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IMCI Infinite

Filed: 29 Mar 21, 8:00pm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2020
 
Commission File Number 0-21816
 
Infinite Group, Inc.
175 Sully’s Trail, Suite 202
Pittsford, NY 14534
(585) 385-0610
A Delaware Corporation
IRS Employer Identification Number: 52-1490422
 
Securities registered pursuant to Section 12(b) of the Act
 
 Common Stock, $0.001 par value per share
IMCIOTC
(Title of each class)(Trading Symbol)(Name of each exchange on which registered)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 
 
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
 
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant (based upon the closing price on the Over the Counter Bulletin Board of $.09 on June 30, 2020 the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1,850,000.
 
As of March 24, 2021, 29,061,883 shares of the registrant's common stock, $.001 par value, were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
NONE
 
 
 
INFINITE GROUP, INC.
 
Form 10-K
 
TABLE OF CONTENTS
 
PART I Page
 Item 1.Business3
 Item 1A.Risk Factors6
 Item 1B.Unresolved Staff Comments9
 Item 2.Properties10
 Item 3.Legal Proceedings10
 Item 4.Mine Safety Disclosures10
   
PART II  
 Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities10
 Item 6.Selected Financial Data10
 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations11
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk15
 Item 8.Financial Statements and Supplementary Data15
 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure15
 Item 9A.Controls and Procedures15
 Item 9B.Other Information15
   
PART III.
  
 Item 10.Directors, Executive Officers and Corporate Governance16
 Item 11.Executive Compensation17
 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters18
 Item 13.Certain Relationships and Related Transactions, and Director Independence21
 Item 14.Principal Accountant Fees and Services22
   
PART IV.
  
 Item 15.Exhibits and Financial Statement Schedules22
 Signatures25
 
FORWARD LOOKING STATEMENT INFORMATION
 
Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth herein under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The terms “we”, “our”, “us”, or any derivative thereof, as used herein refer to Infinite Group, Inc., a Delaware corporation.
 
2
 
 
PART I
Item 1. 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 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, patent pending automated asset identification and vulnerability management and monitoring solution, Nodeware®, which we sell through distribution and channel partners. We are also master distributor for other cybersecurity 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 Overview
 
As of December 31, 2020, we had 60 full-time employees. We possess certifications with our business and technology partners and our personnel maintain numerous security and technical certifications and qualifications. Our professionals are located at our headquarters in Pittsford, New York and in the states of Colorado, Florida, Georgia, Louisiana, Maryland, North Carolina, South Carolina, Texas, Virginia and Washington.
 
We had sales of approximately $7.2 million in 2020 and approximately $7.1 million in 2019. We generated operating income of approximately $1,000 in 2020 as compared to approximately $329,000 in 2019. We had net income of approximately $673,000 in 2020 and approximately $48,000 in 2019. We recorded other income of approximately $967,000 in 2020 primarily from the forgiveness of our Payroll Protection Plan loan. We derived approximately 65% of our sales in 2020 and 70% in 2019 from contracts as either a prime contractor or a subcontractor.
 
During 2020, we derived approximately 61% of our sales from one prime contractor, Perspecta (spun off from DXC Technology Company in 2018), including sales under subcontracts for services to its end clients, principally a major establishment of the U.S. Government (the U.S. Government Entity) for which we manage information security in one of the nation’s largest physical and virtual environments involving server and application security for the Microsoft Windows environment. During 2019, the percentage was approximately 63%. We have been providing this service to the U.S. Government Entity under a long-standing subcontract, which has been renewed annually since 2004. Our 24x7 team of experts supports approximately 5,000 physical and virtual servers and 250,000 client workstations from facilities in Maryland and Colorado. Operating 24 hours per day and seven days per week, we consistently meet or exceed the requirements of our service level agreements. We refer to this as our Advanced Server Management (ASM) team.
 
We continued to grow our team of cybersecurity sales and technical consultants as a result of growing demand and accelerated sales growth in this segment of the market. This market segment of cybersecurity accounts for over 20% of our sales as a result of our direct and channel sales mix. We continue to drive development of our cybersecurity business through growing and developing channel marketing, programs, and relationships for Nodeware and cybersecurity consulting. We believe our channel presence through entities including large distribution and master agents have created significant opportunities in both of these areas. This has further reinforced our commitment to this business strategy and our decision to leverage third party channels to bring new business and customers and drive growth of our existing relationships to IGI resulting in improved operating income.
 
We provide subcontracted professional services to a select set of OEMs and commercial entities that need additional skilled resources when architecting and implementing solutions. We provide cloud computing solutions that include public and private cloud architectures along with hybrid scalable cloud hosting, server virtualization and desktop virtualization solutions. Our experience with cloud and virtualization computing related software has enabled us to take advantage of a growing trend towards Managed IT Security Services, particularly in the SME space. Sales to our principal client, VMware, Inc., consisted of sales under subcontracts for services to their end clients. During 2020, we provided professional services to these clients and earned 3.5% of our sales.
 
 
 
3
 
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. 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. In 2019 and 2020, we continued to expand our channel of directresellers 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. To date, we have filed one patent application for our proprietary product, Nodeware, in May 2017 and the second in December 2020 on the platform. The efforts we have taken to protect our intellectual property may not be sufficient or effective.
 
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. Our patent application for Nodeware is ready for examination by the U.S. patent application examiner. In 2018, 2019 and 2020, our Nodeware patent was reviewed by an auditor and we continue to defend and address references to the patent to continue its cycle through the process. We are awaiting on an auditor assignment for the second provisional patent filed.
 
 
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.
 
 
Partner Agreements
 
Telarus Master Agent Agreement
 
SYNNEX distribution agreement. In 2019, we signed a distribution agreement with SYNNEX Corporation (NYSE: SNX), a leading business process services company, to bring Nodeware and IGI’s full suite of cybersecurity services to the SYNNEX reseller channel in the U.S. and Canada. SYNNEX resellers offer IGI services and Nodeware to their customer base, helping them to improve their security posture and reduce their cyber risk.
 
Staples to sell Nodeware. In 2019, we also signed a distribution agreement with Staples Inc. to sell its Nodeware™ vulnerability management solution through the Staples Business to Business(“B2B”) solutions division. The entire Staples customer base will now have access to this solution.
 
Staples to sell Cybersecurity services. In 2020, we added our portfolio of cybersecurity services to the distribution agreement with Staples Inc. through the Staples B2B solutions division.
 
Certifications
 
Our technical support personnel maintain leading edge certifications and qualifications in the respective software applications. These certifications are examples of our concerted effort to grow and expand our virtualization practice. We believe that our virtualization experience and expertise with VMware will offer opportunities to increase sales, particularly in the cloud computing market.
 
CISSP® - Certified Information Systems Security Professionals. The CISSP certification is a credential for those with technical and managerial competence, skills, experience, and credibility to design, engineer, implement, and manage overall information security programs to protect organizations from increasingly sophisticated attacks. It is a globally recognized standard of achievement. Certain of our employees in our cyber security group have this certification.
 
GCIH - GIAC Certified Incident Handler. The GCIH certification is a credential for incident handlers who manage security incidents by understanding common attack techniques, vectors and tools as well as defending against and/or responding to such attacks when they occur. The GCIH certification focuses on detecting, responding, and resolving computer security incidents including:
the incident reporting process;
malicious applications and network activity;
common attack techniques that compromise hosts;
system and network vulnerabilities; and
continuous process improvement and the root causes of incidents.
Certain of our employees in our cyber security group have this certification.
 
CEH – Certified Ethical Hacker. The Certified Ethical Hacker (CEH) program is a comprehensive ethical hacking certification to help information security professionals grasp the fundamentals of ethical hacking. The certification serves to assist our consultants to systematically attempt to inspect network infrastructures with the consent of its owner to find security vulnerabilities which a malicious hacker could potentially exploit. The course helps assess the security posture of an organization by identifying vulnerabilities in the network and system infrastructure to determine if unauthorized access is possible. Certain of our employees in our cyber security group have this certification.
 
Microsoft Gold Certified Partner. We are part of Microsoft's Accredited Online Cloud Services program. We have been certified in sales, pricing and technical delivery of Office 365 which combines the familiar Office desktop suite with cloud-based versions of the next-generation communications and collaboration services: Exchange Online, SharePoint Online and Lync Online. These services are providing real world benefits to our clients while allowing us to offer clear guidelines for transitioning new users to hybrid-cloud-based solutions. We received certification for Windows Intune which provides complete remote desktop support capabilities enhancing our overall goal of providing complete solutions for virtualization and cloud-based Software as a Service (SaaS). What once required expensive hardware and time-consuming deployments can now be delivered seamlessly, including web conferencing, collaboration, document management, messaging, customer relationship management and productive office web applications all with lower total cost of ownership and quicker return on investment. We believe our Microsoft competencies assist our business development personnel when presenting solutions that, if accepted, will increase our sales.
 
5
 
 
Perspecta Inc. Global Procurement Master Terms Agreement. We are a member of a select group of suppliers that enables Perspecta Inc. (spun off from DXC Technology Company in 2018) to purchase products and services from us under a global procurement master agreement and as specified in a statement of work for each project. This relationship continues to evolve and is something that is responsible for our long-term relationship with the Federal customer mentioned previously. Perspecta has many tools and resources to help us generate new sales streams, and improve our mutual profitability, while at the same time adding unique value for our joint clients. The program comprises practical tools and services that we anticipate will help us in the key areas of marketing and selling our solutions, optimizing the technology, and collaborating with other organizations within our industry to generate more revenue. Our global procurement master agreement with Perspecta runs to January 2021.
 
Competition
 
As we increase our focus in cybersecurity services and product development, we face competition from several different vendors in this evolving market. We compete with other IT professional services firms, Managed Security Services Providers (MSSPs), and cybersecurity product and software developers operating in the Federal Government, state and local government and commercial marketplace. We obtain a portion of our business based on proposals submitted in response to requests from potential and current clients, who typically also receive proposals from other firms. We face competition in the commercial markets from other IT service providers, MSSPs, and software development companies, large and small. Many of our larger competitors, in general, have substantially greater capital resources, research and development staffs, sales, and marketing resources, facilities, and experience.
 
Company Information Available on the Internet
 
We maintain a website at https://igicybersecrity.com. Through a link to the Investor Relations section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are available, free of charge, as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission (SEC). We also maintain a web site for our cybersecurity product, Nodeware, and related services at https://www.nodeware.com. The content of our websites shall not be deemed part of this report.
 
Employees
 
As of December 31, 2020, we have 60 full-time employees, including 42 in information technology services, three in executive management, three in accounting, finance and administration, three in software development and ten in marketing and sales. We are not subject to any collective bargaining agreements and we believe that relations with our employees and independent contractors are good. We believe that we are currently staffed at an appropriate level to administratively implement and carry out our business plan for the next 12 months. However, we expect to add positions in sales, technical support, marketing and cybersecurity consulting to meet growing demands.
 
Our ability to develop and market our services, and to establish and maintain a competitive position in our businesses will depend, in large part, upon our ability to attract and retain qualified technical, marketing and managerial personnel, of which there can be no assurance.
 
General Information
 
We were incorporated under the laws of the state of Delaware on October 14, 1986. Our principal corporate headquarters are located at 175 Sully’s Trail, Suite 202, Pittsford, NY 14534. Our business is in the field of delivering cybersecurity services, licensing and selling our cybersecurity solutions, including Nodeware, and distributing third party software licenses.
 
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.
 
 
 
6
 
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.
 
 
 
7
 
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.
 
 
8
 
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.
 
 
 
Item 1B. Unresolved Staff Comments
 
Not applicable.
 
 
 
9
 
Item 2. Properties
 
The table below lists our facility location and square feet owned or leased. Beginning on August 1, 2016, we lease our headquarters facility under an operating lease agreement. Our rent expense is $80,000 annually during the first year of the lease term and increases by 1.5% annually thereafter. We have the right to terminate the lease upon six months prior notice after three years of occupancy.
 
At December 31, 2020
 
Owned
 
 
Square Feet Leased
 
 
Annual Rent
 
Termination Date
Pittsford, New York
  - 
  7,112 
 $84,908 
June 30, 2022
 
We believe our facility is in good operating condition. We do not own or intend to invest in any real property and currently have no policy with respect to investments or interests in real estate, real estate mortgage loans or securities or interests in persons primarily engaged in real estate activities.
 
 
Item 3. Legal Proceedings
 
We are not presently involved in any material legal proceedings.
 
 
Item 4. Mine Safety Disclosures
 
Not applicable.
PART II
 
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is quoted on the OTC Bulletin Board under the symbol IMCI. The following table sets forth, for the periods indicated, the high and low closing bid quotations per share for our common stock for each quarter within the last two fiscal years, as reported by the OTC Bulletin Board. Quotations represent interdealer prices without an adjustment for retail markups, markdowns or commissions and may not represent actual transactions:
 
 
 
Bid Prices
 
Year Ended December 31, 2020
 
High
 
 
Low
 
 
 
 
 
 
 
 
First Quarter
 $.068 
 $.030 
Second Quarter
 $.150 
 $.052 
Third Quarter
 $.150 
 $.085 
Fourth Quarter
 $.208 
 $.081 
 
    
    
Year Ended December 31, 2019
 
High
 
 
Low
 
 
    
    
First Quarter
 $.024 
 $.005 
Second Quarter
 $.030 
 $.010 
Third Quarter
 $.085 
 $.018 
Fourth Quarter
 $.059 
 $.028 
 
At March 24, 2021, we had 198 record stockholders and estimate that we had approximately 1,200 beneficial stockholders.
 
Dividend Policy
 
We have never declared or paid a cash dividend on our common stock. It has been the policy of our board of directors (the Board) to retain all available funds to finance the development and growth of our business. The payment of cash dividends in the future will be dependent upon our earnings and financial requirements and other factors deemed relevant by our Board.
 
 
Item 6. Selected Financial Data
 
As a smaller reporting company, we are not required to provide the information in response to this Item.
 
 
10
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary statement identifying important factors that could cause our actual results to differ from those projected in forward-looking statements.
 
Readers of this report are advised that this document contains both statements of historical facts and forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward-looking statements. Examples of forward-looking statements include, but are not limited to (i) projections of sales, income or loss, earnings per share, capital expenditures, dividends, capital structure, and other financial items, (ii) statements of our plans and objectives with respect to business transactions and enhancement of stockholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects.
 
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. (IGI) is a developer of cybersecurity software and a provider of cybersecurity consulting services to commercial businesses and government organizations. As part of these offerings we:
focus on key cybersecurity 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 overlay to both internal IT and third-party IT (MSPs, VARs, MSSPs) organizations to 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;
 
developed and brought to market our patent pending, automated vulnerability management solution through our OEM business, Nodeware®, which we sell through distribution and channel partners. We are also 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;
 
have developed and brought to market our SaaS based automated asset identification and vulnerability management and monitoring solution, Nodeware®, which we sell through distribution and channel partners. We are also master distributor for other security solutions like Webroot, a cloud-based endpoint security platform solution, where we market to and provide support for over 300 reseller partners across North America; and
 
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.
 
 
  Business Strategy
 
Our strategy is to create differentiation in cybersecurity by combining personalized and recurring professional services and build 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 product 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 cybersecurity 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 provide.
 
We are working to expand our managed services business with our prime partner, Perspecta, and the current federal enterprise customer and its customers.
 
  Business Overview
 
We had sales of approximately $7.2 million in 2020 and approximately $7.1 million in 2019. We generated operating income of approximately $1,000 in 2020 as compared to approximately $329,000 in 2019. We had net income of approximately $676,000 in 2020 and $48,000 in 2019. We recorded other income of approximately $967,000 in 2020 from primarily the forgiveness of our Payroll Protection Plan loan. We derived approximately 65% of our sales in 2020 and 70% in 2019 from contracts as either a prime contractor or a subcontractor.
 
 
 
11
 
Results of Operations - Comparison of the years ended December 31, 2020 and 2019
 
The following table compares our statements of operations data for the years ended December 31, 2020 and 2019.
 
 
 
 
Years Ended December 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2020 vs. 2019
 
 
 
 
 
 
As a % of
 
 
 
 
 
As a % of
 
 
Amount of 
 
 
% Increase
 
 
 
2020
 
 
Sales
 
 
2019
 
 
Sales
 
 
 Change
 
 
(Decrease)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
 $7,219,446 
  100.0%
 $7,094,279 
  100.0%
 $125,167 
  1.8%
Cost of sales
  4,177,268 
  57.9 
  4,422,533 
  62.3 
  (245,265)
  (5.5)
Gross profit
  3,042,178 
  42.1 
  2,671,746 
  37.7 
  370,432 
  13.9 
General and administrative
  1,696,415 
  23.5 
  1,334,051 
  18.8 
  362,364 
  27.2 
Selling
  1,344,472 
  18.6 
  1,008,558 
  14.2 
  335,914 
  33.3 
Total operating expenses
  3,040,887 
  42.1 
  2,342,609 
  33.0 
  698,278 
  29.8 
Operating income
  1,291 
  0.0 
  329,137 
  4.7 
  (327,846)
  (99.6)
Other income
  967,007 
  13.4 
  0 
  0.0 
  967,007 
  -   
Interest expense, net
  (292,302)
  (4.0)
  (281,160)
  (4.0)
  11,142 
  4.0 
Net income
 $675,996 
  9.4
 $47,977 
  0.7%
 $628,019 
  1,309.0%
Net income per share - basic
 $.02 
    
 $.00 
 
 $.02 
    
Net income per share – diluted
 $.02 
    
 $.00 
 
 $.01 
    
 
 
Sales
 
For 2020 and 2019, our:
managed support service and virtualization project sales comprised approximately 65% and 70% of our total sales, respectively;
cybersecurity projects, Nodeware and commercial sales to small and medium sized enterprises (SMEs), were approximately 32% and 22% of our total sales, respectively; and
other IT consulting services comprise the balance of our sales with 3% and 8%, respectively.
 
 
Our cybersecurity services business has grown by approximately $716,000 in revenues in 2020 versus 2019. We began to close sales of Nodeware with our channel partners during 2017 and have seen continued increases in sales in 2019 and 2020. Our commercial SME business continues to establish new relationships with channel partners who purchase cybersecurity solutions from us. We expect continuing future sales from Nodeware sales, security assessments, and related projects by our cybersecurity personnel.
 
 
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.
 
Gross profit increased by 13.9% while sales increased by 1.8% for 2020. This was primarily due to higher gross profit margin in the cybersecurity services group versus the other areas of business.
 
 
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 in 2020 consisting of offsetting fluctuations in various expense items and increases in salaries of approximately $222,000 and corporate marketing expenses of $90,000.
 
 
Selling Expenses
 
The increase in selling expenses in 2020 is principally due to the increase of employee salaries, commissions and benefits totaling approximately $186,000 due primarily to the growth to the cyber security and Nodeware sales team. The remaining increase is attributable to several smaller items including amortization of development labor and consulting fees.
 
 
 
12
 
Operating Income
 
The decrease in our operating income for 2020 is attributable to an increase in our general and administrative expenses of $362,364 and our selling expenses of $335,914 offset by the increase in gross profit of $370,432.
 
 
Other Income
 
In 2020, we received a Paycheck Protection Plan (“PPP”) loan which was subsequently forgiven. We recorded $963,516 of other income at that time of forgiveness.
 
 
Interest Expense, net
 
Interest expense includes interest on indebtedness, amortization of loan fees, cost of stock options as part of debt agreements and fees for financing accounts receivable invoices. The increase in interest expense is principally attributable to stock option costs offset by lower rates and less use of financing accounts receivable invoices due to the availability of PPP.
 
 
Net Income
 
The increase in net income is attributable to the items discussed above for 2020 as compared to 2019.
 
 
Liquidity and Capital Resources
 
At December 31, 2020, we had cash of $32,313 available for working capital needs and planned capital asset expenditures. During 2020, we financed our business activities through cash flows provided by financing activities and sales with recourse of our accounts receivable. Our primary source of liquidity is cash provided by collections of accounts receivable, PPP loan and our factoring line of credit. At December 31, 2020, we had approximately $362,000 available to borrow under this line. At December 31, 2020, we had a working capital deficit of approximately $2,051,627 and a current ratio of 0.35. Our objective is to improve our working capital position through profitable operations, and we may continue to borrow to provide cash for working capital.
 
At December 31, 2020, we have current notes payable of approximately $162,500 to third parties, which includes convertible notes payable of approximately $150,000. Also included is $12,500 in principal amount of a note payable due on June 30, 2016 but not paid by then. 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.
 
At December 31, 2020, we also have an accrued liability for the voluntary match portion of a former simple IRA plan, including interest, of approximately $265,000. We do not anticipate distributing this liability in the next year or two. Interest will continue to accrue.
 
We have current maturities of long-term obligations of approximately $246,000 to the Pension Benefit Guaranty Corporation (the PBGC) with all principal due on September 15, 2018, which has not been extended. We are in discussions with the PBGC and expect to reach an agreement to settle this debt, for which we have available financing under our existing credit facilities. We have maturities of our long-term notes to third parties of $265,000 due on January 1, 2018, which has not been renewed or amended, and $500,000 due on December31, 2021. The accrued interest on these notes and current maturities is approximately $405,000 at December 31, 2020. These notes have not been paid. We plan to renegotiate the terms of the notes payable, offset with amounts owed to us, seek funds to repay the notes or use a combination of the alternatives. At December 31, 2020, we have future cash receipts under contract related to the projects identified in deferred assets in the amount of approximately $565,000.  Exclusive of these items and adjusting for future cash receipts under contract, the working capital would be approximately $120,000.
 
The following table summarizes our cash flow information for the years presented, described below, and should be read in conjunction with our financial statements appearing at Item 15, Page F-1, et seq., of this report.
 
 
 
Years Ended December 31,
 
 
 
2020
 
 
2019
 
Net cash provided by (used in) operating activities
 $(413,755)
 $29,572 
Net cash used in investing activities
  (303,540)
  (196,160)
Net cash provided by financing activities
  743,210 
  143,270 
Net increase (decrease) in cash
 $25,915 
 $(23,318)
 
 
 
13
 
Cash Flows Used in 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 income of $675,996 for 2020 was increased by non-cash expenses for depreciation, amortization, bad debt expense and stock-based compensation of $230,418 and decreased for non-cash adjustments for forgiveness of debt of $963,516. In addition, an increase in accounts payable and accrued expenses of $203,082 was offset by increases in accounts receivable and other assets of $559,735 resulted in net cash used in operating activities of $413,755.
 
We are marketing Webroot and Nodeware to our IT channel partners who resell to their customers. We are making investments in our cyber security team for penetration testing, vCISO and other services. 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 small operating income or 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 in Investing Activities
 
In 2020, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business.
 
 
Cash Flows Provided by Financing Activities
 
During 2020, we received $957,372 from the U. S. Small Business Administration (“SBA”) as part of the Paycheck Protection Plan enacted by Congress under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). We received SBA forgiveness of this amount plus accrued interest of $6,143 later in the year. We borrowed $50,000 from a related party under the terms of a note payable. The note allows for up to $500,000 credit and is due in August 2026. During 2019, we borrowed $200,000 from the $500,000 credit note. During 2020, we made principal payments of $96,635 to related party note holders and $167,527 to a third party.
 
We plan to evaluate alternatives which may include renegotiating the terms of the notes, seeking conversion of the notes to shares of common stock and seeking funds to repay the notes. We continue to evaluate repayment of our notes payable based on our cash flow.
 
 
Credit Resources
 
We maintain an accounts receivable financing line of credit from an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain costs and expenses. At December 31, 2020, we had financing availability, based on eligible accounts receivable, of approximately $362,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately $265,000 of available credit under various lines of credit as of December 31, 2020.
 
During May 2019, we originated a line of credit note payable for a $500,000 with a related party and borrowed $250,000 and have $250,000 available to borrow for working capital. This agreement matures in August 2026. We may borrow from the outstanding line of credit to pay a portion the PBGC settlement amount.
 
During 2017, we originated two lines of credit with related parties totaling $175,000. At December 31, 2020, we had $15,000 available under these financing agreements which mature in July 2022 and January 2023, respectively.
 
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 approximately $574,000 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 for at least the next 12 months.
 
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.
 
 
Critical Accounting Policies and Estimates
 
See Note 3 to the Financial Statements for a discussion of the Company’s accounting policies and estimates including Capitalization of Software for Resale and management’s assessment of going concern.
 
 
 
14
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
As a smaller reporting company, we are not required to provide the information required by this Item.
 
 
 
Item 8. Financial Statements and Supplementary Data
 
The response to this item is submitted as a separate section of this report beginning on page F-1.
 
 
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
None.
 
 
 
Item 9A. Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (the Exchange Act) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the Evaluation Date). Based upon that evaluation, our chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Infinite Group have been detected.
 
(b) Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Our management has concluded that, as of December 31, 2020, our internal control over financial reporting was effective based on these criteria.
 
This Annual Report does not include an attestation report of our Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
 
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
Item 9B. Other Information
 
Information required by this item is disclosed elsewhere herein.
 
 
 
 
 
 
 
 
 
 
15
 
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
 
Age
 
Position
 
Affiliated
Since
 
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.
 
 
16
 
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 PositionYear
 
Salary
 
 
Option
Awards *
 
 
Total
 
James Villa2020
 $238,664 
 $0 
 $238,664 
Chief Executive Officer2019
 $223,401 
 $5,575 
 $228,976 
Andrew Hoyen2020
 $225,078 
 $0 
 $225,078 
President and Chief Operating Officer2019
 $214,251 
 $8,875 
 $223,126 
Richard Glickman2020
 $114,235 
 $1,783 
 $116,018 
VP Finance and Chief Accounting Officer2019
 $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.
 
 
 
 
 
 
 
 
 
 
 
 
 
17
 
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 Exercise Price
 
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 director;
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.
 
 
 
18
 
 
Name of Beneficial Owner (1)
 
Shares of Common Stock Beneficially Owned (1)
 
 
 
 
 
Percentage of Ownership
 
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.
 
 
 
 
19
 
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))
 
 
 
(a)
 
 
(b)
 
 
(c)
 
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.
 
 
 
20
 
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.
 
 
 
21
 
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:
 
 
2020
 
 
2019
 
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.
 
 
Item 15. Exhibits and Financial Statement Schedules
 
(a)The following documents are filed as part of this report:
(1) Financial Statements – See the Index to the financial statements on page F-1.
 
(b) Exhibits:
 
Exhibit
No. Description
 
3.1Certificate of Incorporation of the Company dated April 29, 1993. (1)
3.5By-Laws of the Company. (1)
4.1Specimen Stock Certificate. (1)
10.3Form of Stock Option Agreement. (1)
10.9Modification Agreement No. 3 to Promissory Notes between Allan Robbins and the Company dated October 1, 2005. (6)
 
 
22
 
10.22Promissory Note in favor of the PBGC dated October 17, 2011. (15)
 
101.INS XBRL Instance Document. * 
101.SCHXBRL Taxonomy Extension Schema Document. *
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. *
101.LABXBRL Taxonomy Extension Label Linkbase Document. *
101.PREXBRL Taxonomy Extension Presentation Linkbase Document. *
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. *
 
* Filed as an exhibit hereto.
**Management contract or compensatory plan or arrangement.
# Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Omitted portions have been filed separately with the SEC.
 
(1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (File #33- 61856) and incorporated herein by reference.
(2) Incorporated by reference to Appendix II of the Company's DEF14A filed on February 1, 2006.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006.
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
(11) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended June 30, 2010.
(12) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2010.
 
23
 
(13) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
(14) Incorporated by reference to the Company's Current Report on Form 8-K filed on September 12, 2011.
(15) Incorporated by reference to the Company's Current Report on Form 8-K filed on November 7, 2011.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
(17) Incorporated by reference to the Company's Current Report on Form 8-K filed on December 4, 2014.
(18) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
(19) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2015.
(20) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2016.
(21) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended June 30, 2017.
(22) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended September 30, 2017.
(23) Incorporated by reference to the Company's Current report on Form 10-K for the fiscal year ended December 31, 2017.
(24) Incorporated by reference to the Company's Current Report on Form 8-K filed on May 16, 2019.
(25) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 22, 2019.
(26) Incorporated by reference to the Company's Current report on Form 10-K for the fiscal year ended December 31, 2019.
(27) Incorporated by reference to the Company's Quarter Report on Form 10-Q for the quarterly period ended March 31, 2020.
 
 
Information required by schedules called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.
 
 
 
 
24
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 Infinite Group, Inc. 
    
Date: March 30, 2021
By:/s/ James Villa 
  James Villa 
  Chief Executive Officer 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
    
/s/ James Villa   
James Villa 
Chief Executive Officer
(Principal Executive Officer)
March 30, 2021
    
/s/ Richard Glickman   
Richard Glickman VP Finance and Chief Accounting OfficerMarch 30, 2021
  (Principal Financial and Accounting Officer) 
    
/s/ Andrew Hoyen   
Andrew Hoyen President and Chief Operating OfficerMarch 30, 2021
    
/s/ Donald W. Reeve   
Donald W. Reeve Chairman of the BoardMarch 30, 2021
 
 
 
 
 
25
 
 
 
 
 
FINANCIAL STATEMENTS
 
INFINITE GROUP, INC.
 
 
DECEMBER 31, 2020
with
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
F-1
 
Report of Independent Registered Public Accounting Firm
 
 
To the Board of Directors and Stockholders
Infinite Group, Inc.
 
 
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Infinite Group, Inc. (the Company) as of December 31, 2020 and 2019, and the related statements of operations, changes in stockholders’ deficiency and cash flows, for the years then ended, and the related notes to the financial statements (collectively, the financial statements)]. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
 
As discussed in Note 2 to the financial statements, the Company has negative working capital, which raises substantial doubt about the entity’s ability to continue as a going concern. The ability to continue to meet its obligations as they become due is dependent on the Company generating operating cash flow to satisfy these obligations, managing the date these obligations are settled, and identifying alternative equity or long-term liability financing to replace the current obligations. The Company has concluded that management’s plans have alleviated this substantial doubt about the ability to continue as a going concern. We have identified this item as a critical audit matter because certain estimates and assumptions used by the Company in their plan to alleviate substantial doubt are subjective and required a high degree of auditor judgement.

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedures we performed include: obtaining an understanding of the process and assumptions used by management to develop their plan, obtaining executed agreements and documents to support this plan where available, evaluating the reasonableness and consistency of methodology and assumptions applied by management based on historical facts, and evaluating the disclosures in the notes to the financial statements.
 
We have not been able to determine the specific year that we began serving as the Company’s auditor; however, we are aware that we have served as the Company’s auditor since at least 1995. 
 
 
 
Rochester, New York
March 30, 2021
 
 
 
 
 
 
 
 
 
INFINITE GROUP, INC.
BALANCE SHEETS
 
 
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
ASSETS
 
Current assets:
 
 
 
 
 
 
Cash
 $32,313 
 $6,398 
Accounts receivable, net
  953,826 
  432,289 
Prepaid expenses and other current assets
  96,483 
  65,285 
Total current assets
  1,082,622 
  503,972 
 
    
    
Right of use asset – operating lease, net
  120,777 
  195,441 
Property and equipment, net
  48,199 
  5,915 
Software, net
  354,905 
  184,676 
Deposits
  6,937 
  6,937 
Total assets
 $1,613,440 
 $896,941 
 
    
    
 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
 
Current liabilities:
    
    
Accounts payable
 $343,073 
 $217,777 
Accrued payroll
  353,268 
  218,352 
Accrued interest payable
  531,409 
  939,440 
Accrued retirement
  264,675 
  254,348 
Deferred revenue
  320,042 
  178,824 
Accrued expenses – other and other current liabilities
  74,579 
  64,207 
Current maturities of long-term obligations
  1,004,445 
  950,000 
Operating lease liability - Short-term
  80,258 
  74,373 
Current maturities of long-term obligations - related parties
  0 
  512,935 
Notes payable
  162,500 
  332,500 
Notes payable - related parties
  0 
  58,000 
Total current liabilities
  3,134,249 
  3,800,756 
 
    
    
Long-term obligations:
    
    
Notes payable:
    
    
Other
  457,769 
  495,890 
Related parties
  1,015,820 
  385,000 
Accrued payroll taxes(See Note 8)
  69,025 
  0 
Operating lease liability - Long-term
  42,347 
  122,605 
 
    
    
Total liabilities
  4,719,210 
  4,804,251 
 
    
    
Commitments and contingencies
    
    
 
    
    
Stockholders' deficiency:
    
    
Common stock, $.001 par value, 60,000,000 shares authorized; issued and outstanding: 29,061,883 shares
  29,061 
  29,061 
Additional paid-in capital
  30,763,717 
  30,638,173 
Accumulated deficit
  (33,898,548)
  (34,574,544)
Total stockholders’ deficiency
  (3,105,770)
  (3,907,310)
Total liabilities and stockholders’ deficiency
 $1,613,440 
 $896,941 
 
 
 
  See notes to audited financial statements.
 
 
 
INFINITE GROUP, INC.
STATEMENTS OF OPERATIONS
 
 
 
 
Years Ended December 31,
 
 
 
2020
 
 
2019
 
Revenue
 $7,219,446 
 $7,094,279 
Cost of revenue
  4,177,268 
  4,422,533 
Gross profit
  3,042,178 
  2,671,746 
 
    
    
Costs and expenses:
    
    
General and administrative
  1,696,415 
  1,334,051 
Selling
  1,344,472 
  1,008,558 
Total costs and expenses
  3,040,887 
  2,342,609 
 
    
    
Operating income
  1,291 
  329,137 
 
    
    
Other income (expense)
    
    
Interest income
  786 
  0 
Interest expense:
    
    
Related parties
  (62,789)
  (89,079)
Other
  (230,299)
  (192,081)
Total interest expense
  (293,088)
  (281,160)
 Other income - (see Note 8)
  967,007 
  0 
Total other income (expense)
  674,705 
  (281,160)
 
    
    
Net income
 $675,996 
 $47,977 
 
    
    
Net income per share – basic and diluted
 $.02 
 $.00 
 
    
    
Weighted average shares outstanding – basic
  29,061,883 
  29,061,883 
 
    
    
Weighted average shares outstanding – diluted
  43,450,086 
  29,811,883 
 
 
 
See notes to audited financial statements.
 
 
 
 
 
 
 
 
 
 
 
INFINITE GROUP, INC.
 
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
 
Years Ended December 31, 2020 and 2019
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
Common Stock
 
 
Paid-in
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2018
  29,061,883 
 $29,061 
 $30,593,366 
 $(34,622,521)
 $(4,000,094)
 
    
    
    
    
    
Stock based compensation
  0 
  0 
  44,807 
  0 
  44,807 
Net income
  0 
  0 
  0 
  47,977 
  47,977 
 
    
    
    
    
    
Balance - December 31, 2019
  29,061,883 
 $29,061 
 $30,638,173 
 $(34,574,544)
 $(3,907,310)
 
    
    
    
    
    
Stock based compensation
  0 
  0 
  125,544 
  0 
  125,544 
Net income
  0 
  0 
  0 
  675,996 
  675,996 
 
    
    
    
    
    
Balance - December 31, 2020
  29,061,883 
 $29,061 
 $30,763,717 
 $(33,898,548)
 $(3,105,770)
 
    
    
    
    
    
See notes to audited financial statements.
 
 
 
 
INFINITE GROUP, INC.
 
STATEMENTS OF CASH FLOWS
 
 
 
 
 
Years Ended December 31,
 
 
 
2020
 
 
2019
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 $675,996 
 $47,977 
Adjustments to reconcile net income to net cash
    
    
 provided by (used in) operating activities:
    
    
Stock based compensation
  125,544 
  44,807 
Depreciation and amortization
  97,874 
  29,648 
Bad debt expense
  7,000 
  0 
Forgiveness of note payable and interest
  (963,516)
  0 
(Increase) decrease in assets:
    
    
Accounts receivable
  (528,537)
  (146,102)
Prepaid expenses and other current assets
  (31,198)
  (62,649)
Increase (decrease) in liabilities:
    
    
Accounts payable
  125,296 
  (149,759)
Accrued expenses and other current liabilities
  77,786 
  265,650 
Net cash provided by (used in) operating activities
  (413,755)
  29,572 
 
    
    
Cash flows from investing activities:
    
    
Purchases of property and equipment
  (48,310)
  (1,945)
Capitalization of software development costs
  (255,230)
  (194,215)
Net cash used in investing activities
  (303,540)
  (196,160)
 
    
    
Cash flows from financing activities:
    
    
Proceeds from note payable
  957,372 
  0 
Proceeds from notes payable - related parties
  50,000 
  200,000 
Repayments of notes payable - related parties
  (96,635)
  (56,730)
Repayments of note payable - short-term
  (167,527)
  0 
Net cash provided by financing activities
  743,210 
  143,270 
 
    
    
Net increase (decrease) in cash
  25,915 
  (23,318)
 
    
    
Cash - beginning of year
  6,398 
  29,716 
 
    
    
Cash - end of year
 $32,313 
 $6,398 
 
    
    
Supplemental Disclosures of Cash Flow Information:
    
    
Cash payments for:
    
    
Interest
 $346,328 
 $152,908 
 
    
    
Income taxes
 $0 
 $0 
See notes to audited financial statements.
 
INFINITE GROUP, INC.
 
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:
 
 
 
Years Ended December 31,
 
 
 
2020
 
 
2019
 
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:
 
 
 
Years ended December 31,
 
 
 
2020
 
 
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:
 
  
 
December 31,
 
 Depreciable Lives
 
2020
 
 
2019
 
Software3 years
 $72,834 
 $34,934 
Equipment3 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:
 
 
December 31,
 
 
 
2020
 
 
2019
 
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:
 
 
 
December 31,
 
 
 
 2020
 
 
 2019
 
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:
 
 
 
December 31,
 
 
 
2020
 
 
2019
 
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:
 
 
 
December 31,
 
 
 
2020
 
 
2019
 
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:
 
 
 
Annual
 
 
Annual
 
 
 
 
 
 
Payments
 
 
Amortization
 
 
Net
 
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.
 
 
 
2020
 
 
2019
 
Risk free interest rate
 
0.17% to 1.40%
 
 
1.38% to 2.55%
 
Expected dividend yield
  0
  0%
Expected stock price volatility
  100%
  100%
Expected life of options
 
1.75 to 3.01 years 
 
2.75 to 3.90 years
 
 
   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:
 
 
 
 
December 31,
 
 
 
 2020
 
 
 2019
 
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.
 
 
 
December 31,
 
 
 
2020
 
 
2019
 
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:
 
 
 
December 31,
 
 
 
2020
 
 
 2019
 
 
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:
 
 
 
 
 
December 31, 2020
 
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