Note 2. Management Plans - Capital Resources
The
Company reported net losses of $152,227 and $6,062 for the three
months ended March 31, 2021 and 2020, respectively, and
stockholders’ deficiencies of $3,229,749 and $3,105,770 at
March 31, 2021 and December 31, 2020, respectively. The Company has
a working capital deficit of approximately $ 2.3 million at March
31, 2021. 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.
The
Company's goal is to increase sales and generate cash flow from
operations on a consistent basis. The Company uses a formal
financial review and budgeting process as a tool for improvement
that has aided expense reduction and internal performance. The
Company’s business plans require improving the results of its
operations in future periods.
The
Company believes the capital resources available under its
factoring line of credit, cash from additional related party and
third-party loans and cash generated by improving the results of
its operations provide sources to fund its ongoing operations and
to support the internal growth of the Company. Although the Company
has no assurances, the Company believes that related parties, who
have previously provided working capital, and third parties will
continue to provide working capital loans on similar terms, as in
the past, as may be necessary to fund its on-going operations for
at least the next 12 months. If the Company experiences significant
growth in its sales, the Company believes that this may require it
to increase its financing line, finance additional accounts
receivable, or obtain additional working capital from other sources
to support its sales growth.
Note
3. Summary of Significant Accounting Policies
There
are several accounting policies that the Company believes are
significant to the presentation of its financial statements. These
policies require management to make complex or subjective judgments
about matters that are inherently uncertain. Note 3 to the
Company’s audited financial statements for the year ended
December 31, 2020 presents a summary of significant accounting
policies as included in the Company's Annual Report on Form 10-K as
filed with the SEC.
Reclassifications – It is the Company’s policy
to reclassify prior year amounts to conform with the current year
presentation.
Fair Value of Financial Instruments - The carrying amounts
reported in the balance sheets for cash, accounts receivable,
accounts payable, and accrued expenses approximate fair value
because of the immediate short-term maturity of these financial
instruments. The carrying value of notes payable and convertible
notes payable approximates the fair value based on rates currently
available from financial institutions and various
lenders.
Revenue
The
Company’s total revenue recognized from contracts from
customers was comprised of three major services: Managed support
services, Cybersecurity projects and software and Other IT
consulting services. The categories depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by
economic factors. There were no material unsatisfied performance
obligations at March 31, 2021 or 2020 for contracts with an
expected original duration of more than one year. The following
table summarizes the revenue recognized by the major
services:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
$1,070,899
|
$1,141,761
|
|
Cybersecurity
projects and software
|
702,443
|
646,834
|
|
Other IT consulting
services
|
51,000
|
111,000
|
|
Total
sales
|
$1,824,342
|
$1,899,595
|
Managed support services
Managed
support services consist of revenue primarily from our subcontracts
for services to its end clients, principally a major establishment
of the U.S. Government for which we manage one of the
nation’s largest physical and virtual Microsoft Windows
environments.
●
We generate revenue primarily from these subcontracts through fixed
price service and support agreements. Revenues are earned and
billed weekly and are generally paid within 45 days. The revenues
are recognized at time of service.
Cybersecurity projects and software
Cybersecurity
projects and software revenue includes the selling of licenses of
Nodeware® and third-party software, principally Webroot™
as well as performing cybersecurity assessments and
testing.
●
Nodeware® and Webroot™ software offerings consist of
fees generated from the use of the respective software by our
customers. Revenue is recognized on a ratable basis over the
contract term beginning on the date that our service is made
available to the customer. Substantially all customers are billed
in the month of the service and is cancellable upon notice per the
respective agreements. Substantially all payments are
electronically billed, and the billed amounts are paid to the
Company instantaneously via an online payment platform. If payments
are made in advance, revenues related to the term associated with
our software licenses is recognized ratably over the contractual
period.
●
Some of our customers have the option to purchase additional
subscription and support services at a stated price. These options
generally do not provide a material right as they are priced at our
standalone selling price.
●
Cybersecurity assessments and testing services are considered
distinct performance obligations when sold stand alone or with
other products. These contracts generally have terms of one year or
less. For substantially all these contracts, revenue is recognized
when the specific performance obligation is satisfied. If the
contract has multiple performance obligations, the revenue is
recognized when the performance obligations are satisfied.
Depending on the nature of the service, the amounts recognized are
based on an allocation of the transaction price to each performance
obligation 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. Upon completion of performance
obligation of service, payment terms are 30 days.
Other IT consulting services
Other
IT consulting services consists of services such as project
management and general IT consulting services.
●
We generate revenue via fixed price service agreements. These
are based on periodic billings of a fixed dollar amount for
recurring services of a similar nature performed according to the
contractual arrangements with clients. The revenues are
recognized at time of service.
Based
on historical experience, the Company believes that collection is
reasonably assured.
During
the three months ended March 31, 2021, sales to one client,
including sales under subcontracts for services to several
entities, accounted for 57.5% of total sales (58.4% - 2020) and
30.2% of accounts receivable at March 31, 2021 (38.8% - December
31, 2020).
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. See
Note 5 for further disclosure regarding capitalization of software
for resale.
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 9 for further disclosure
regarding lease accounting.
Note 4. Sale of Certain Accounts Receivable
The
Company has available a financing line with a financial institution
(the Purchaser), which enables the Company to sell accounts
receivable to the Purchaser with full recourse against the Company.
Pursuant to the provisions of FASB ASC 860, the Company reflects
the transactions as a sale of assets and establishes an accounts
receivable from the Purchaser for the retained amount less the
costs and fees of the transaction and less any anticipated future
loss in the value of the retained asset.
The
retained amount is 10% of the total accounts receivable invoice
sold to the Purchaser. The fee is charged at prime plus 3.6%
(effective rate of 6.85% at March 31, 2021) against the average
daily outstanding balance of funds advanced. The estimated future
loss reserve for each receivable included in the estimated value of
the retained asset is based on the payment history of the accounts
receivable customer and is included in the allowance for doubtful
accounts, if any. As collateral, the Company granted the Purchaser
a first priority interest in accounts receivable and a blanket
lien, which may be junior to other creditors, on all other
assets.
The
financing line provides the Company the ability to finance up to
$2,000,000 of selected accounts receivable invoices, which includes
a sublimit for one of the Company’s customers of $1,500,000.
During the three months ended March 31, 2021, the Company sold
approximately $667,000 ($1,052,000 - March 31, 2020) of its
accounts receivable to the Purchaser. As of March 31, 2021,
approximately $222,000 ($0 - December 31, 2020) of these
receivables remained outstanding. Additionally, as of March 31,
2021, the Company had approximately $199,000 available under the
financing line with the financial institution ($362,000 - December
31, 2020). After deducting estimated fees, allowance for bad debts
and advances from the Purchaser, the net receivable from the
Purchaser amounted to $22,000 at March 31, 2021 ($0 - December 31,
2020), and is included in accounts receivable in the accompanying
balance sheets.
There
were no gains or losses on the sale of the accounts receivable
because all were collected. The cost associated with the financing
line totaled $5,693 for the three months ended March 31, 2021
($11,026 - March 31, 2020). These financing line fees are
classified on the statements of operations as interest
expense.
Note 5. Capitalization of
Software for Resale
As of
March 31, 2021, there was $507,487 of costs capitalized ($449,445
as of December 31, 2020) and $129,491 of accumulated amortization
($94,540 as of December 31, 2020). During the quarter ended March
31, 2021 there was $34,950 of amortization expense recorded ($9,538
in 2020). Costs incurred prior to reaching technological
feasibility are expensed as incurred. Labor amounts expensed
related to these development costs amounted to approximately
$40,814 and $17,400 during the quarter ended March 31, 2021 and
2020, respectively.
Note 6. Debt Obligations
Four
debt obligations were extended during the quarter ended March 31,
2021.
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.
Note 7. Earnings per Share
Basic
earnings per share is based on the weighted average number of
common shares outstanding during the periods presented. Diluted
earnings per share is based on the weighted average number of
common shares outstanding, as well as dilutive potential common
shares which, in the Company’s case, comprise shares issuable
under convertible notes payable and stock options. The treasury
stock method is used to calculate dilutive shares, which reduces
the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options and warrants assumed
to be exercised. In a loss period, the calculation for basic and
diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.
The
following table sets forth the computation of basic and diluted net
income (loss) per share for the three months ended:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
Numerator for basic
and diluted net loss per share:
|
|
|
|
Net
loss
|
$(152,227)
|
$(6,062)
|
|
Basic and diluted
net loss per share
|
$(.01)
|
$.00
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
|
Basic and diluted
shares
|
29,061,883
|
29,061,883
|
|
|
|
|
|
Anti-dilutive
shares excluded from net loss per share calculation
|
22,703,772
|
32,673,741
|
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 prices were greater than the
average market price of the common shares or their inclusion would
have been anti-dilutive.
Note 8. Stock Option Plans and Agreements
The
Company has approved stock options plans and agreements covering up
to an aggregate of 12,842,000 shares of common stock. Such options
may be designated at the time of grant as either incentive stock
options or nonqualified stock options. Stock based compensation
consists of charges for stock option awards to employees, directors
and consultants.
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. 385,000 options were
granted for the three months ended March 31, 2021. 75,000 options
were granted for the three months ended March 31, 2020. The
following assumptions were used for the three months ended March
31, 2021.
|
Risk-free interest
rate
|
0.16%-0.21%
|
|
Expected dividend
yield
|
0%
|
|
Expected stock
price volatility
|
100%
|
|
Expected life of
options
|
2.75 years
|
The
Company recorded expense for options issued to employees and
independent service providers of $28,248 and $2,130 for the three
months ended March 31, 2021 and 2020, respectively.
At
March 31, 2021, there was no unrecognized compensation cost related
to non-vested options. 655,000 options vested during the three
months ended March 31, 2021.
A
summary of all stock option activity for the three months ended
March 31, 2021 follows:
|
|
Number
of Options Outstanding
|
Weighted
Average Exercise Price
|
Remaining
Contractual Term
|
Aggregate
Intrinsic Value
|
|
Outstanding at
December 31, 2020
|
12,430,500
|
$.05
|
|
|
|
Granted
|
385,000
|
.13
|
|
|
|
Forfeited
|
(280,000)
|
.05
|
|
|
|
Expired
|
0
|
.00
|
|
|
|
Outstanding at
March 31, 2021
|
12,535,500
|
$.06
|
3.1
years
|
$2,180,700
|
|
|
|
|
|
|
|
At March 31, 2021 -
vested or
|
|
|
|
|
|
expected to vest
and exercisable
|
12,535,500
|
$.06
|
3.1
years
|
$2,180,700
|
Note 9. 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 lease on March 31, 2021
and December 31, 2020 is as follows:
|
Description
|
Classification
|
|
|
|
Right of Use Asset
– Lease, net
|
Other
assets (non-current)
|
$101,402
|
$120,777
|
|
Operating Lease
liability – Short-term
|
Accrued
liabilities
|
81,787
|
80,258
|
|
Operating Lease
liability – Long-term
|
Other long-term
liabilities
|
21,332
|
42,347
|
|
Total operating
lease liability
|
|
$103,119
|
$122,605
|
|
|
|
|
|
Discount rate
– operating lease
|
|
|
6.0%
|
Note 10. Related Party Accounts Receivable and Accrued Interest
Payable
Included
in accrued interest payable is amounts due to related parties of
$64,108 at March 31, 2021 ($62,114 - December 31, 2020). An
additional $109,122 of accrued interest to related parties is due
to be paid after March 31, 2022.
Note 11. Subsequent Events
Subsequent
to March 31, 2021, the Company entered into a settlement agreement
with the PBGC for $200,000 to settle the outstanding principal of
$246,000 and accrued interest of approximately $73,000 as of April
30, 2021. The $200,000 is expected to be paid during the three
months ended June 30, 2021. 95 days after payment is received
, the PBGC is expected to release the remaining principal and
accrued interest owed.
Subsequent
to March 31, 2021, the Company issued 200,000 shares to a
consultant for services to be rendered from March 1, 2021 to
February 28, 2023 as well as issued 50,000 shares to another
consultant for services from April 1, 2021 to September 30, 2021.
Expenses associated with the issuances will be recognized over the
term of the respective agreements.
Subsequent
to March 31, 2021, the Company issued options to an employee for
1,000,000 common shares at an exercise price of $0.245. 250,000
were vested immediately and 750,000 will be vested based upon
reaching certain incentive goals. The expense recorded with respect
to the vested options will be $35,550 during the three months ended
June 30, 2021.
************
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This
discussion contains forward-looking statements, the accuracy of
which involves risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking
statements for many reasons including, but not limited to, those
discussed under the heading “Forward Looking
Statements” above and elsewhere in this report. We disclaim
any obligation to update information contained in any
forward-looking statements.
The
following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction
with our financial statements and the notes thereto appearing
elsewhere in this report.
Impact of COVID-19 on Our Business
The
COVID-19 pandemic has resulted, and is likely to continue to
result, in significant economic disruption. It has already
disrupted global travel and supply chains and adversely impacted
global commercial activity. Considerable uncertainty still
surrounds COVID-19 and its potential long-term economic effects, as
well as the effectiveness of any responses taken by government
authorities and businesses. The travel restrictions, limits on
hours of operations and/or closures of non-essential businesses,
and other efforts to curb the spread of COVID-19 has continued to
disrupt business activity globally.
During
the first quarter of 2021, our managed support services,
cybersecurity projects and software license revenues were minimally
impacted by the impact of the COVID-19 pandemic on our
customers’ operational priorities. We are also continuing to
adapt our operations to meet the challenges of this uncertain and
rapidly evolving situation, including remote working arrangements
for our employees, limiting non-essential business travel, and
utilizing virtual sales and marketing events. Our sales and
marketing expenses increased slightly during the first quarter of
2021, and we expect these expenses to grow slowly but will be lower
compared to prior year periods pre-COVID-19 pandemic on travel and
in-person marketing events. We will continue to actively
monitor the nature and extent of the impact to our business,
operating results, and financial condition.
Business
Headquartered
in Pittsford, New York, Infinite Group, Inc. (IGI) is a developer
of cybersecurity software and a provider of cybersecurity related
services and managed information security related services to
commercial businesses and government organizations. As part of
these offerings we:
●
as a trusted
advisor and cybersecurity overlay, our focus is on key
cybersecurity services (virtual CISO, baseline risk assessments,
compliance review and assessment, incident response, penetration
testing, vulnerability assessments and other related consulting
services) to solve and simplify security for Managed Service
Providers (MSPs), small and medium sized enterprises (SMEs),
government agencies, and certain large commercial enterprises.
Acting as the cybersecurity overlay to both internal IT and
third-party IT organizations such as MSPs, VARs, MSSPs, we provide
guidance and structure for companies to meet compliance and have an
overarching cybersecurity plan. We work with both our channel
partners and direct customers to provide these
services;
●
have developed and
brought to market a SaaS based, recently patented, automated asset
identification vulnerability management and monitoring solution,
Nodeware®, which we sell through distribution and channel
partners. We are also a master distributor for other security
solutions such as Webroot, a cloud-based endpoint security platform
solution, where we market to and provide support for over 300
reseller partners across North America;
●
provide level 2
technical and security support across the application layer and
physical and virtual infrastructure including software-based
managed services supporting enterprise and federal government
customers through our partnership with Perspecta; and
●
are an Enterprise
Level sales and professional services partner with VMware selling
virtualization licenses and solutions and providing virtualization
services support to commercial and government customers including
the New York State and Local Government and Education (SLED)
entities and the New York State Office of General Services (NYS
OGS).
Business Strategy
Our
strategy creates differentiation in cybersecurity by combining
personalized and recurring professional services to small to
mid-sized enterprises who lack the internal resources to focus on
cybersecurity related matters. Additionally, we have built growth
businesses by designing, developing, and marketing
cybersecurity-based software-as-a-service (SaaS). Products and
solutions are spun off from our technology platform to fill
technology gaps in cybersecurity. We brought a product platform to
market that has two patents pending and intend to develop other
intellectual property that serve as the core to other proprietary
products and solutions to market through a channel of domestic and
international partners and distributors. Our products, solutions,
and services are designed to simplify the security needs in
customer and partner environments, with a focus on the mid-tier
Enterprise market and below. We enable our partners by providing
recurring revenue-based business models for both recurring services
and through our automated and continuous security solutions.
Products may be sold as standalone solutions or integrated into
existing environments to further automate the management of
security and related IT functions. Our ability to succeed depends
on how successful we are in differentiating ourselves in the market
at a time when competition and consolidation in these markets is on
the rise.
Our
cybersecurity business is comprised of three components:
cybersecurity services, product development and deployment, and
integration of third-party security solutions into our security
offerings to our channel and customers. We provide cybersecurity
services and technical consulting resources to support both our
channel partners and end customers. For example, we sell our
proprietary product, Nodeware, through both our direct partners and
through other 3rd party partner distribution and agents so they can
either sell it as a standalone solution or part of other technical
services they provide to their customers. This enables the channel
partner to develop a base of recurring revenue. We have also
enabled Nodeware to be vertically integrated into other
cybersecurity platforms to create native offerings. We also provide
our cybersecurity services through our channel partners as a
cybersecurity overlay to the technical services they provide, which
also provides recurring revenue.
We are
working to expand our managed services business with our prime
partner, Perspecta, and the current federal enterprise customer and
its customers.
The
following sections define specific components of our business
strategy.
Nodeware®
In May
2016, we filed a provisional patent application for our proprietary
product, Nodeware and launched it commercially in November 2016. In
May 2017, we filed a utility patent application for Nodeware. Our
patent application is ready for examination by the U.S. patent
application examiner and in 2018, we have provided our first
defense of the patent application from the examiner.
We have
been notified that U.S. Patent No. 10,999,307, was issued on May 4,
2021, for NETWORK ASSESSMENT SYSTEMS AND METHODS THEREOF [U.S.
Patent Application Serial No. 15/600,297, filed May 19, 2017,
claiming priority of U.S. Provisional Patent Application Serial No.
62/338,904, filed May 19, 2016].
Nodeware
is an automated asset identification and vulnerability management
and monitoring solution that enhances security by proactively
identifying, monitoring, and addressing potential vulnerabilities
on both internal and external facing networks, creating a safeguard
against malicious intent to exploit known problems in a
customer’s network with simplicity and affordability.
Nodeware assesses vulnerabilities in a computer network using
scanning technology to capture a comprehensive view of the security
exposure of a network infrastructure. Users receive alerts and view
network information through a proprietary, web enabled dashboard.
Continuous and automated internal scanning and external on demand
scanning are components of this offering.
The
SaaS based platform has an agile and continuous development process
that is flexible to react to customer and market needs. In December
2019, we filed a second provisional patent application and in
December 2020 we filed the subsequent action on the institutional
patent on the Nodeware platform. In 2020, we created many new
feature updates and improvements to the platform in response to
COVID-19 needs and impact such as a downloadable Windows executable
version along with a Windows Agent that could be downloaded to a
remote PC or server. A number of enhancements related to data
management, threat intelligence, and user functionality were part
of the 2020 continued evolution.
Nodeware
creates an opportunity for resellers, including managed service
providers, managed security service providers, distributors, and
value-added resellers to use a product that provides greater
visibility into the network security of an organization. We sell
Nodeware in the commercial sector through channel partners and
agents. Since 2018, we have continued to expand our channel of
direct resellers in addition to organizations like Telarus, SYNNEX
and Staples.
Intellectual Property
We
believe that our intellectual property is an asset that may
contribute to the growth and profitability of our business. We rely
on a combination of patent-pending and confidentiality procedures
and contractual provisions to establish and protect our
intellectual property rights in the United States and abroad. In
addition to the Patent noted above, we have filed a patent
application for the Nodeware® platform in December 2020. The
efforts we have taken to protect our intellectual property may not
be sufficient or effective As a result of this uncertainty and
overall significance to the financial statements these costs have
been expensed.
The
U.S. patent system permits the filing of provisional and
non-provisional patent applications. A non-provisional patent
application is examined by the United States Patent and Trademark
Office (USPTO) and can mature into a patent once the USPTO
determines that the claimed invention meets the standards for
patentability.
Technology and Product Development
Our
goal is to position our products and solutions to enable vertical
and other API-based integration with other solutions. We have a
technology and product development strategy aligned with our
business strategy. We continue to identify other technical partners
in the cybersecurity market to integrate Nodeware into; through
either API or full stack integration.
Cybersecurity Services
We
provide cybersecurity consulting services that include incident
response, security awareness training, risk management, IT
governance and compliance, security assessment services,
penetration testing, and virtual Chief Information Security Officer
(vCISO) offerings to channel partners and direct customers across
different vertical markets (banking, supply chain, manufacturing,
legal, etc.) in North America. Our cybersecurity projects leverage
different technology platforms and processes such as 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. We
support both internal and external IT organizations with our
cybersecurity overlay that allows us to stay agnostic in the
process, especially for compliance while enabling the IT
organization to address the issues discovered. We validate 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. We continue to enhance our Cybersecurity
services when opportunities materialize and as the market
evolves.
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and
2020
The
following table compares our statements of operations data for the
three months ended March 31, 2021 and 2020. The trends suggested by
this table are not indicative of future operating
results.
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$1,824,342
|
100.0%
|
$1,899,595
|
100.0%
|
$(75,253)
|
(4.0)%
|
|
Cost of
sales
|
1,072,916
|
58.8
|
1,123,066
|
59.1
|
(50,150)
|
(4.5)
|
|
Gross
profit
|
751,426
|
41.2
|
776,529
|
40.9
|
(25,103)
|
(3.2)
|
|
General and
administrative
|
464,392
|
25.5
|
374,530
|
19.7
|
89,862
|
24.0
|
|
Selling
|
387,725
|
21.2
|
346,701
|
18.3
|
41,024
|
11.8
|
|
Total costs and
expenses
|
852,117
|
46.7
|
721,231
|
38.0
|
130,886
|
18.1
|
|
Operating income
(loss)
|
(100,691)
|
(5.5)
|
55,298
|
2.9
|
(155,989)
|
(282.1)
|
|
Interest
expense
|
(51,536)
|
(2.8)
|
(61,360)
|
(3.2)
|
(9,824)
|
(16.0)
|
|
Net
loss
|
$(152,227)
|
(8.3)%
|
$(6,062)
|
(0.3)%
|
$(146,165)
|
2,411.2%
|
|
|
|
|
|
|
|
|
|
Net loss per share
- basic and diluted
|
$(.01)
|
|
$.00
|
|
$(.01)
|
|
Sales
Our
managed support service sales comprised approximately 59% of our
sales in 2021 and approximately 60% in 2020. Our cybersecurity
projects and software sales, primarily to SMEs, were approximately
39% of our total sales in 2021 as compared to approximately 34% for
2020.
Sales
of virtualization subcontract projects have continued to decrease
since 2015 because VMware has continued to assign fewer projects to
us. Our virtualization subcontract project sales decrease of
approximately 30% from 2020 to 2021 was more than offset by sales
growth of approximately $56,000 from our cybersecurity projects and
software business during the three months ended March 31, 2021 as
compared to 2020. Our goal is to continue to grow our cybersecurity
projects and software business by using our expanding salesforce as
well as channel partners. We also hope to recapture some of our
VMware business in both the public and commercial sector by
building VMware license sales volume and services concurrently
directly with customers rather than relying on subcontract project
services. Other IT projects comprised the balance of our
sales.
Cost
of Sales and Gross Profit
Cost of
sales principally represents the cost of employee services related
to our IT Services Group. We have grown our cybersecurity projects
team to meet demand and terminated some support personnel in the
last year as part of efficiency measures. As virtualization project
sales decreased, related personnel cost of sales also
decreased.
Our
gross profit decreased by $25,103 primarily due to pricing
concessions made in our managed services business offset by
improved cybersecurity projects sales and better cost containment
of salaries.
General
and Administrative Expenses
General
and administrative expenses include corporate overhead such as
compensation and benefits for executive, administrative and finance
personnel, rent, insurance, professional fees, travel, and office
expenses. General and administrative expenses increased due
primarily to personnel increases and increases to professional fees
for legal and consulting services.
Selling
Expenses
The
increase in selling expenses is due to the hiring of salespeople
throughout 2020 to sell our cybersecurity services and software and
associated commissions due to the increased sales. The increase in
selling expenses from the hiring of new personnel was offset by
less travel related spending due to COVID-19 as well as less
marketing spending.
Operating
Income
The
decrease in our operating income from the previous year is
principally attributable to the growth of our sales team and the
associated costs as well as professional fees incurred for the
three months ended March 31, 2021 as compared to 2020.
Interest
Expense
The
decrease in interest expense is principally attributable to the
decrease in interest rates over the last year.
Net
Loss
The
increase is attributable to the items discussed above for the three
months ended March 31, 2021 as compared to 2020.
Liquidity and Capital Resources
At
March 31, 2021, we had cash of $42,472 available for working
capital needs and planned capital asset expenditures. At March 31,
2021, we had a working capital deficit of approximately $2,196,000
and a current ratio of .29.
During
2021, we financed our business activities principally through cash
flows provided by operations and sales with recourse of our
accounts receivable. Our primary source of liquidity is cash
provided by collections of accounts receivable and our factoring
line of credit. We maintain an accounts
receivable financing line of credit with an independent financial
institution that allows us to sell selected accounts receivable
invoices to the financial institution with full recourse against us
in the amount of $2,000,000, including a sublimit for one major
client of $1,500,000. This provides us with the cash needed to
finance certain of our on-going costs and expenses. At March 31,
2021, we had financing availability, based on eligible accounts
receivable, of approximately $199,000 under this line. We pay fees
based on the length of time that the invoice remains
unpaid.
We
entered into unsecured lines of credit financing agreement (the
“LOC Agreements”) with two related parties in previous
years. The LOC Agreements provide for working capital of up to
$100,000 through July 31, 2022 and $75,000 through January 2, 2023.
At March 31, 2021, we had approximately $15,000 of availability
under the LOC Agreements.
At
March 31, 2021, we have current notes payable of $162,500 to third
parties, which includes convertible notes payable of $150,000. Also
included is $12,500 in principal amount of a note payable due on
June 30, 2016 but not paid. This note was issued in payment of
software we purchased in February 2016 and secured by a security
interest in the software. To date, the holder has not taken any
action to collect the amount past due on this note or to enforce
the security interest in the software.
We have
$1,006,084 of current maturities of long-term obligations to third
parties. This is comprised of various notes including long-term
notes to third parties of $265,000 due on January 1, 2018, which
has not been renewed or amended, $175,000 due on August 31, 2018,
which have not been renewed or amended and approximately $500,000
due on December 31, 2021. We also have approximately $246,000 to
the Pension Benefit Guaranty Corporation (the “PBGC”)
with all principal due by September 15, 2018. We entered into a
Second Amended Settlement Agreement with the PBGC during the
quarter. The Company is expecting to pay $200,000 to PBGC by the
end of the second quarter to settle the debt in full, including
accrued interest of $71,755 as of March 31, 2021.
At
March 31, 2021, we have $100,000 of current maturities of long-term obligations
to a related party. This is due on January 1, 2022.
We plan
to renegotiate the terms of the various notes payable, seek funds
to repay the notes or use a combination of both
alternatives. We cannot
provide assurance that we will be able to repay current notes
payable or obtain extensions of maturity dates for long-term notes
payable when they mature or that we will be able to repay or
otherwise refinance the notes at their scheduled
maturities.
We
cannot provide assurance that we will be able to repay current
notes payable or obtain extensions of maturity dates for long-term
notes payable when they mature or that we will be able to repay or
otherwise refinance the notes at their scheduled
maturities.
We have
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 balance is $250,000 at March 31, 2021. $200,000 of this
availability is expected to be used after March 31, 2021 to settle
the PBGC liability.
The
following table sets forth our cash flow information for the
periods presented:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
Net cash provided
by operating activities
|
$71,555
|
$169,167
|
|
Net cash used by
investing activities
|
(61,396)
|
(62,446)
|
|
Net cash used by
financing activities
|
0
|
(6,680)
|
|
Net increase in
cash
|
$10,159
|
$100,041
|
Cash
Flows Provided by Operating Activities
Our
operating cash flow is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect
from our clients in a timely manner, and our ability to manage our
vendor payments. We bill our clients weekly or monthly after
services are performed as well as collect down payments depending
on the contract terms. Our net loss of $152,227 for 2021 was offset
in part by non-cash expenses and credits of $69,375. In addition, a
decrease in accounts receivable and other assets of $147,980,
offset by an increase in accrued payroll, deferred revenue and
other expenses payable of $51,918 and a decrease in accounts
payable of $45,491 resulting in cash provided by operating
activities of $71,555.
We
market Webroot and Nodeware to our IT channel partners who resell
to their customers. We continue to make investments in expanding
our sales of cyber security and Nodeware licenses to a growing
channel and direct commercial customers. Due to the time of
investment in cultivating relationships with our channel partners
and end customers needed to generate these new sales, we do not
expect to realize a return from our sales and marketing efforts for
one or more quarters. As a result, we may continue to experience
operating losses from these investments in personnel until
sufficient sales are generated. We expect to fund the cost for the
new sales personnel from our operating cash flows and incremental
borrowings, as needed.
Cash
Flows Used by Investing Activities
Cash
used by investing activities was $61,396 during the three months
ended March 31, 2021. It was primarily for capitalization of
software development costs as well as computer hardware for new
employees.
Cash
Flows Used by Financing Activities
There
were no financing activities during the three months ended March
31, 2021.
Credit Resources
We
believe the capital resources available under our factoring line of
credit, cash from additional related party loans and cash generated
by improving the results of our operations as well as the extension
of short-term debt to long term will be sufficient to fund our
ongoing operations and to support the internal growth we expect to
achieve.
We
anticipate financing growth from acquisitions of other businesses,
if any, and our longer-term internal growth through one or more of
the following sources: cash from collections of accounts
receivable; additional borrowing from related and third parties;
issuance of equity; use of our existing accounts receivable credit
facility; or a refinancing of our accounts receivable credit
facility.