, 2021
pursuant to the exercise of options or upon the conversion of
securities are deemed to be outstanding for the purpose of
computing the percent of ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table. On
March 25, 2021, we had 29,061,883 shares of common stock
outstanding.
|
|
(2)
|
Assumes
that all currently exercisable options, which total 5,625,000
shares, and convertible securities, which total 5,136,326 shares,
owned by members of the group have been exercised.
|
|
(3)
|
Includes
275,000 shares subject to currently exercisable
options.
|
|
(4)
|
Includes
250,000 shares, which are issuable upon the conversion of a note in
the principal amount of $25,000 through March 24, 2021; and
1,700,000 shares subject to currently exercisable
options.
|
|
(5)
|
Includes
2,150,000 shares subject to currently exercisable
options.
|
|
(6)
|
Includes
4,886,326 shares, which are issuable upon the conversion of notes
to Northwest Hampton Holdings, LLC, whose sole member is James
Villa, including principal in the amount of $146,300 and accrued
interest in the amount of $98,016 through March 24, 2021; and
1,500,000 shares subject to currently exercisable
options.
|
|
(7)
|
Includes
328,371 shares, which are issuable upon the conversion of a note in
the principal amount of $9,000 and accrued interest in the amount
of $7,419 through March 24, 2021; and 848,000 shares subject to
currently exercisable options.
|
|
(8)
|
Includes
2,360,000 shares owned of record by Upstate Holding Group, LLC, an
entity wholly-owned by Mr. Delmore.
|
|
|
|
|
(9)
|
Consists
of 2,900,000 shares subject to currently exercisable
options.
|
|
(10)
|
Includes
500,000 shares subject to currently exercisable
options.
|
Securities Authorized for Issuance Under Equity Compensation
Plans
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 990,000 common shares at December
31, 2020. Since this plan has expired, no more options may be
granted.
The
2009 Plan was established in February 2009 to align the interests
of our employees, consultants, agents and affiliates with those of
our stockholders to incent them to increase their efforts on our
behalf and to promote the success of our business. Under the 2009
Plan up to 4,000,000 shares of common stock were authorized for
option grants. As of December 31, 2020, there are $3,427,000
options outstanding under the 2009 Plan. The 2009 Plan expired on
February 3, 2019; therefore, expired options after that date could
not be re-issued. Generally, the 2009 Plan is administered by the
compensation committee of the Board and provides (i) for the
granting of non-qualified stock options, (ii) that the maximum term
for options granted under the plan is 10 years and (iii) that the
exercise price for the options may not be less than 100% of the
fair market value of our common stock on the date of grant. Since
this plan has expired, no more options may be granted.
The
2019 Plan was established in August 2019 to align the interests of
our employees, consultants, agents and affiliates with those of our
stockholders to incent them to increase their efforts on our behalf
and to promote the success of our business. Under the 2019 Plan up
to 1,500,000 shares of common stock were authorized for option
grants. Generally, the 2019 Plan is administered by the
compensation committee of the Board and provides (i) for the
granting of non-qualified stock options, (ii) that the maximum term
for options granted under the plan is 10 years and (iii) that the
exercise price for the options may not be less than 100% of the
fair market value of our common stock on the date of grant. As of
December 31, 2020, an aggregate of 1,500 shares were available
under our 2019 stock option plan (the 2019 Plan) for option
grants.
The
2020 Plan was established in April 2020 to align the interests of
our employees, consultants, agents and affiliates with those of our
stockholders to incent them to increase their efforts on our behalf
and to promote the success of our business. Under the 2020 Plan up
to 1,500,000 shares of common stock were authorized for option
grants. Generally, the 2020 Plan is administered by the
compensation committee of the Board and provides (i) for the
granting of non-qualified stock options, (ii) that the maximum term
for options granted under the plan is 10 years and (iii) that the
exercise price for the options may not be less than 100% of the
fair market value of our common stock on the date of grant. As of
December 31, 2020, an aggregate of 560,000 shares were available
under our 2020 stock option plan (the 2020 Plan) for option
grants.
The
following table summarizes, as of December 31, 2020, the (i)
options granted under our option plans and (ii) all other
securities subject to contracts, options, warrants, and rights or
authorized for future issuance outside of our plans. The shares
covered by outstanding options or authorized for future issuance
are subject to adjustment for changes in capitalization stock
splits, stock dividends and similar events.
|
|
Equity Compensation Plan Table
|
|
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options, warrants
and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
|
|
|
|
Equity compensation
plans previously approved by security holders (1)
|
990,000
|
$.10
|
-
|
|
Equity compensation
plans not previously approved by security holders (2)
|
5,865,500
|
$.05
|
561,500
|
|
Individual option
grants that have not been approved by security holders
(3)
|
5,575,000
|
$.05
|
-
|
|
Total
|
12,430,500
|
$.05
|
561,500
|
___________________________
|
(1)
|
Consists
of grants under our 2005 Stock Option Plans of which all are
exercisable at December 31, 2020.
|
|
(2)
|
Consists
of grants under our 2009 Plan, 2019 Plan and 2020 Plan of which
5,320,500 are exercisable at December 31, 2020.
|
|
(3)
|
Consists
of individual option grants approved by the Board of which all are
exercisable at December 31, 2020.
|
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Officers, Directors, and Equity Investment
On May
7, 2019, we entered into a note payable agreement for up to
$500,000 with Dr. Harry Hoyen. Dr. Harry Hoyen is the brother of
Mr. Andrew Hoyen, our current President, Chief Operating Officer
and member of our Board. The note has an interest rate of 7.5% and
is due on August 31, 2026. We borrowed $200,000 during the year
ended December 31, 2019 and $50,000 during the year ended December
31, 2020, which remains outstanding as of December 31, 2020. As
consideration for providing this financing, we granted a stock
option to purchase a total of 2,500,000 common shares at an
exercise price of $.02 and recorded interest expense of $14,250 in
2019 using the Black-Scholes option pricing model to determine the
estimated fair value of the option.
On July
12, 2018, we issued an unsecured demand note payable to Northwest
Hampton Holdings, LLC (Northwest) in the principal amount of
$70,000 with interest at 6% per annum. On June 19, and July 17,
2017, we issued unsecured demand notes payable to Northwest in the
principal amount of $12,000 with interest at 6% per annum. On
August 1, 2019, we paid $40,000 plus accrued interest to the
noteholder. On December 11, 2019, we paid $4,000 of principal only
to the noteholder. On March 31, 2020, we paid $4,000 plus accrued
interest to the noteholder. On July 31, 2020, we paid off the
remaining $34,000 plus accrued interest to the noteholder. Mr.
James Villa, our Chief Executive Officer, is the sole member of
Northwest.
On June
29, 2017, we issued an unsecured demand note payable to Mr. Donald
Reeve, a member of our board, in the principal amount of $20,000
with interest at 6% per annum. On December 31, 2020, we paid off
the principal plus accrued interest to the noteholder.
On July
18, 2017, we entered into an unsecured line of credit financing
agreement for $100,000 with Mr. Andrew Hoyen, our Chief Operating
Officer and member of our Board. The LOC Agreement provides for
working capital of up to $100,000 with interest at 6% due quarterly
through July 1, 2022. The principal balance owed was $90,000 at
December 31, 2020. In consideration for providing the financing,
Mr. Andrew Hoyen 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 31,
2022.
On
September 21, 2017, we entered into an unsecured line of credit
financing agreement for $75,000 with Dr. Harry Hoyen, 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.
The principal balance owed was $70,000 at December 31, 2020. In
consideration for providing the financing, Mr. Harry Hoyen 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.
We are
obligated under a convertible note payable to Northwest. This
note’s maturity date was amended to January 1, 2024. At March
24, 2021, Northwest is the holder of a convertible note bearing
interest at 6% with principal of $146,300 and convertible accrued
interest of $98,016 and is convertible into shares of our common
stock at a conversion price of $.05 per share for a total of
4,886,326 shares. Principal of $203,324 was reduced by payments of
$53,700 during 2015 and $3,324 during 2014 on this note. Accrued
interest was reduced by a payment of $9,500 during
2020.
At
March 24, 2021, Mr. James Witzel, our former Chief Financial
Officer, is the holder of a convertible note bearing interest at
6%, with principal of $9,000 and convertible accrued interest of
$7,419 which matures on January 1, 2024 and is convertible into
shares of our common stock at a conversion price of $.05 per share
for a total 328,371 shares.
The
interest rates on the notes payable to Northwest and Mr. Witzel
(collectively, the Notes) are adjusted annually, on January
1st of each year, to a rate
equal to the prime rate in effect on December 31st of the
immediately preceding year, plus one and one quarter percent, but
in no event less than 6% per annum. The interest rate was 6% at
March 24, 2021. The Notes are secured by a security interest in all
our assets.
Generally, upon notice, prior to the maturity date, note holders
can convert all or a portion of the outstanding principal on the
Notes. However, the Notes are not convertible into shares of our
common stock to the extent conversion would result in a change of
control which would limit the use of our net operating loss
carryforwards; provided, however, this limitation will not apply if
we close a transaction with another third party or parties that
results in a change of control which will limit the use of our net
operating loss carryforwards. Prior to any conversion, the holders of the Notes
are entitled to convert their Notes, on a pari passu basis and upon
any such participation the requesting note holder shall
proportionately adjust his conversion request such that, in the
aggregate, a change of control, which will limit the use of our net
operating loss carryforwards, does not occur; provided, however,
the right to participate is only available to a noteholder if his
Note is then convertible into 5% or more of our common
stock.
On
February 12, 2015, we issued a note payable to Mr. Andrew Hoyen,
our current President and Chief Operating Officer, in the principal
amount of $25,000 with interest at 7% per annum which matured on
March 31, 2018. During, 2019, Mr. Hoyen extended the maturity date
to March 31, 2021. During, 2021, Mr. Hoyen extended the maturity
date to June 30, 2023. At the election of the holder, the principal
of the note is convertible into shares of our common stock at a
conversion price of $.10 per share for a total of 250,000
shares.
Director Independence
Our Board has determined that Donald Reeve is independent in
accordance with the NASDAQ’s independence standards. Our
audit and compensation committees consist of Mr. Villa and Mr.
Reeve, of which only Mr. Reeve is sufficiently independent for
compensation committee purposes under NASDAQ’s standards and
neither of them is sufficiently independent for audit committee
purposes under NASDAQ’s standards due to their respective
beneficial ownership of our common stock.
Item 14. Principal Accountant Fees and Services
The
aggregate fees billed by our principal accounting firm, Freed
Maxick CPAs, P.C. for the years ended December 31, 2020 and 2019
are as follows:
|
|
|
|
|
Audit
fees
|
$85,900
|
$80,000
|
Audit fees for 2020 and 2019 were for professional services
rendered for the audits of our annual financial statements and
reviews of the financial statements included in our Quarterly
Reports on Form 10-Q. There were no tax or other non-audit related
services provided by the independent accountants for 2020 and
2019.
As a matter of policy, each permitted non-audit service is
pre-approved by the audit committee or the audit committee’s
chairman pursuant to delegated authority by the audit committee,
other than de minimus non-audit services for which the pre-approval
requirements are waived in accordance with the rules and
regulations of the SEC.
Audit Committee Pre-Approval Policies and Procedures
The audit committee charter provides that the audit committee will
pre-approve audit services and non-audit services to be provided by
our independent auditors before the accountant is engaged to render
these services. The audit committee may consult with management in
the decision-making process but may not delegate this authority to
management. The audit committee may delegate its authority to
pre-approve services to one or more committee members, provided
that the designees present the pre-approvals to the full committee
at the next committee meeting.
NOTES TO THE AUDITED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION & BUSINESS
The
accompanying financial statements consist of the financial
statements of Infinite Group, Inc. (the Company).
The
Company operates in one segment, the field of information
technology (IT) consulting services, with all operations based in
the United States. The primary consulting services are in the
cybersecurity industry. There were no significant sales from
customers in foreign countries during 2020 and 2019. All assets are
located in the United States.
Nodeware® - Nodeware
is an automated vulnerability management and network security
scanning 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 to accommodate the varying network needs of their
organizations. Nodeware provides a value-based solution designed
for small and medium-sized enterprises (SMEs) with single subnet or
several subnets as well as accommodating larger organizations with
more advanced network needs. Nodeware continues to release
upgrades.
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.
NOTE 2. - MANAGEMENT PLANS
The
Company reported operating income of $1,291 in 2020 and $329,137 in
2019, net income of $675,996 in 2020 and $47,977 in 2019, and
stockholders’ deficiencies of $3,105,770 and $3,907,310 at
December 31, 2020 and 2019, respectively. The Company has a working
capital deficit of approximately $ 2.1 million at December 31,
2020. These factors raise initial doubt about the ability to
continue as a going concern. The Company has modified a significant
amount of the existing short-term liabilities, plans to restructure
certain remaining short term debt, is exploring additional sources
of financing, including debt and equity, and anticipates
significant growth of business. These plans, in management’s
opinion, will allow the Company to meet its obligations for the
twelve-month period from the date the financial statements are
available to be issued and alleviate the initial substantial
doubt.
Continue to Improve Operations and Capital Resources
The
Company expects to increase revenue and cash flow from operations
on a consistent basis based on recent demand for services and
products. The Company has renegotiated the terms of some of the
notes, using operational cash flow to pay down balances and
extending terms and expects to continue to renegotiate additional
obligations. These includes transactions during the first quarter
of 2021, where the Company has renegotiated the due dates of
approximately $446,000 of notes payable into 2023 and 2024. These
obligations have been reclassified as long-term in the accompanying
balance sheet.
During
2017, the Company originated lines of credit with related parties
totaling $175,000 and borrowed $140,000. During 2018, the Company
borrowed an additional $20,000. At December 31, 2020, the Company
had approximately $15,000 available under these financing
agreements.
During
2019, the Company borrowed $200,000 from a related party under the
terms of a note payable. In 2020, the Company borrowed $50,000 more
from this note payable. At December 31, 2020, the Company had
$250,000 available under this financing
agreement.
The
Company believes the capital resources generated by the improving
results of its operations as well as cash available under its
factoring line of credit and from additional related parties and
third-party loans, if needed, provide sources to fund its ongoing
operations and to support the internal growth of the Company. If
the Company experiences significant growth in its sales, the
Company believes that this may require it to increase its financing
line, finance additional accounts receivable, or obtain additional
working capital from other sources to support its sales
growth.
The
Company plans to continue to evaluate alternatives which may
include continuing to renegotiate the terms of other notes, seeking
conversion of the notes to shares of common stock and seeking funds
to repay the notes. The Company continues to evaluate repayment of
our remaining notes payable based on its cash flow. These plans, in
management’s opinion, will allow the Company to meet its
obligations for a reasonable period of time from the date the
financial statements are available to be issued.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable - Credit is granted to substantially all
customers throughout the United States. The Company carries its
accounts receivable at invoice amount, less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful
accounts, based on a history of past write-offs and collections and
current credit conditions. The Company’s policy is to not
accrue interest on past due receivables. Management determined that
an allowance of $10,089 for doubtful accounts was reasonably stated
at December 31, 2020 ($17,455 – 2019).
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist of cash
accounts in financial institutions. The cash accounts occasionally
exceed the federally insured deposit amount; however, management
does not anticipate nonperformance by financial institutions.
Management reviews the financial viability of these institutions on
a periodic basis.
Loan Origination Fees - The Company capitalizes the costs of
loan origination fees and amortizes the fees as interest expense
over the contractual life of each agreement and show as a reduction
of the debt.
Sale of Certain Accounts
Receivable - The Company has available a financing
line with a financial institution (the Purchaser). In connection
with this line of credit, the Company adopted FASB ASC 860
“Transfers and Servicing”. FASB ASC 860 provides
consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings.
The Company has a factoring line with the Purchaser which enables
the Company to sell selected accounts receivable invoices to the
Purchaser with full recourse against the Company.
These
transactions qualify for a sale of assets since (1) the Company has
transferred all of its right, title and interest in the selected
accounts receivable invoices to the financial institution, (2) the
Purchaser may pledge, sell or transfer the selected accounts
receivable invoices, and (3) the Company has no effective control
over the selected accounts receivable invoices since it is not
entitled to or obligated to repurchase or redeem the invoices
before their maturity and it does not have the ability to
unilaterally cause the Purchaser to return the invoices. Under FASB
ASC 860, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when
extinguished.
Pursuant to the
provisions of FASB ASC 860, the Company reflects the transactions
as a sale of assets and establishes an accounts receivable from the
Purchaser for the retained amount less the costs of the transaction
and less any anticipated future loss in the value of the retained
asset. The retained amount is equal to 10% of the total accounts
receivable invoice sold to the Purchaser. The fee is charged at
prime plus 3.6% (effective rate of 6.85% at December 31, 2020)
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, 2020, the
Company sold approximately $1,749,697 ($4,742,933 - 2019) of its
accounts receivable to the Purchaser. As of December 31,
2020, $0 ($324,125 - 2019) of these receivables remained
outstanding. Additionally, as of December 31, 2020, the
Company had $362,000 available under the financing line with the
financial institution ($67,000 - 2019). After deducting
estimated fees and advances from the Purchaser, the net receivable
from the Purchaser amounted to $0 at December 31, 2020 ($32,412 -
2019) 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 $21,100 for the year ended December 31, 2020
($53,600 - 2019). These financing line fees are classified on the
statements of operations as interest expense.
Property and Equipment - Property and equipment are recorded at
cost and are depreciated over their estimated useful lives for
financial statement purposes. The cost of improvements to leased
properties is amortized over the shorter of the lease term or the
life of the improvement. Maintenance and repairs are charged to
expense as incurred while improvements are
capitalized.
Capitalization of Software for Resale -
The Company capitalizes the software development costs for software
to be sold, leased, or otherwise marketed. Capitalization begins
upon the establishment of technological feasibility of a new
product or enhancements to an existing product, which is generally
the completion of a working prototype that has been certified as
having no critical bugs and is a release candidate. Costs incurred
after the enhancement has reached technological feasibility and
before it is released in the market are capitalized and are
primarily labor costs related to coding and testing. Amortization
begins once the software is ready for its intended use, generally
based on the pattern in which the economic benefits will be
consumed. Costs associated with major upgrade releases begin
amortization in the month after release. The amortization period is
three years.
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 2020 and
2019.
Revenue Recognition -
The
Company’s revenues are generated under both time and material
and fixed price agreements. Managed Support services revenue
is recognized when the associated costs are incurred, which
coincides with the consulting services being provided. Time
and materials service agreements are based on hours worked and are
billed at agreed upon hourly rates for the respective position plus
other billable direct costs. Fixed price service agreements
are based on a fixed amount of periodic billings for recurring
services of a similar nature performed according to the contractual
arrangements with clients. These agreements are arrangements
for monthly or weekly support services. Under both types of
agreements, the delivery of services occurs when an employee works
on a specific project or assignment as stated in the contract or
purchase order. Based on historical experience, the Company
believes that collection is reasonably assured.
The
Company sells licenses of Nodeware and third-party software,
principally Webroot. Substantially all customers are invoiced
monthly at fixed rates for license fees and revenue is recognized
over time.
The
Company sold VMware software and service credits in 2019. Sales
were recorded upon receipt of the software or credits by the
customer. The Company did not take title to the software or
credits. Accordingly, the Company accounted for these as agent
sales and reduced its sales amount by the related cost of
sales.
The
Company’s total revenue recognized from contracts from
customers was comprised of three major services: Managed support
services, Cybersecurity projects and software and Other IT
consulting services. The categories depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by
economic factors. There were no material unsatisfied performance
obligations at December 31, 2020 or 2019 for contracts with an
expected original duration of more than one year. The following
table summarizes the revenue recognized by the major
services:
|
|
|
|
|
|
|
|
Managed support
services
|
$4,669,570
|
$4,986,217
|
|
Cybersecurity
projects and software
|
2,285,876
|
1,569,972
|
|
Other IT consulting
services
|
264,000
|
538,090
|
|
Total
revenue
|
$7,219,446
|
$7,094,279
|
Managed support services
Managed
support services consist of revenue primarily from our subcontracts
for services to its end clients, principally a major establishment
of the U.S. Government for which we manage one of the
nation’s largest physical and virtual Microsoft Windows
environments.
●
We generate revenue primarily from these subcontracts through fixed
price service and support agreements. Revenues are earned and
billed weekly and are generally paid within 45 days. The revenues
are recognized at time of service.
Cyber security projects and software
Cyber
security projects and software revenue includes the selling of
licenses of Nodeware™ and third-party software, principally
Webroot™ as well as performing cybersecurity assessments,
testing and consulting as a vCISO (Virtual Chief Information
Security Officer).
●
Nodeware™ and Webroot™ software offerings consist of
fees generated from the use of the respective software by our
customers. Revenue is recognized on a ratable basis over the
contract term beginning on the date that our service is made
available to the customer. Substantially all customers are billed
in the month of the service and is cancellable upon notice per the
respective agreements. Substantially all payments are
electronically billed, and the billed amounts are paid to the
Company instantaneously via an online payment platform. If payments
are made in advance, revenues related to the term associated with
our software licenses is recognized ratably over the contractual
period.
●
Some of our customers have the option to purchase additional
subscription and support services at a stated price. These options
generally do not provide a material right as they are priced at our
standalone selling price.
●
Cybersecurity assessments, testing and vCISO 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 earned. For the year ended December 31,
2020, we recognized revenue of approximately $169,000 that was
included in the deferred revenue balance at the beginning of the
period presented. Deferred revenue that will be realized during the
succeeding 12-month period is approximately $311,000, and the
remaining deferred revenue of $10,000 is scheduled to be realized
in 2022.
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
2020, sales to one client, including sales under subcontracts for
services to several entities, accounted for 61.2% of total sales
(62.6% - 2019) and 38.8% of accounts receivable at December 31,
2020 (22.1% - 2019).
Revenue and Cost of Revenue - The
Company designates certain revenue of third-party software and
project credits as agent revenue where the Company does not have
the performance obligation to deliver the software or credits to
the end user. Accordingly, cost of revenue is recorded as a
reduction of revenue and only the gross profit is included in
revenue in the accompanying statements of operations. For the years
ended December 31, 2020 and 2019, the Company designated agent
revenue of $0 and $238,136, respectively. The related accounts
receivables and accounts payable are recorded on a gross basis in
the accompanying balance sheets.
Stock Options - The Company recognizes
compensation expense related to stock-based payments at the grant
date fair value of the awards. The Company uses the Black-Scholes
option pricing model to determine the estimated fair value of the
awards.
Income Taxes - The Company accounts for
income tax expense in accordance with FASB ASC 740 “Income
Taxes.” Deferred taxes are provided on an asset and liability
method whereby deferred tax assets are recognized for deductible
temporary differences, operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of
enactment.
The
Company periodically reviews tax positions taken to determine if it
is more likely than not that the position would be sustained upon
examination. The Company did not have any material unrecognized tax
benefit at December 31, 2020 or 2019. The Company recognizes
accrued interest and penalties related to unrecognized tax benefits
in tax expense. During the years ended December 31, 2020 and 2019,
the Company recognized no interest and penalties.
The
Company files U.S. federal tax returns and tax returns in various
states. The tax years 2017 through 2020 remain open to examination
by the taxing jurisdictions to which the Company is
subject.
Fair Value of Financial Instruments
- The Company has determined
the fair value of debt and other financial instruments using a
valuation hierarchy. The hierarchy, which prioritizes the inputs
used in measuring fair value, consists of three
levels.
Level 1
uses observable inputs such as quoted prices in active
markets;
Level 2
uses inputs other than quoted prices in active markets that are
either directly or indirectly observable; and
Level 3
is defined as unobservable inputs in which little or no market data
exist and requires the Company to develop its own
assumptions.
The
hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level
3 measurements).
The
carrying amounts of cash, accounts receivable and accounts payable
and accrued expenses are reasonable estimates of their fair value
due to their short maturity. 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, 2020 and 2019:
|
|
|
|
|
|
|
|
Numerator
for basic and diluted net income per share:
|
|
|
|
Basic
net income
|
$675,996
|
$47,977
|
|
Plus:
Interest expense saved on converted debt
|
27,068
|
0
|
|
Diluted
net income
|
$703,064
|
$47,977
|
|
Basic
and diluted net income per share
|
$.02
|
$.00
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
Basic
shares
|
29,061,883
|
29,061,883
|
|
Plus:
Stock options
|
6,215,883
|
750,000
|
|
Plus:
Convertible debt
|
9,422,320
|
0
|
|
Diluted
shares
|
44,700,086
|
29,811,883
|
|
|
|
|
|
Anti-dilutive
shares excluded from net income per share
|
2,715,000
|
29,195,736
|
Certain
common shares issuable under stock options and convertible notes
payable have been omitted from the diluted net income (loss) per
share calculation because their inclusion is considered
anti-dilutive because the exercise or conversion prices were
greater than the average market price of the common shares or their
inclusion would have been anti-dilutive.
Reclassifications - The Company reclassifies amounts in
its prior year financial statements to conform to the current
year’s presentation.
Use of Estimates - The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Leases - At contract inception, the
Company determines whether the arrangement is or contains a lease
and determines the lease classification. The lease term is
determined based on the non-cancellable term of the lease adjusted
to the extent optional renewal terms and termination rights are
reasonably certain. Lease expense is recognized evenly over the
lease term. Variable lease payments are recognized as period costs.
The present value of remaining lease payments is recognized as a
liability on the balance sheet with a corresponding right-of-use
asset adjusted for prepaid or accrued lease payments. The Company
uses its incremental borrowing rate for the discount rate, unless
the interest rate implicit in the lease contract is readily
determinable. The Company has adopted the practical expedients to
not separate non-lease components from lease components and to not
present short-term leases on the balance sheet. See Note 13 for
further disclosure regarding lease accounting.
NOTE 4. - PROPERTY AND EQUIPMENT
Property and
equipment consists of:
|
|
|
|
|
|
Depreciable
Lives
|
|
|
|
Software
|
3
years
|
$72,834
|
$34,934
|
|
Equipment
|
3 to 10
years
|
142,129
|
131,719
|
|
Furniture and
fixtures
|
5 to 7
years
|
17,735
|
17,735
|
|
|
232,698
|
184,388
|
|
Accumulated
depreciation
|
|
(184,499)
|
(178,473)
|
|
|
$48,199
|
$5,915
|
Depreciation
expense was $6,026 and $4,567 for the years ended December 31, 2020
and 2019, respectively.
NOTE 5. – CAPITALIZATION OF SOFTWARE FOR RESALE
As of
December 31, 2020, there was $449,445 ($194,215 in 2019) of costs
capitalized and $94,541 of accumulated amortization ($9,539 in
2019). During the year ended December 31, 2020 there was $85,002 of
amortization expense recorded ($9,539 in 2019). Future amortization
is expected to be $354,905 at a rate of $148,146, $140,276, $64,813
and $1,670 for the years 2021, 2022, 2023 and 2024 respectively.
Costs incurred prior to reaching technological feasibility are
expensed as incurred. Labor amounts expensed related to these
development costs amounted to approximately $159,700 and $58,000
during the year ended December 31, 2020 and 2019,
respectively.
NOTE 6. - NOTES PAYABLE - CURRENT
Notes
payable consist of:
|
|
|
|
|
|
|
|
Demand note
payable, 10%, secured by Software (A)
|
$12,500
|
$12,500
|
|
Demand note payable
to former director, 10%, unsecured (B)
|
0
|
30,000
|
|
Convertible demand
note payable to former director, 12%, unsecured (B)
|
0
|
40,000
|
|
Convertible notes
payable, 6% (C)
|
150,000
|
150,000
|
|
Convertible term
note payable, 7%, secured (D)
|
0
|
100,000
|
|
|
$162,500
|
$332,500
|
(A)
Demand Note payable, 10%, secured by
Software - During 2015, the Company issued a note in
connection with the purchase of Software.
(B)
Demand note payable to former director, 10%,
unsecured and Convertible demand note payable to former director,
12%, unsecured -
These notes were paid off in 2020 as part of the transaction noted
in Note 7 (F).
(C)
Convertible notes payable, 6%, maturity date of
December 31, 2016 - At December 31, 2020, the Company was
obligated to unrelated third parties for $150,000 ($150,000 - 2019)
(“The Notes”). The principal is unsecured and
convertible at the option of the holders into shares of common
stock at $.05 per share, subject to certain
limitations.
(D)
Convertible term note payable, 7%, secured,
maturity date of October 4, 2016 - 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.
Subsequent to December 31, 2020, the Company extended Maturity date
to January 1, 2024.
Notes
payable - related parties consist of:
|
|
|
|
|
|
|
|
Demand notes
payable to officer and director, 6%, unsecured
|
$0
|
$38,000
|
|
Demand note payable
to director, 6%, unsecured
|
0
|
20,000
|
|
|
$0
|
$58,000
|
Both
Notes payable – related parties were paid off in
2020.
NOTE 7. - LONG-TERM OBLIGATIONS
Notes Payable – Other consist of:
|
|
|
|
|
|
|
|
2016 note payable,
6%, unsecured, due December 31, 2021 (A)
|
$500,000
|
$500,000
|
|
Convertible note
payable, 6%, due January 1, 2020 (B)
|
0
|
264,000
|
|
Note payable, 10%,
secured, due January 1, 2018 (C)
|
265,000
|
265,000
|
|
Convertible term
note payable,12%, secured, due August 31, 2018 (D)
|
175,000
|
175,000
|
|
Term note payable -
PBGC, 6%, secured (E)
|
246,000
|
246,000
|
|
2020 note payable,
6%, unsecured, due August 24, 2024 (F)
|
166,473
|
0
|
|
Convertible term
note payable, 7%, secured (G)
|
100,000
|
0
|
|
Convertible notes
payable, 6%, due January 1, 2024 (H)
|
9,000
|
9,000
|
|
Accrued interest
due after 2021(I)
|
7,296
|
0
|
|
|
1,468,769
|
1,459,000
|
|
Less: deferred
financing costs
|
6,555
|
13,110
|
|
|
1,462,214
|
1,445,890
|
|
Less: current
maturities
|
1,004,445
|
950,000
|
|
|
$457,769
|
$495,890
|
(A)
2016 note payable, 6%, unsecured, due December
31, 2021 - On March 14, 2016, the Company entered into
an unsecured financing agreement with a third-party lender.
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. These deferred financing costs
are recorded as a reduction of the principal owed and are amortized
over the life of the debt. As of December 31, 2020, the balance was
$493,445 (2019 - $486,890), representing principal outstanding less
issuance costs of $6,555 (2019-$13,110). The lender has piggy back
registration rights for these shares. The Company’s Chief
Executive Officer agreed to guarantee the loan obligations if he is
no longer an “affiliate” of the Company as defined by
Securities and Exchange Commission rules.
(B)
Convertible note payable, 6%, due January 1,
2020 - This note has the same terms as item (C) of Note 6
except it matured on January 1, 2020. This note was paid off as
part of the transaction noted in item (F) of this
note.
(C)
Note payable, 10%, secured, due January 1, 2018
- During the years ended December 31, 2004 and 2003, the
Company issued secured notes payable aggregating $265,000. These
borrowings bear interest at 10% and were due, as modified on
January 1, 2018. This note has not been further extended. 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.
(D)
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 was due, as modified on August 31, 2018 for an
aggregate of $175,000. During 2009, the note was modified for its
conversion into common shares at $.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.
(E)
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.
(F)
2020 note payable, 6%, unsecured, due August
24, 2024 - The Company entered into a Promissory Note
agreement dated August 24, 2020 with a third-party Lender. The Note
represents the negotiated amount owed to the Lender after a payment
in the amount of $550,000 was made to settle previous notes and
interest held by the Lender See Note 6 and item (B) of this note.
The principal amount of the new note is $166,473. This note becomes
due on August 24, 2024.
(G)
Convertible term note payable, 7%, secured, due
January 1, 2024 - The note bears interest at the rate of 7%
per annum, payable monthly, and is secured by a subordinate lien on
all the Company’s assets. The note's principal is convertible
at the option of the holder into shares of the Company’s
common stock at $.10 per share, which was the price of the
Company's common stock on the closing date of the
agreement.
(H)
Convertible notes payable,
6%, due January 1, 2024 - The Company has a
note payable to a former related party in the amount of $9,000. The
note’s maturity was extended to January 1, 2024 from January
1, 2021. In consideration for this extension, the Company agreed to
issue the borrower 25,000 options with a 3-year term to purchase
common stock of Infinite Group Inc. exercisable at $0.10 (ten
cents) per share. Principal and accrued interest are convertible at
the option of the holder into shares of common stock at $.05 per
share. The note bears interest at 6.00% at December 31, 2020. The
rate is adjusted annually, on January 1st of each year, to the
prime rate in effect on December 31st of the immediately preceding
year, plus one and one quarter percent, and in no event, shall the
interest rate be less than 6% per annum. The rate effective as of
January 1, 2021 was 6.00%.
(I)
Accrued interest due after 2021 –
The accrued interest for items(H) above is not due until the due
date of the respective loan. The amount of accrued interest for
item (H) at December 31, 2020 is$7,296.
Notes Payable - Related Parties
Notes
payable - related parties consist of:
|
|
|
|
|
|
|
|
Note payable, up to
$500,000, 7.5%, due August 31, 2026 (A)
|
$250,000
|
$200,000
|
|
2020 Note payable,
6%, due January 1, 2024 (B)
|
328,000
|
0
|
|
Convertible notes
payable, 6% (C)
|
146,300
|
146,300
|
|
Note payable,
$400,000 line of credit, 8.35%, unsecured (D)
|
0
|
366,635
|
|
Convertible note
payable, 7%, due June 30, 2023 (E)
|
25,000
|
25,000
|
|
Note payable,
$100,000 line of credit, 6%, unsecured (F)
|
90,000
|
90,000
|
|
Note payable,
$75,000 line of credit, 6%, unsecured (G)
|
70,000
|
70,000
|
|
Accrued interest
due after 2021(H)
|
106,520
|
0
|
|
|
1,015,820
|
897,935
|
|
Less current
maturities
|
0
|
512,935
|
|
|
$1,015,820
|
$385,000
|
(A)
Note payable of up to $500,000, 7.5%, due
August 31, 2026 - On May 7, 2019, the Company entered into a
note payable agreement for up to $500,000 with a related party. The
note has an interest rate of 7.5% and is due on August 31, 2026.
The Company borrowed $200,000 during the year ended December 31,
2019 and $50,000 during the year ended December 31, 2020, which
remains outstanding.
(B)
Note payable, 6%, due January 1, 2024 -
On December 30, 2020, the Company entered into a promissory note
agreement with a member of its Board. The interest payments are due
quarterly starting on April 1, 2021. Principal payments of $100,000
are to be made on January 1, 2022 and January 1, 2023 and a balloon
payment of $128,000 on January 1, 2024. This note replaced the note
in (D) below.
(C)
Convertible notes payable, 6% - The
Company has a note payable to a related party of $146,300 maturing
on January 1, 2024. This note’s maturity date was extended
from January 1, 2020. Principal and accrued interest are
convertible at the option of the holder into shares of common stock
at $.05 per share, subject to certain limitations. The notes bear
interest at 6.00% at December 31, 2020. The rate is adjusted
annually, on January 1st of each year, to
the prime rate in effect on December 31st of the immediately
preceding year, plus one and one quarter percent, and in no event,
shall the interest rate be less than 6% per annum. The rate
effective as of January 1, 2021 was 6.00%.
The
Company executed collateral security agreements with the note
holders providing for a subordinate security interest in all the
Company’s assets. Generally, upon notice, prior to the note
maturity date, the Company can prepay all or a portion of the
outstanding notes.
(D)
Note payable, $400,000 line of credit, 8.35%,
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. This line of credit agreement was
cancelled and replaced by the note payable noted in item (B) of
this note.
(E)
Convertible note payable, 7%, due June 30, 2023
- On February 12, 2015, the Company borrowed $25,000 from a
Company officer. The note is unsecured and matured on March 31,
2018 with principal convertible at the option of the holder into
shares of common stock at $.10 per share. In 2021, the Company
officer extended the due date to June 30, 2023.
(F)
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.
(G)
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.
(H)
Accrued interest due after 2021 –
The accrued interest for item (C) and (E) above is not due until
the due date of the loan.
Long-Term
Obligations
As of
December 31, 2020, minimum future annual payments of long-term
obligations and amortization of deferred financing costs are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Due Prior to
2021
|
$673,500
|
$0
|
$673,500
|
|
2021
|
500,000
|
6,555
|
493,445
|
|
2022
|
190,000
|
0
|
190,000
|
|
2023
|
205,500
|
0
|
205,500
|
|
2024
|
828,089
|
0
|
828,089
|
|
2025
|
0
|
0
|
0
|
|
2026
|
250,000
|
0
|
250,000
|
|
Total long-term
obligations
|
$2,647,089
|
$6,555
|
$2,640,534
|
NOTE 8. – CARES ACT
Paycheck Protection Program (“PPP”)
Loan - On April 10, 2020, the Company entered into a U. S.
Small Business Administration (“SBA”) Note Payable
agreement (the “Note”) with Upstate National Bank
(“Lender”) under the Paycheck Protection Program (15
U.S.C. § 636(a)(36)) enacted by Congress under the Coronavirus
Aid, Relief and Economic Security Act (the “Act”). The
Note provided funding for working capital to the Company in the
amount of $957,372 and was restricted to certain uses and could not
have been used to repay debt. The interest rate on the Note was
fixed at 1.00% and was accrued until forgiveness. The Act
(including the guidance issued by SBA and U.S. Department of the
Treasury related thereto) provided that all or a portion of this
Note could be forgiven upon request from Borrower to Lender,
subject to requirements in the Note and Act. The Company received
100% forgiveness of the loan during the fourth quarter of 2020.
Total amount forgiven was $963,516 including interest.
Deferral of employment tax deposits and
payments – The Act allowed employers to defer the
deposit and payment of the employer's share of Social Security
taxes through December 31, 2020. The amount deferred was $138,050.
The deferred deposits of the employer's share of Social Security
tax must be deposited by the following dates to be treated as
timely (and avoid a failure to deposit penalty):
●
On December 31,
2021, 50 percent of the eligible deferred amount ($69,025);
and
●
On December 31,
2022, the remaining amount.
NOTE 9. - STOCK AND STOCK OPTION PLANS
Preferred Stock - The Company’s
certificate of incorporation authorizes its Board to issue up to
1,000,000 shares of preferred stock. The stock is issuable in
series that may vary as to certain rights and preferences, as
determined upon issuance, and has a par value of $.01 per share. As
of December 31, 2020, and 2019, there were no preferred shares
issued or outstanding.
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 990,000 common shares at December 31, 2020 and 2019. There are
no options to be granted under this plan.
2009 Plan - During 2009, the
Company’s Board approved the 2009 stock option plan, which
grants options to purchase up to an aggregate of 3,427,000 common
shares at December 31, 2020. There are no remaining options to
issue under this plan. Options issued to date are nonqualified
since the Company has decided not to seek stockholder approval of
the 2009 Plan.
2019 Plan - During 2019, the
Company’s Board approved the 2019 stock option plan, which
grants options to purchase up to an aggregate of 1,500,000 common
shares of which 1,500 common shares are available for grant at
December 31, 2020. Options issued to date are nonqualified since
the Company has decided not to seek stockholder approval of the
2019 Plan.
2020 Plan - During 2020, the
Company’s Board approved the 2020 stock option plan, which
grants options to purchase up to an aggregate of 1,500,000 common
shares of which 560,000 common shares are available for grant at
December 31, 2020. Options issued to date are nonqualified since
the Company has decided not to seek stockholder approval of the
2020 Plan.
NOTE 10. - STOCK OPTION AGREEMENTS AND TRANSACTIONS
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 750,000 common
shares are outstanding at December 31, 2020 with an average
exercise price of $.12 per share. At December 31, 2020, options for
750,000 shares are vested. Options for 938,000 shares were
forfeited unvested in January 2019.
Loan Fees - On May 7, 2019, the Company
entered into a note payable agreement for up to $500,000 with a
related party. The note has an interest rate of 7.5% and is due on
August 31, 2026. The Company borrowed $200,000 in 2019 and $50,000
in 2020. The $250,000 remains outstanding as of December 31, 2020.
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 and recorded interest expense of $14,250
using the Black-Scholes option pricing model to determine the
estimated fair value of the option.
On
August 24, 2020, the Company entered into a note payable agreement
for $166,473 with a third party. The note has an interest rate of
6% and is due on August 24, 2024. As consideration for
providing this financing, the Company granted a stock option to
purchase a total of 500,000 common shares at an exercise price of
$.05 and recorded interest expense of $52,900 using the
Black-Scholes option pricing model to determine the estimated fair
value of the option.
On
November 17, 2020, the Company extended a note payable agreement of
$146,300 with a related party. The note has an interest rate of 6%
and is due on January 1, 2022. As consideration for providing this
extension of the financing, the Company granted a stock option to
purchase a total of 250,000 common shares at an exercise price of
$.12 and recorded interest expense of $15,450 using the
Black-Scholes option pricing model to determine the estimated fair
value of the option.
On
December 31, 2020, the Company extended a note payable agreement of
$9,000 with a third party. The note has an interest rate of 6% and
is due on January 1, 2024. As consideration for providing this
extension of the financing, the Company granted a stock option to
purchase a total of 25,000 common shares at an exercise price of
$.10 and recorded interest expense of $958 using the Black-Scholes
option pricing model to determine the estimated fair value of the
option.
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,
2020 and 2019.
|
|
|
|
|
Risk free interest
rate
|
|
|
|
Expected dividend
yield
|
0%
|
0%
|
|
Expected stock
price volatility
|
100%
|
100%
|
|
Expected life of
options
|
|
|
The following is a
summary of stock option activity, including qualified and
non-qualified options for the years ended December 31, 2020 and
2019:
|
|
Number
of Options Outstanding
|
Weighted
Average Exercise Price
|
Remaining
Contractual Term
|
Aggregate
Intrinsic Value
|
|
Outstanding at
December 31, 2018
|
7,920,000
|
$.09
|
|
|
|
Granted
|
4,203,500
|
$.03
|
|
|
|
Expired
|
(275,000)
|
$.07
|
|
|
|
Forfeited
|
(938,000)
|
$.23
|
|
|
|
Outstanding at
December 31, 2019
|
10,910,500
|
$.05
|
|
|
|
Granted
|
1,880,000
|
$.07
|
|
|
|
Expired
|
(335,000)
|
$.15
|
|
|
|
Forfeited
|
(25,000)
|
$.05
|
|
|
|
Outstanding
at December 31, 2020
|
12,430,500
|
$.05
|
3.3
years
|
$480,400
|
|
|
|
|
|
|
|
Vested
or expected to vest at December 31, 2020
|
12,430,500
|
$.05
|
3.3
years
|
$480,400
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2020
|
11,885,500
|
$.05
|
3.3
years
|
$467,800
|
At
December 31, 2020, there was $0 of total unrecognized compensation
cost related to outstanding non-vested options.
The
weighted average fair value of options granted was $.07 and $.03
per share for the years ended December 31, 2020 and 2019,
respectively. The exercise price for all options granted equaled or
exceeded the market value of the Company’s common stock on
the date of grant with the exception of the 500,000 options granted
in consideration for providing the financing on August 24,
2020.
NOTE 11. - INCOME TAXES
The
components of income tax expense (benefit) consists of the
following:
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
$39,000
|
$49,000
|
|
State
|
(10,000)
|
6,000
|
|
|
29,000
|
55,000
|
|
Change in valuation
allowance
|
(29,000)
|
(55,000)
|
|
|
$0
|
$0
|
At
December 31, 2020, the Company had federal net operating loss
carryforwards of approximately $6,900,000 ($7,300,000 - 2019) and
various state net operating loss carryforwards of approximately
$3,200,000 ($3,200,000 - 2019) which expire from 2021 through
2040. 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, 2020, 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 $1,914,000 ($1,943,000 - 2019), 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
|
$1,550,000
|
$1,650,000
|
|
Defined
benefit pension liability
|
60,000
|
60,000
|
|
Operating
Lease ROU
|
(30,000)
|
(48,000)
|
|
Operating
Lease Liability
|
30,000
|
48,000
|
|
Deferred
Revenue
|
11,000
|
0
|
|
Reserves
and accrued expenses payable
|
293,000
|
233,000
|
|
Gross
deferred tax asset
|
1,914,000
|
1,943,000
|
|
Deferred tax asset
valuation allowance
|
(1,914,000)
|
(1,943,000)
|
|
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
|
21.0%
|
21.0%
|
|
|
|
|
|
Change in valuation
allowance
|
(4.2)
|
(115.6)
|
|
Net operating loss
carryforward expiration
|
13.4
|
71.5
|
|
State
taxes
|
(1.5)
|
12.8
|
|
Expired stock-based
compensation
|
1.0
|
3.1
|
|
Forgiveness of PPP
loan
|
(29.9)
|
0.0
|
|
Other permanent
non-deductible items
|
.2
|
7.2
|
|
Effective income
tax rate
|
0.0%
|
0.0%
|
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 $264,675 and $254,348,
as of December 31, 2020 and 2019, 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 2020, 401(k) employee
contribution limits are $19,500 plus a catch-up contribution for
those over age 50 of $6,500. The Company can elect to make a
discretionary contribution to the Plan. No discretionary
contribution was approved for 2020 or 2019.
NOTE 13. - LEASE
Beginning on August
1, 2016, the Company leases its headquarters facility under an
operating lease agreement that expires on June 30, 2022. The
Company has the right to terminate the lease upon six months prior
notice after three years of occupancy. Rent expense is $80,000
annually during the first year of the lease term and increases by
1.5% annually thereafter.
Supplemental
balance sheet information related to the operating lease was as
follows:
|
|
|
|
Right of use asset
– lease, net
|
$120,777
|
|
Operating lease
liability - short-term
|
$80,258
|
|
Operating lease
liability - long-term
|
42,347
|
|
Total
operating lease liability
|
$122,605
|
|
|
|
|
Discount rate -
operating lease
|
6.0%
|
NOTE 14. - RELATED PARTY ACCRUED INTEREST PAYABLE
Accrued Interest Payable - Included in
accrued interest payable is accrued interest payable to related
parties of $62,114 at December 31, 2020 ($157,067 - 2019). An
additional $106,520 of accrued interest to related parties is due
to paid after 2021.
NOTE 15. - SUBSEQUENT EVENTS
To
date, the COVID-19 outbreak has not had a material adverse impact
on our operations. The extent of the impact of COVID-19 on the
Company's operational and financial results will depend on future
developments, including the duration and spread of the outbreak and
related governmental or other regulatory actions.
On
January 15, 2021, the Company extended a note payable agreement of
$175,000 with a third party. The note has an interest rate of 12%
and is due on January 1, 2024.
On
January 15, 2021, the Company extended a note payable agreement of
$100,000 with a third party. The note has an interest rate of 7%
and is due on January 1, 2024.
On
February 14, 2021, the Company extended a note payable agreement of
$146,300 and accrued interest of $97,102 with a related party. The
note has an interest rate of 6% and is due on January 1,
2024.
On February 14,
2021, the Company extended a note payable agreement of
$25,000
and accrued interest of $35,135 with a related party. The note has
an interest rate of 6% and is due on June 30,
2023