Note 2. Management Plans - Capital Resources
The
Company reported net losses of $93,896 and $114,000 for the nine
months ended September 30, 2019 and 2018, respectively, and
stockholders’ deficiencies of $4,073,944 and $4,000,094 at
September 30, 2019 and December 31, 2018, respectively. Current
maturities of long-term obligations were approximately $1,490,000
and $720,000 at September 30, 2019 and December 31, 2018,
respectively. We have a working capital deficiency of approximately
$3,305,000 and $2,593,000 at September 30, 2019 and December 31,
2018, respectively. Accordingly, there is substantial doubt about
the Company’s ability to continue as a going concern and this
substantial doubt has not been alleviated.
The
Company's goal is to increase sales and generate cash flow from
operations on a consistent basis. The Company uses a formal
financial review and budgeting process as a tool for improvement
that has aided expense reduction and internal performance. The
Company’s business plans require improving the results of its
operations in future periods.
The
Company believes the capital resources available under its
factoring line of credit, cash from additional related party and
third-party loans and cash generated by improving the results of
its operations provide sources to fund its ongoing operations and
to support the internal growth of the Company. Although the Company
has no assurances, the Company believes that related parties, who
have previously provided working capital, and third parties will
continue to provide working capital loans on similar terms, as in
the past, as may be necessary to fund its on-going operations for
at least the next 12 months. If the Company experiences significant
growth in its sales, the Company believes that this may require it
to increase its financing line, finance additional accounts
receivable, or obtain additional working capital from other sources
to support its sales growth.
Note
3. Summary of Significant Accounting Policies
There
are several accounting policies that the Company believes are
significant to the presentation of its financial statements. These
policies require management to make complex or subjective judgments
about matters that are inherently uncertain. Note 3 to the
Company’s audited financial statements for the year ended
December 31, 2018 presents a summary of significant accounting
policies as included in the Company's Annual Report on Form 10-K as
filed with the SEC.
Reclassifications - The Company reclassifies amounts in its
financial statements to comply with recently adopted accounting
pronouncements.
Fair Value of Financial Instruments - The carrying amounts
reported in the balance sheets for cash, accounts receivable,
accounts payable, and accrued expenses approximate fair value
because of the immediate short-term maturity of these financial
instruments. The carrying value of notes payable and convertible
notes payable approximates the fair value based on rates currently
available from financial institutions and various
lenders.
Revenue - Effective January 1, 2018, the Company adopted
Topic 606 using the modified retrospective approach and applied the
guidance to those contracts which were not completed as of January
1, 2018. Adoption of Topic 606 did not impact the timing of revenue
recognition in the Company’s financial statements for the
current or prior periods. Accordingly, no adjustments have been
made to opening accumulated deficit or prior period
amounts.
The
Company’s total revenue recognized from contracts from
customers was comprised of three major services: Managed support
services, Cybersecurity Projects and software and Other IT
consulting services. The categories depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by
economic factors. There were no material unsatisfied performance
obligations at September 30, 2019 or 2018 for contracts with an
expected original duration of more than one year. The following
table summarizes the revenue recognized by the major
services:
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
Managed support
services
|
$1,275,273
|
$1,224,138
|
$3,769,274
|
$3,657,509
|
|
Cybersecurity
projects and software
|
406,926
|
295,138
|
1,089,778
|
865,449
|
|
Other IT consulting
services
|
137,500
|
51,066
|
427,089
|
143,604
|
|
Total
sales
|
$1,819,699
|
$1,570,342
|
$5,286,141
|
$4,666,562
|
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 recognized. Upon completion of
performance obligation of service, payment terms are 30
days.
Other IT consulting services
Other
IT consulting services consists of services such as project
management and general IT consulting services.
●
We generate revenue via fixed price service agreements. These
are based on periodic billings of a fixed dollar amount for
recurring services of a similar nature performed according to the
contractual arrangements with clients. The revenues are
recognized at time of service.
Based
on historical experience, the Company believes that collection is
reasonably assured.
During
the nine months ended September 30, 2019, sales to one client,
including sales under subcontracts for services to several
entities, accounted for 63.1% of total sales (71.4% - 2018) and
32.6% of accounts receivable at September 30, 2019 (10.5% -
December 31, 2018).
Leases - In February 2016, the FASB issued amended guidance
for lease arrangements to increase transparency and comparability
by providing additional information to users of financial
statements regarding an entity's leasing activities. The new
standard requires entities to recognize a liability for their lease
obligations and a corresponding right-of-use asset, initially
measured at the present value of the lease payments. Subsequent
accounting depends on whether the agreement is deemed to be a
financing or operating lease. For operating leases, a lessee
recognizes its total lease expense as an operating expense over the
lease term. The ASU requires that assets and liabilities be
presented and disclosed separately, and the liabilities must be
classified appropriately as current and noncurrent. The ASU further
requires additional disclosure of certain qualitative and
quantitative information related to lease agreements. The ASU was
effective for the Company beginning on January 1, 2019, at which
time we adopted the new standard using the modified retrospective
approach as of the date of adoption. Upon adoption, we recognized a
right-of-use asset of $265,825 and a lease liability of $265,825
related to the existing office lease that is classified as an
operating lease. A summary of the impact to the Balance Sheet on
January 1, 2019 and the balances as of September 30, 2019 for this
asset is as follows:
|
|
|
|
|
|
|
Right of use asset
– lease, net
|
0
|
265,825
|
265,825
|
213,426
|
|
Operating lease
liability – short-term
|
0
|
68,848
|
68,848
|
72,957
|
|
Operating lease
liability – long-term
|
0
|
196,977
|
196,977
|
141,801
|
Note 4. Sale of Certain Accounts Receivable
The
Company has available a financing line with a financial institution
(the Purchaser), which enables the Company to sell accounts
receivable to the Purchaser with full recourse against the Company.
Pursuant to the provisions of FASB ASC 860, the Company reflects
the transactions as a sale of assets and establishes an accounts
receivable from the Purchaser for the retained amount less the
costs and fees of the transaction and less any anticipated future
loss in the value of the retained asset.
The
retained amount is 10% of the total accounts receivable invoice
sold to the Purchaser. The fee is charged at prime plus 3.6%
(effective rate of 8.60% at September 30, 2019) against the average
daily outstanding balance of funds advanced. The estimated future
loss reserve for each receivable included in the estimated value of
the retained asset is based on the payment history of the accounts
receivable customer and is included in the allowance for doubtful
accounts, if any. As collateral, the Company granted the Purchaser
a first priority interest in accounts receivable and a blanket
lien, which may be junior to other creditors, on all other
assets.
The
financing line provides the Company the ability to finance up to
$2,000,000 of selected accounts receivable invoices, which includes
a sublimit for one of the Company’s customers of $1,500,000.
During the nine months ended September 30, 2019, the Company sold
approximately $3,398,000 ($3,890,000 - September 30, 2018) of its
accounts receivable to the Purchaser. As of September 30, 2019,
approximately $306,400 ($363,000 - December 31, 2018) of these
receivables remained outstanding. Additionally, as of September 30,
2019, the Company had approximately $188,000 available under the
financing line with the financial institution ($0 - December 31,
2018). After deducting estimated fees, allowance for bad debts and
advances from the Purchaser, the net receivable from the Purchaser
amounted to approximately $31,000, at September 30, 2019 ($36,000 -
December 31, 2018), 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 $38,382 for the nine months ended September 30, 2019
($40,007 - September 30, 2018). These financing line fees are
classified on the statements of operations as interest
expense.
Note 5. Earnings per Share
Basic
earnings per share is based on the weighted average number of
common shares outstanding during the periods presented. Diluted
earnings per share is based on the weighted average number of
common shares outstanding, as well as dilutive potential common
shares which, in the Company’s case, comprise shares issuable
under convertible notes payable and stock options. The treasury
stock method is used to calculate dilutive shares, which reduces
the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options and warrants assumed
to be exercised. In a loss period, the calculation for basic and
diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.
The
following table sets forth the computation of basic and diluted
loss per share for the nine months ended:
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
Numerator for basic
and diluted net loss per share:
|
|
|
|
|
|
Net
(loss) income
|
$(93,071)
|
$16,000
|
$(93,896)
|
$(114,000)
|
|
Denominator for
basic and diluted net loss per share:
|
|
|
|
|
|
Weighted average
common shares outstanding
|
29,061,883
|
29,061,883
|
29,061,883
|
29,061,883
|
|
Basic and diluted
net loss/ earnings per share
|
$.00
|
$.00
|
$.00
|
$.00
|
|
Anti-dilutive
shares excluded from net loss/earnings per share
calculation
|
31,288,912
|
28,530,252
|
31,288,912
|
28,530,252
|
Certain common shares issuable under stock options and convertible
notes payable have been omitted from the diluted net loss per share
calculation because their inclusion is considered anti-dilutive
because the exercise prices were greater than the average market
price of the common shares or their inclusion would have been
anti-dilutive.
Note 6. Notes Payable - Related Parties
On May 7, 2019, the Company entered into a note payable agreement
for up to $500,000 with a related party. The note has an interest
rate of 7.5% and is due on August 31, 2026. The Company borrowed
$200,000 which remains outstanding. As consideration for providing
this financing, the Company granted a stock option to purchase a
total of 2,500,000 common shares at an exercise price of $.02 and
recorded interest expense of $14,250 using the Black-Scholes option
pricing model to determine the estimated fair value of the
option.
Note 7. Stock Option Plans and Agreements
The
Company has approved stock options plans and agreements covering up
to an aggregate of 11,255,000 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.
On
August 20, 2019, the Company’s board of directors approved
the 2019 stock option plan, which grants options to purchase up to
an aggregate of 1,500,000 common shares. As of September 30, 2019,
1,371,500 options to purchase shares remain unissued under the 2019
plan. Options issued to date are nonqualified since the Company has
decided not to seek stockholder approval of the 2019
Plan.
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. Options for 2,973,500
shares were granted for the nine months ended September 30, 2019.
No options were granted for the nine months ended September 30,
2018. The following assumptions were used for the nine months ended
September 30, 2019.
|
Risk-free interest
rate
|
1.38% - 2.55%
|
|
Expected dividend
yield
|
0%
|
|
Expected stock
price volatility
|
100%
|
|
Expected life of
options
|
2.75 - 3.90
years
|
The
Company recorded expense for options issued to employees of $5,796
and related-party loan financing consideration of $14,250 for the
nine months ended September 30, 2019 and $0 for the nine months
ended September 30, 2018.
At
September 30, 2019, there was $0 of total unrecognized compensation
cost related to non-vested options. No options vested during the
nine months ended September 30, 2019.
A
summary of all stock option activity for the nine months ended
September 30, 2019 follows:
|
|
Number
of Options Outstanding
|
Weighted
Average Exercise Price
|
Remaining
Contractual Term
|
Aggregate
Intrinsic Value
|
|
Outstanding at
December 31, 2018
|
7,920,000
|
$.09
|
|
|
|
Granted
|
2,973,500
|
.02
|
|
|
|
Forfeited
|
(938,000)
|
.23
|
|
|
|
Expired
|
(75,000)
|
.17
|
|
|
|
Outstanding at
September 30, 2019
|
9,880,500
|
$.05
|
4.1
years
|
$206,400
|
|
|
|
|
|
|
|
At September 30,
2019 - vested or
|
|
|
|
|
|
expected to
vest
|
9,880,500
|
$.05
|
4.1
years
|
$206,400
|
|
Exercisable
|
9,755,500
|
$.05
|
4.1
years
|
$202,300
|
Note 8. Related Party Accounts Receivable and Accrued Interest
Payable
Accrued
Interest Payable - Included in accrued interest payable is accrued
interest payable to related parties of $150,360 at September 30,
2019 ($148,703 - December 31, 2018).
************
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This
discussion contains forward-looking statements, the accuracy of
which involves risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking
statements for many reasons including, but not limited to, those
discussed under the heading “Forward Looking
Statements” above and elsewhere in this report. We disclaim
any obligation to update information contained in any
forward-looking statements.
The
following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction
with our financial statements and the notes thereto appearing
elsewhere in this report.
Business
Headquartered
in Pittsford, New York, Infinite Group, Inc. is a provider of
managed IT and virtualization services and a developer and provider
of cybersecurity tools and solutions to private businesses and
government agencies. As part of these services we:
●
focus on key
security services (virtual CISO, compliance review and assessment,
incident response, penetration testing, and vulnerability
assessments) to solve and simplify security for small and medium
sized enterprises (SMEs), government agencies, and certain large
commercial enterprises. We act as the security layer to both
internal IT and third party IT organizations. We work with both our
channel partners and direct customers to provide these
services;
●
developed and
brought to market our automated vulnerability management solution
through our OEM business, 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). These activities take place in our virtualization sales
organization in conjunction with support from our professional
services organization (PSO).
Business Strategy
Our strategy is to build our business by designing, developing, and
marketing cybersecurity based services, products and solutions that
fill technology gaps in cybersecurity. We brought one patent
pending product to market and intend to bring other proprietary
products and solutions to market through a channel of domestic and
international partners and distributors. Our products and solutions
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:
managed security 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 also provide our
cybersecurity services through our channel partners as a
cybersecurity overlay to the technical services they already
provide.
Our goal is to maintain our base of opportunities in our VMware
business in both the public and commercial sector.
Opportunistically, we will continue to identify license and
services engagements as they arise.
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
strategic components of our business strategy.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2019
and 2018
The
following tables compares our statements of operations data for the
three and nine months ended September 30, 2019 and 2018. The trends
suggested by this table are not indicative of future operating
results.
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$1,819,699
|
100.0%
|
$1,570,342
|
100.0%
|
$249,357
|
15.9%
|
|
Cost of
sales
|
1,197,315
|
65.8
|
1,005,542
|
64.0
|
191,773
|
19.1
|
|
Gross
profit
|
622,384
|
34.2
|
564,800
|
36.0
|
57,584
|
10.2
|
|
General and
administrative
|
335,528
|
18.4
|
261,401
|
16.6
|
74,127
|
28.4
|
|
Selling
|
311,647
|
17.1
|
223,367
|
14.2
|
88,280
|
39.5
|
|
Total costs and
expenses
|
647,175
|
35.6
|
484,768
|
30.8
|
162,407
|
33.5
|
|
Operating (loss)
income
|
(24,791)
|
(1.4)
|
80,032
|
5.1
|
(104,823)
|
(131.0)
|
|
Interest
expense
|
(68,280)
|
(3.8)
|
(64,032)
|
(4.1)
|
4,248
|
6.6
|
|
Net (loss)
income
|
$(93,071)
|
(5.1)%
|
$16,000
|
1.0%
|
$(109,071)
|
(681.7)%
|
|
|
|
|
|
|
|
|
|
Net (loss) income
per share - basic and diluted
|
$.00
|
|
$.00
|
|
$.00
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5,286,141
|
100.0%
|
$4,666,562
|
100.0%
|
$619,579
|
13.3%
|
|
|
3,386,526
|
64.1
|
3,063,893
|
65.7
|
322,633
|
10.5
|
|
|
1,899,615
|
35.9
|
1,602,669
|
34.3
|
296,946
|
18.5
|
General
and administrative
|
959,535
|
18.2
|
848,735
|
18.2
|
110,800
|
13.1
|
|
|
822,307
|
15.6
|
677,677
|
14.5
|
144,630
|
21.3
|
|
Total costs and
expenses
|
1,781,842
|
33.7
|
1,526,412
|
32.7
|
255,430
|
16.7
|
|
|
117,773
|
2.2
|
76,257
|
1.6
|
41,516
|
(54.4)
|
|
|
(211,669)
|
(4.0)
|
(190,257)
|
(4.1)
|
21,412
|
11.3
|
|
|
$(93,896)
|
(1.8)%
|
$(114,000)
|
( 2.4)%
|
$(20,104)
|
(17.6)%
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
$.00
|
|
$.00
|
|
$.00
|
|
Sales
Our
managed service and virtualization project and software license
sales comprised approximately 71% of our sales in 2019 and
approximately 78% in 2018. Our 2019 cybersecurity projects and
software sales to SMEs, were approximately 21% of our total sales
as compared to approximately 19% for 2018.
Sales
of virtualization subcontract projects have increased during the
most recent twelve months. Our virtualization subcontract project
sales increased by approximately 4% and 3% during the three months
and nine months ended September 30, 2019 as compared to 2018,
respectively. We also had sales growth of approximately 38% and 26%
from cybersecurity projects and software during the three months
and nine months ended September 30, 2019 as compared to 2018,
respectively. Our goal is to continue to expand our cybersecurity
projects and software business by using our expanding salesforce as
well as channel partners. We plan to maintain our VMware services
business in both the public and commercial sectors as a preferred
subcontractor to VMWare. Other IT projects comprised the balance of
our sales.
Cost
of Sales and Gross Profit
Cost of
sales principally represents the cost of employee services related
to our IT Services Group. In smaller amounts, we also incurred cost
of sales for third party software licenses for our commercial SME
partners. As virtualization project sales decreased, related
personnel cost of sales also decreased.
Our
gross profit improved by $57,584 and $296,946 during the three
months and nine months ended September 30, 2019 as compared to
2018, respectively, primarily due to improved sales and better cost
containment of salaries as noted.
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
approximately 28% and 13% during the three months and nine months
ended September 30, 2019 as compared to 2018, respectively,
primarily due to new personnel and increased legal and accounting
fees.
Selling
Expenses
The
increase in selling expenses of approximately 40% and 21% during
the three months and nine months ended September 30, 2019 as
compared to 2018, respectively, is primarily due to the hiring of
salespeople in late 2018 and in mid-2019 to sell our cybersecurity
services and software as well as a marketing manager to enhance our
marketing activities.
Operating
(Loss) Income
The
increase in our operating income from the previous year’s
operating loss is principally attributable to an improved gross
margin and decreases in other expenses for the three months and
nine months ended September 30, 2019 as compared to 2018 as
explained above.
Interest
Expense
The
increase in interest expense is principally attributable to a net
increase in long-term debt to fund our operations, a stock option
based loan origination fee for the new debt and an increase in the
interest rates. The prime rate increased from 4.0% at December 31,
2017 to 4.75% on March 22, 2018 to 5.00% on June 14, 2018 to 5.25%
on September 27, 2018 and to 5.50% on December 20, 2018, which
increased our financing costs under our accounts receivable
financing line and our line of credit payable to a related party.
The rate decreased to 5.25% on August 1, 2019 and to 5.00% on
September 19, 2019.
Net
(Loss) Income
The
decrease is attributable to the items discussed above for the three
and nine months ended September 30, 2019 as compared to
2018.
Liquidity and Capital Resources
At
September 30, 2019, we had cash of $32,167 available for working
capital needs and planned capital asset expenditures. At September
30, 2019, we had a working capital deficit of approximately
$3,305,000 and a current ratio of .17.
During
2019, we financed our business activities principally through cash
flows provided by operations, sales with recourse of our accounts
receivable and borrowings from related parties. Our primary source
of liquidity is cash provided by collections of accounts receivable
and our factoring line of credit. We maintain an accounts
receivable financing line of credit with an independent financial
institution that allows us to sell selected accounts receivable
invoices to the financial institution with full recourse against us
in the amount of $2,000,000, including a sublimit for one major
client of $1,500,000. This provides us with the cash needed to
finance certain of our on-going costs and expenses. At September
30, 2019, we had financing availability, based on eligible accounts
receivable, of approximately $188,000 under this line. We pay fees
based on the length of time that the invoice remains
unpaid.
We
entered into unsecured line of credit financing agreements (the
“LOC Agreements”) with three related parties. The LOC
Agreements provide for working capital of up to $400,000 through
January 1, 2020, $100,000 through July 31, 2022 and $75,000 through
January 2, 2023. At September 30, 2019, we had approximately
$46,000 of availability under the LOC Agreements.
At
September 30, 2019, we have current notes payable of $332,500 to
third parties, which includes convertible notes payable of
$290,000. Also included is $12,500 in principal amount of a note
payable due on June 30, 2016 but not paid. This note was issued in
payment of software we purchased in February 2016 and secured by a
security interest in the software. To date, the holder has not
taken any action to collect the amount past due on this note or to
enforce the security interest in the software.
We have
$950,000 of current maturities of long-term obligations to third
parties. This is comprised of various notes including $264,000 due
on January 1, 2020. We also have current maturities of long-term
obligations of approximately $246,000 to the Pension Benefit
Guaranty Corporation (the PBGC) with all principal due September
15, 2018, which the due date has not been extended. We have
maturities of our long-term notes to third parties of $265,000 due
on January 1, 2018 and $175,000 due on August 31, 2018, which have
not been renewed or amended.
We also
have current maturities of our long-term debt to related parties of
approximately $539,000 of which approximately $516,000 is due on
January 1, 2020. Also included is a note payable for $25,000 due to
an officer of the Company which matured on March 31, 2018 and has
not been paid. We also have current notes payable to related
parties of $62,000.
We plan
to renegotiate the terms of the notes payable, seek funds to repay
the notes or use a combination of both alternatives. Previously, we
have extended certain notes totaling $440,000 with certain
third-party lenders. 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
long-term obligations to third parties of $500,000 due on December
31, 2021. We have a long-term obligation of $9,000 to a related
party due January 1, 2021.
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 $200,000 at September 30, 2019.
The
following table sets forth our cash flow information for the
periods presented:
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
Net cash used by
operating activities
|
$(145,554)
|
$(158,751)
|
|
Net cash used by
investing activities
|
(1,945)
|
0
|
|
Net cash provided
by financing activities
|
149,950
|
88,660
|
|
Net increase
(decrease) in cash
|
$2,451
|
$(70,091)
|
Cash
Flows Used by Operating Activities
Our
operating cash flow is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect
from our clients in a timely manner, and our ability to manage our
vendor payments. We bill our clients weekly or monthly after
services are performed, depending on the contract terms. Our net
loss of $93,896 for 2019 was offset in part by non-cash expenses
and credits of $35,418. In addition, an increase in accounts
receivable and other assets of $375,528 was offset by increases in
accounts payable and accrued expenses of $288,452 resulting in a
use of funds of $145,554.
We
market Webroot and Nodeware to our IT channel partners who resell
to their customers. We are making investments in expanding our
sales of cyber security and virtualization projects and VMware
licenses to commercial and SLED customers. Due to the lengthy lead
times typically needed to generate these new sales, we do not
expect to realize a return from our sales and marketing personnel
for one or more quarters. As a result, we may continue to
experience operating losses from these investments in personnel
until sufficient sales are generated. We expect to fund the cost
for the new sales personnel from our operating cash flows and
incremental borrowings, as needed.
Cash
Flows Used by Investing Activities
Cash
used by investing activities was $1,945 during the nine months
ended September 30, 2019. It was for computer hardware for new
employees. We expect to invest approximately $30,000 during 2019 in
computer hardware and software to update our technology to support
our business.
Cash
Flows Provided by Financing Activities
Cash
provided by financing activities was $149,950 for the nine months
ended September 30, 2019 consisting of $200,000 in borrowings from
a related party offset by principal payments of $50,050 to related
parties.
Credit Resources
We believe the capital resources available under our factoring line
of credit, cash from additional related party and third-party loans
and cash generated by improving the results of our operations
provide sources to fund our ongoing operations and to support our
internal growth. Although we have no assurances, we believe that
related parties, who have previously provided working capital, and
third parties will continue to provide working capital loans on
similar terms, as in the past, as may be necessary to fund our
on-going operations for at least the next 12 months, however,
substantial doubt about our ability to continue as a going concern
has not been alleviated. If we experience significant growth in its
sales, we believe that this may require us to increase our
financing line, finance additional accounts receivable, or obtain
additional working capital from other sources to support its sales
growth.
We plan to evaluate alternatives which may include renegotiating
the terms of our notes, seeking conversion of the notes to shares
of common stock and seeking funds to repay our notes. We continue
to evaluate repayment of our notes payable based on its cash
flow.