UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
Commission File Number 0-21816
INFINITE GROUP INC.
(Exact name of small business issuer as specified in its charter)
Delaware 52-1490422
--------- -----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
595 Blossom Rd. Suite 309
Rochester, New York 14610
(Address of principal executive office)
(585) 654-5525
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |_| No |X|
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of July 15, 2005, there were 19,206,965
shares of common stock outstanding.
Transitional Small Business Disclosure Format. Yes |_| No |X|
1
INFINITE GROUP INC.
FORM 10-QSB REPORT
Infinite Group Inc.
TABLE OF CONTENTS PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheet - March 31, 2005 (unaudited) and
December 31, 2004 (audited) 3
Statements of Operations - (unaudited) for the three
month periods ended March 31, 2005 and 2004 4
Statements of Cash Flows - (unaudited) for the three
month periods ended March 31, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 10
Item 3. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 5. Other Information 14
Item 6. Exhibits 15
SIGNATURES 15
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-QSB are
"forward-looking statements" within the meaning of Section 21E of the Securities
and Exchange Act of 1934 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 continued
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. The terms
"we", "our", "us", or any derivative thereof, as used herein refer to Infinite
Group Inc., a Delaware corporation.
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INFINITE GROUP, INC.
Consolidated Balance Sheets
March 31, December 31,
2005 2004
---------------------------------------------------------------------------------------------------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 29,176 $ 97,297
Restricted cash 41,577 30,327
Accounts receivable, net of allowance of $45,485 ($25,000-2004) 1,547,170 1,054,623
Current portion of notes receivable 249,276 270,347
Other current assets 44,457 41,207
Assets of discontinued operations 205,921 205,921
-------------- --------------
Total current assets 2,117,577 1,699,722
Property and equipment, net 271,958 239,907
Other assets:
Note receivable 1,888,876 1,940,857
Intangible assets, net 47,426 50,526
-------------- --------------
Total other assets 1,936,302 1,991,383
-------------- --------------
Total assets $ 4,325,837 $ 3,931,012
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable:
Bank 29,136 50,207
Other 390,476 176,184
Related parties 9,906 9,906
Accounts payable 429,184 504,327
Accrued expenses 637,040 542,066
Current maturities of long-term obligations 2,087,840 2,128,572
Current maturities of long-term obligations-related parties 44,000 44,000
Liabilities of discontinued operations 210,045 217,300
-------------- --------------
Total current liabilities 3,837,627 3,672,562
Long-term obligations
Bank notes payable 61,079 64,133
Notes payable-related parties 1,100,124 1,100,124
Accrued pension expense 2,206,987 2,177,287
-------------- --------------
Total liabilities 7,205,817 7,014,106
-------------- --------------
Commitments and contingencies
Stockholders' deficiency:
Common stock, $.001 par value, 20,000,000 shares authorized;
19,206,965 (17,561,965 in 2004) shares issued and outstanding 19,207 17,562
Additional paid-in capital 28,455,803 28,375,198
Accumulated deficit (28,599,099) (28,719,963)
Accumulated other comprehensive loss (2,755,891) (2,755,891)
-------------- --------------
Total stockholders' deficiency (2,879,980) (3,083,094)
-------------- --------------
Total liabilities and stockholders' deficiency $ 4,325,837 $ 3,931,012
============== ==============
See notes to consolidated financial statements.
3
INFINITE GROUP, INC.
Consolidated Statements of Operations (Unaudited)
Three Months Ended
March 31,
---------------------------------
2005 2004
------------------------------------------------------------------------------------------
Sales $ 2,124,727 $ 560,435
Cost of goods and services 1,494,290 359,986
-------------- --------------
Gross profit 630,437 200,449
-------------- --------------
Costs and expenses:
General and administrative 408,434 264,180
Depreciation and amortization 11,181 6,606
Selling 894 169
Research and development 71,681 68,646
-------------- --------------
Total costs and expenses 492,190 339,601
-------------- --------------
Operating income (loss) 138,247 (139,152)
-------------- --------------
Other income (expense):
Interest income 34,062 --
Interest expense:
Related parties (21,857) (17,088)
Other (35,542) --
-------------- --------------
(57,399) (17,088)
-------------- --------------
Total other income (expense) (23,337) (17,088)
-------------- --------------
Income (loss) from continuing operations before
income tax expense 114,910 (156,240)
Income tax expense (1,300) (350)
-------------- --------------
Income (loss) from continuing operations 113,610 (156,590)
Discontinued operations:
Income (loss) from discontinued operations 7,254 (88,669)
-------------- --------------
Net income (loss) $ 120,864 $ (245,259)
============== ==============
Net income (loss) per share-basic:
Income (loss) from continuing operations $ .01 $ (.01)
Income (loss) from discontinued operations .00 (.01)
-------------- --------------
Net income (loss) $ .01 $ (.02)
============== ==============
Net income (loss) per share-diluted:
Income (loss) from continuing operations $ .01 $ (.01)
Income (loss) from discontinued operations .00 (.01)
-------------- --------------
Net income (loss) $ .01 $ (.02)
============== ==============
Weighted average number of shares outstanding:
Basic 18,611,354 12,987,762
============== ==============
Diluted 19,846,464 12,987,762
============== ==============
See notes to consolidated financial statements.
4
INFINITE GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
-----------------------------
2005 2004
----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ 120,864 $ (245,259)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Income (loss) from discontinued operations (7,254) 88,669
Depreciation and amortization 11,181 6,606
(Increase) decrease in:
Accounts receivable (492,547) (388,368)
Other current assets (3,250) (8,048)
Increase (decrease) in liabilities:
Accounts payable (72,893) 65,199
Accrued expenses 94,973 85,029
Accrued pension obligations 29,700 40,386
------------ ------------
Net cash used in operating activities of continuing operations (319,226) (355,786)
Net cash provided by operating activities of discontinued operations -- 92,223
------------ ------------
Net cash used in operating activities (319,226) (263,563)
------------ ------------
Investing activities:
Increase in restricted funds (11,250) (26,233)
Purchase of property and equipment (40,132) (3,768)
Proceeds from notes receivable 73,052 --
------------ ------------
Net cash provided by (used in) investing activities 21,670 (30,001)
------------ ------------
Financing activities:
Proceeds from short-term notes payable-other 214,292 --
Net (repayments) borrowings of bank notes payable (21,071) 6,788
Proceeds from issuance of long-term obligations-related parties -- 342,000
Repayment of notes payable-related parties -- (71,000)
Repayment of long-term obligations (43,786) (76,033)
Proceeds from issuance of common stock, net of costs 80,000 106,000
------------ ------------
Net cash provided by financing activities 229,435 307,755
------------ ------------
Net (decrease) increase in cash (68,121) 14,191
Cash - beginning of period 97,297 16,515
------------ ------------
Cash - end of period $ 29,176 $ 30,706
============ ============
Supplemental disclosure:
Cash paid for:
Interest $ (58,256) $ (536)
============ ============
Income taxes $ (1,300) $ (350)
============ ============
See notes to consolidated financial statements.
5
INFINITE GROUP INC.
Notes to Consolidated Financial Statements-(Unaudited)
------------------------------------------------------
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Infinite Group
Inc. ("Infinite Group Inc." or the "Company"), included herein have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. The accompanying unaudited consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and footnotes for the year ended December 31, 2004 and the notes thereto
included in the Company's Annual Report on Form 10-KSB filed with the United
States Securities and Exchange Commission. Results of consolidated operations
for the three month period ended March 31, 2005 are not necessarily indicative
of the operating results that may be expected for the year ended December 31,
2005. The consolidated financial statements herein include the accounts of the
Company and its wholly owned subsidiaries. All material inter-company accounts
and transactions have been eliminated.
Note 2. Summary of Significant Accounting Policies
Critical Accounting Policies and Estimates
There are several accounting policies that we believe are significant to the
presentation of our consolidated financial statements. These policies require
management to make complex or subjective judgments about matters that are
inherently uncertain. Note 3 to our audited consolidated financial statements
present a summary of significant accounting policies. The most critical
accounting policies follow.
Revenue Recognition
Beginning in the second quarter of 2003, we commenced providing services in the
field of information technology (IT) consulting services through our IT Services
Group. Consulting revenues are recognized as the consulting services are
provided. Customer deposits received in advance are recorded as liabilities
until associated services are completed.
Stock-Based Compensation
We disclose the pro forma compensation cost relating to stock options granted
under employee stock option plans, based on the fair value of those options at
the date of grant. This valuation is determined utilizing the Black-Scholes,
option-pricing model, which takes into account certain assumptions, including
the expected life of the option and the expected stock volatility and dividend
yield over this life. These assumptions are made based on past experience and
expected future results. In the event the actual performance varies from the
estimated amounts, the value of these options may be misstated.
Effect of New Accounting Pronouncements
In February 2003, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation: A Comparison of FASB Statement No. 123, Accounting for Stock-Based
Compensation, and Its Related Interpretations, and IASB Proposed IFRS,
Share-based Payments." SFAS 148 amends SFAS 123 to provide alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based compensation. The statement also amends APB Opinion
No. 28, "Interim Financial Reporting", to require disclosure about those effects
in interim financial information. We have chosen not to voluntarily change to
the fair value based method of accounting for stock-based employee compensation
but have adopted the disclosure rules under SFAS 148.
6
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment". For public companies, the cost of employee services received in
exchange for equity instruments generally should be measured at fair value at
the grant date. The cost of employee services received in exchange for an award
of liability instruments should be measured initially at fair value and
re-measured subsequently at each reporting date through the settlement date.
Publicly traded companies, other than small business issuers, must apply this
Standard as of the beginning of the first interim or annual period that begins
after June 15, 2005. Public entities that file as small business issuers must
comply as of the beginning of the first interim or annual reporting period that
begins after December 15, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an amendment of APB Opinion No. 29". This amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The Statement is
effective for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3".
This Statement replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements",
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting charges and corrections of errors made in fiscal years
beginning after December 15, 2005.
Note 3. Discontinued Operations and Reclassifications
The statements of operations and cash flows for the three months ended March 31,
2005 and 2004 account for the discontinued operations of the Photonics Group,
consisting of Infinite Photonics, Inc. (IPI), which business was suspended in
2002 as a result of the loss of the DARPA contract and for Laser Fare (LF),
which was sold as discussed below.
On October 30, 2002, IPI received a Notice of Termination of its DARPA contract
for the government's convenience under the contract provisions entitled
Termination, Federal Acquisition Regulation (FAR) 52.249.6. The DARPA contract
had provided substantially all of the revenue of the Photonics Group. As of
December 31, 2004, the contract termination process was substantially complete.
We have been reimbursed for substantially all costs associated with the
termination. The termination of the contract had a detrimental effect on the
development of our technology. During 2002, all of our Photonics Group employees
were released and the operations of the Photonics Group ceased. We also
determined that our Photonics Group patents and property and equipment were
impaired, and consequently recorded impairment losses in the fourth quarter of
2002 of approximately $468,000 and $148,000 respectively, which were included in
loss on disposal of discontinued operations in the consolidated statement of
operations for the year ended December 31, 2002.
On December 31, 2003, the Company and LF entered into an asset purchase
agreement with LFI, Inc. ("LFI") relating to the purchase by LFI of certain
assets and the assumption of certain liabilities of LF relating to the laser
engraving and medical products manufacturing and assembly businesses of LF (the
"Purchase Agreement"). The principals of LFI are former employees of LF,
including the former chairman and chief executive officer of the Company. The
purchase price for the assets was assumed liabilities of LF and/or the Company.
On December 31, 2004, the Company completed the sale of the remaining assets,
including the assumption of certain liabilities, to an affiliate of LFI,
relating to all the remaining laser businesses of LF. The purchase price was the
assumed liabilities of LF plus the issuance of several notes by the buyer to LF.
LF recorded a loss on sale of approximately $99,000 for the year ended December
31, 2003. LF reclassified the operating assets and liabilities to assets and
liabilities held for sale at December 31, 2003.
In accordance with FASB 144, the disposal of the Photonics and Laser segments
have been accounted for as a disposal of business segments and accordingly, the
assets and liabilities for IP and LF have been segregated from continuing
operations in the accompanying consolidated balance sheets and classified as
assets of discontinued operations and assets held for sale. The operating
results for both segments are segregated and reported as discontinued operations
in the accompanying consolidated statements of operations and cash flows.
7
The following is a summary of financial position at March 31, 2005 and December
31, 2004 and results of operations for the three months ended March 31, 2005 and
March 31, 2004 for the disposed Photonics (IP), Plastics (O&W and EP) and Laser
Fare (LF).
March 31, December 31,
Financial Position 2005 2004
---- ----
Current assets and total assets of
discontinued operations $ 205,921 $ 205,921
============== ==============
Liabilities of discontinued operations:
Accounts payable and accrued
expenses $ 205,045 $ 212,300
Unsecured note payable 5,000 5,000
-------------- --------------
Total liabilities of discontinued
operations $ 210,045 $ 217,300
============== ==============
Three Months Ended
March 31,
---------
Results of Operations 2005 2004
---- ----
Revenue from discontinued operations $ -- $ 670,510
============== ==============
Income (loss) from discontinued operations $ 7,254 $ (88,669)
Loss on disposal of discontinued
operations -- --
-------------- --------------
Net income (loss) from discontinued operations $ 7,254 $ (88,669)
============== ==============
Certain other amounts in the 2004 financial statements have been reclassified to
conform with the 2005 financial statement presentations.
Note 4. Stock Option Plans
As of March 31, 2005 the Company's Stock Option Plans (the "Plan") provided for
the grant of incentive or non-qualified stock options for the purchase of common
stock for up to 2,314,000 shares to employees, directors and consultants. The
Plan is administered by the compensation committee established by the Company's
board of directors, which determines the terms of options including the exercise
price, expiration date, number of shares and vesting provisions.
A summary of all stock option activity for the three months ended March
31, 2005 is as follows:
Weighted
Number Exercise Average
Of Options Price Exercise Price
----------------------------------------------
Outstanding at December 31, 2004 1,895,482 $ .01-$2.50 $ .13
============= =============
Options issued 1,510,000 $ .09-$.25 $ .20
============= =============
Options expired (166,982) $ .14-$2.50 $ .95
------------- ============= =============
Outstanding at March 31, 2005 3,238,500 $ .01 -$.25 $ .12
============= ============= =============
Exercisable at March 31, 2005 3,238,500 $ .01-$.25 $ .12
============= ============= =============
8
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 -"Accounting for Stock-Based Compensation, "
and, accordingly, does not recognize compensation cost for stock option grants
under fixed awards. If the Company had elected to recognize compensation costs
based on the fair value of the options granted at grant date as prescribed by
SFAS No.123, net loss and loss per share from continuing operations would have
increased as follows:
Three Months Ended
March 31,
Results of Operations 2005 2004
---- ----
Net income (loss)-as reported (000's) $ 121 $ (245)
Total stock based employee compensation
expense determined
under the fair value
method for all awards (000's) $ 128 $ 7
---------- ----------
Net (loss) - pro forma (000's) $ (7) $ (252)
========== ==========
Income (loss) per share as reported-basic and diluted $ .01 $ (.02)
========== ==========
Income (loss) per share pro forma-basic and diluted $ (.00) $ (.02)
========== ==========
Note 5. Business Segments
Prior to 2002, the Company's business were organized, managed and internally
reported as three segments. The segments are determined based on differences in
products, production processes and internal reporting. During the fourth quarter
of 2002, the Company's contract with DARPA was terminated and as a result of the
termination, management decided to suspend the activities of the Photonics Group
in 2002 and liquidate the remaining assets. During the fourth quarter of 2003,
the Company approved the sale of the assets and certain liabilities of its Laser
Fare, Inc. subsidiary, referred to as the Laser Group. As a result, in
accordance with FASB 144, the disposal of the Photonics, and Laser segments have
been accounted for as disposals of business segments and accordingly, the
respective assets (liabilities) have been segregated from continuing operations
and classified as assets of discontinued operations and the operating results
for all segments are segregated and reported as discontinued operations.
Beginning in 2003, the Company revised its business strategy and began operating
its newly formed IT Services Group.
All of the segments of the Company operate entirely within the United States.
Revenues from customers in foreign countries are minimal. The Company relies on
inter-segment cooperation and management does not represent that these segments,
if operated independently, would report the results shown. A summary of selected
consolidated information for the Company's industry segments during the periods
ended March 31, 2005 and 2004, respectively, is set forth as follows.
==================================================================================================================================
Photonics Group Laser Group IT Services Group Consolidated
==================================================================================================================================
Three Months ended March 31, 2005
==================================================================================================================================
Sales to unaffiliated customers $ -- $ -- $ 2,169,103 $ 2,169,103
----------------------------------------------------------------------------------------------------------------------------------
Operating income $ -- $ -- $ 137,392 $ 137,392
----------------------------------------------------------------------------------------------------------------------------------
Income from discontinued operations $ 7,254 $ -- $ -- $ 7,254
----------------------------------------------------------------------------------------------------------------------------------
Three Months ended March 31, 2004
==================================================================================================================================
Sales to unaffiliated customers -- $ -- $ 560,435 $ 560,435
----------------------------------------------------------------------------------------------------------------------------------
Operating loss -- $ -- $ (139,152) $ (139,152)
----------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations $ (40,179) $ (48,490) $ -- $ (88,669)
==================================================================================================================================
9
Note 6. Supplemental Cash Flow Information
Non-cash investing and financing transactions, including non-monetary exchanges,
consist of the following:
Three Months Ended
March 31,
---------
2005 2004
----------- ------------
Common stock authorized not issued, transferred to issued $ -- $ 75,000
============ ============
Conversion of accounts payable to common stock $ 2,250 $ --
============ ============
Note 7. Earnings Per Share
Basic income per share is based on the weighted average number of common shares
outstanding during the periods presented. Diluted income 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 the stock options and stock warrants. The treasury stock method is used to
calculate dilutive shares, which reduces the gross number of dilutive shares by
the number of shares purchasable from the proceeds of the options assumed to be
exercise. In a loss year, the calculation for basic and diluted earnings per
share is considered to be the same, as the impact of potential common shares is
anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share as of March 31, 2005:
Numerator:
Income available to common stockholders
from continuing operations $ 113,610
============
Weighted average shares outstanding 18,611,354
============
Denominator for diluted income per share:
Weighted average shares outstanding 18,611,354
Common stock options and stock warrants 1,235,110
------------
Weighted average shares and conversions 19,846,464
============
As of March 31, 2004, all outstanding stock options, warrants and convertible
obligations have not been considered common stock equivalents because their
assumed exercise would be anti-dilutive.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
On January 3, 2003, our former president and chief executive officer, Clifford
G. Brockmyre II, resigned and was replaced by Michael S. Smith, one of our board
members. At the same time, we moved our corporate headquarters from Rhode Island
to Rochester, New York. On May 6, 2003, Dr. Allan Robbins and Paul Delmore were
appointed to fill two existing vacancies on our board. Mr. Brockmyre remained on
our board of directors until October 30, 2003 at which time he resigned. On
March 15, 2004, Brian Corridan resigned from our board.
In the fourth quarter of 2003, we decided to dispose of our Laser Fare, Inc.
subsidiary (LF) and to restructure our business. We sold a portion of the
business of LF (primarily the medical and engraving business) as of December 31,
2003 and the remaining business as of December 31, 2004, although we continued
to operate the business during the disposal process.
10
The purchase price for the assets consisted of LFI's assumption of certain of
our liabilities in the aggregate amount of approximately $358,000. On December
31, 2004, we sold the remaining assets of LF to Rolben Acquisition Corporation
(Rolben), a company affiliated with LFI. The purchase price for the remaining
assets consisted of Rolben's assumption of substantially all of the liabilities
of LF and the delivery of promissory notes in the aggregate amount of
approximately $2.1 million. Because certain required consents were not yet
obtained at December 31, 2004, we remained obligated under several notes to UPS
Capital Business Credit (UPS) and the Rhode Island Industrial Facilities
Corporation (RIIFC) in the same amounts as the notes from Rolben. In May 2005,
the UPS and RIIFC notes were paid in full and we were released from all of our
obligations thereunder. At the same time, the notes from Rolben to us
terminated.
During the second quarter of 2003, we commenced providing services in the field
of information technology (IT) consulting services through our IT Services
Group. We provide business and technology integration and systems support to
government clients. We focus on aligning business processes with technology for
delivery of solutions meeting the client's exact needs.
Results of Operations
Comparison of Three Months ended March 31, 2005 and 2004
We commenced the operations of our IT Services Group in the second quarter of
2003. The following results which consist of the operations of our IT Services
Group are not necessarily indicative of future operating results due to the
start up nature of our IT Services Group.
Three Months Ended March 31,
-------------------------------------------------------------------------
As a % of Net As a % of Net Increase
2005 Revenues 2004 Revenues (Decrease)
---- -------- ---- -------- ----------
Sales $ 2,124,727 100.0% $ 560,435 100.0% 279.1%
Cost of sales 1,494,290 70.3 359,986 64.2 315.1
-------------------------- -------------------------- -----------
Gross profit 630,437 29.7 200,449 35.8 214.5
-------------------------- -------------------------- -----------
General and administrative 408,434 19.2 264,180 47.1 54.6
Depreciation and amortization 11,181 0.5 6,606 1.2 69.3
Selling 894 0.0 169 0.0 429.0
Research and development 71,681 3.4 68,646 12.2 4.4
-------------------------- -------------------------- -----------
Total operating expenses 492,190 23.2 339,601 60.6 44.9
-------------------------- -------------------------- -----------
Operating income (loss) 138,247 6.5 (139,152) (24.8) (199.3)
Other income (expense) and income taxes, net (24,637) (1.2) (17,438) (3.1) 41.3
-------------------------- -------------------------- -----------
Income (loss) from continuing operations 113,610 5.3 (156,590) (27.9) (172.6)
Income (loss) from discontinued operations 7,254 0.3 (88,669) (15.8) (108.2)
-------------------------- -------------------------- -----------
Net income (loss) $ 120,864 5.7% $ (245,259) (43.8)% (149.3)%
-------------------------- -------------------------- -----------
Sales
Sales for the three months ended March 31, 2005 increased substantially by
$1,564,292 to $2,124,727 as compared to sales for the three months ended March
31, 2004 of $560,435. The increase was due to the start up of our IT Services
Group, which began operations in the second quarter of 2003. We realized sales
increases from new contracts with prime contractors for the U.S. Government. Our
new IT Services Group's business base was still developing in 2004 and 2005.
11
Cost of Sales and Gross Profit
Cost of sales represents the cost of employee services related to the IT
Services Group. Cost of sales for the three months ended March 31, 2005 was
$1,494,290 or 70.3% of sales as compared to $359,986 or 64.2% for the three
months ended March 31, 2004. Gross profit was $630,437 or 29.7% of sales for the
three months ended March 31, 2005 compared to $200,449 or 35.8% of sales for the
three months ended March 31, 2004. Gross profit as a percent of sales in 2004 is
based on a relatively low volume of sales and is not necessarily indicative of
gross margins that we will earn as our sales grows. We expect that gross margin
as a percent of sales may decrease as sales increase due to the competitive
nature of our business.
General and Administrative Expenses
General and administrative expenses include corporate overhead such as
compensation and benefits for administrative and finance personnel, rent,
insurance, professional fees, travel, and office expenses. General and
administrative expenses for the three months ended March 31, 2005 increased by
$144,254 or 54.6% due to the increases in employee compensation and related
fringe benefits expenses as well as increased operating expenses as we manage a
larger volume of business. General and administrative expense for the three
months ended March 31, 2005 was $408,434 or 19.2% of sales which represented an
increase from $264,180 or 47.1% of sales in 2004. We anticipate that general and
administrative expenses will increase as we continue to transition our business
strategy and incur travel and other expenses associated with managing a larger
business. We expect increases in accounting and legal expenses in 2005 due to
our focus on completing audits of our financial statements and related public
information filings.
General and administrative expense includes expenses of the Osley & Whitney
defined benefit retirement plan of approximately $50,000 and $40,000 for the
three months ended March 31, 2005 and 2004, respectively.
Depreciation and Amortization
Depreciation and amortization expense increased by $4,575 to $11,181 for the
three months ended March 31, 2005 compared to the three months ended March 31,
2004. This increase is due to depreciation of equipment and software that were
added in 2004 and 2005.
Selling Expenses
For the three months ended March 31, 2005 we incurred selling expenses of $894
associated with growing business in our IT Services Group. We expect selling
expenses to increase as we generate sales opportunities and grow our IT Services
Group. A portion of our sales and contract development is handled by employees
whose salary and benefits expenses is included in general and administrative
expenses since they perform multiple tasks for us.
Research and Development
For the three months ended March 31, 2005 we continued to incur research and
development expenses associated with growing business in our IT Services Group
related to our biometrics applications and recorded $71,681 compared to $68,646
for the three months ended March 31, 2004. These expenses are principally
related to the development of an access control terminal and related software
called TouchThru(TM). TouchThru(TM) is a self-contained terminal enabling
physical access control using biometric identification. It incorporates
fingerprint matching technology licensed from Ultra-Scan Corporation, a private
technology company headquartered in Buffalo, New York. TouchThru(TM) will be the
first biometric product we introduce, and we intend to be in a position to
market and sell that product beginning in 2006. We plan to market and sell
TouchThru(TM) in a variety of industries and markets, including the federal,
state and local government, health care, travel and general security, and access
control.
Income (Loss) From Operations
For the three months ended March 31, 2005 our operating income was $138,247
compared to a loss from operations of $139,152 in the comparable period of 2004.
This is primarily attributable to our focus on our new IT Services Group and the
growth of IT sales which provided gross profit of $609,846 to fund research and
development, general and administrative expense and interest expenses.
12
Other Income (Expense)
Other income and expense consists of interest expense on indebtedness for the
three months ended March 31, 2005. Interest expense was $57,399 (including
$35,542 of interest expense on notes payable of LF) for the three months ended
March 31, 2005 compared to $17,088 for the three months ended March 31, 2004.
This increase of $40,311 is principally offset by $34,062 of interest income
from the notes receivable due from the buyer of LF.
Income (loss) from Discontinued Operations
We recorded income from discontinued operations of $7,254 for the three months
ended March 31, 2005 compared to a loss of $88,669 for the three months ended
March 31, 2004. The income for 2005 is the result of the Photonics Group which
was classified as discontinued operations. The loss from discontinued operations
for the three months ended March 31, 2004 is due to the discontinued operations
of the Laser Group and the Photonics Group.
Net Income (Loss)
For the three months ended March 31, 2005, we recorded income from continuing
operations of $113,610 or $.01 per share and net income of $120,864, or $.01 per
share. This compares to a net loss from continuing operations of $(156,590) or
$(.01) per share and a net loss of $(245,259) or $(.02) per share (the
difference of $(.01) per share is from discontinued operations) for the three
months ended March 31, 2004. The improvement is attributable to growth of sales
and gross profit from our new IT Services which allowed us to fund our research
and development, general and administrative, and interest expenses.
Liquidity and Capital Resources
As of March 31, 2005 we had cash of $29,176, which is available for working
capital and property and equipment acquisition.
At March 31, 2005 we had a working capital deficit of $1,720,050 ($1,715,926
after eliminating the assets and liabilities of our discontinued operations).
Approximately $2,076,000 of this deficit is caused by bank loan covenant
violations resulting in the classification of long term maturities as current
liabilities.
We have financed the activity of our new IT Services Group through the issuance
of notes payable to related parties and private placements of common stock. We
also have two lines of credit which we use to provide cash from the financing of
our accounts receivable. In the future, we may issue additional debt or equity
securities to satisfy our cash needs. Any debt incurred or issued may be secured
or unsecured, at a fixed or variable interest rates and may contain other terms
and conditions that our board of directors deems prudent. Any sales of equity
securities may be at or below current market prices. We cannot assure you that
we will be successful in generating sufficient capital to adequately fund our
liquidity needs.
Risk Factors
You should consider the risk factors included in our Annual Report on Form
10-KSB 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
results of the risks occur, our business, financial condition, or results of
operations could be materially adversely affected.
13
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the
participation of the 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, the chief
executive officer and chief financial officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective, providing
them with material information relating to the company as required to be
disclosed in the reports we file or submit under the Exchange Act on a timely
basis.
Changes in Internal Control over Financial Reporting. There were no changes in
our internal controls over financial reporting, known to the chief executive
officer or chief financial officer that occurred during our fiscal first quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
We are the plaintiff in a lawsuit filed in the Superior Court, State of Rhode
Island on August 13, 1999 captioned Infinite Group, Inc. vs. Spectra Science
Corporation and Nabil Lawandy. In the action, we assert that by fraud and in
breach of fiduciary duties owed, Spectra and its president, Nabil Lawandy,
caused us to sell to Spectra shares of Spectra's Series A Preferred stock at a
substantial discount to fair market value. We allege that in entering into the
transaction we relied on various representations made by Spectra and Mr.
Lawandy, which were untrue at the time they were made. In the action, we seek
compensatory damages in the amount of $500,000 plus statutory interest, punitive
damages as well as an award of attorney's fees and costs. One of Spectra's
counterclaims was dismissed by the court in response to our motion for summary
judgment. The trial was completed in February 2005. The jury returned a verdict
and judgment in our favor in the amount of approximately $600,000. We have filed
a notice of appeal with respect to the damages portion of the verdict. On June
1, 2005, Spectra voluntarily dismissed with prejudice its remaining pending
counterclaim against us. We have entered into an escrow agreement with the
defendants pursuant to which approximately $600,000 representing the amount of
the judgment has been deposited. Withdrawal of the funds will be permitted only
upon the date that judgment in the matter becomes a final, non-appealable
decision, or earlier upon the written agreement of all parties.
We are the respondent in an arbitration proceeding filed on December 10, 2002
captioned J. Terrence Feeley v. Infinite Group, Inc. Claimant, a former employee
and former member of our board of directors, alleges that the parties entered
into a consulting agreement dated June 27, 2002 relative to the early
termination of claimant's employment requiring certain cash payments to be made.
Claimant alleges that we have failed or refused to make such cash payments and
have breached the agreement and seeks all monies owed to him, said amount
alleged to be approximately $130,000. We answered the claim by admitting that a
letter agreement was entered into but denied all of the remaining allegations.
We also filed a counterclaim in the arbitration proceeding. We filed a related
claim against Mr. Feeley in the Superior Court, State of Rhode Island on
September 5, 2003. We claim that he breached certain provisions of his
employment agreement, breached fiduciary duties he owed to us and violated
several provisions of the June 27, 2002 letter agreement. We seek compensatory
damages in amounts to be shown at trial, and preliminary and permanent
injunctive relief and other relief as may be appropriate.
Mr. Feeley's arbitration claims are pending before the American Arbitration
Association and an arbitrator selected by the parties. Our claims against Mr.
Feeley are pending in the Rhode Island Superior Court. In January of 2004, the
parties agreed to stay arbitration proceedings and to mediate all the disputes
under procedures available through the Superior Court. To date, neither party
has initiated mediation proceedings.
Other than the foregoing proceeding, we are not a party to any material legal
proceeding.
14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
For the three months ended March 31, 2005, we issued 1,600,000 restricted shares
of common stock at $.05 per share in private placement transactions. We also
issued 45,000 shares of restricted common stock to satisfy liabilities in the
amount of $ 2,250.
These transactions were exempt from registration, as they were nonpublic
offerings made pursuant to Sections 4(2) and 4(6) of the Act. All shares issued
in the transactions described hereinabove bore an appropriate restrictive
legend.
Item 3. Defaults Upon Senior Securities.
The Company's LF subsidiary had a $1,250,000 bank term promissory note that
required monthly principal and interest payments amounting to approximately
$13,000 through February 2011. The outstanding balance as of March 31, 2005
amounted to $674,881 and bore interest at the bank's prime rate plus 1.0%. All
the assets of LF and the guarantee of the Company secured the note. We continued
to be in violation of certain loan covenants. These violations related to
exceeding certain levels of the ratio of debt to intangible net worth, not
meeting the minimum current ratio or the working capital ratio, and exceeding
capital expenditure limits. Accordingly, the entire outstanding portion of the
note was classified as current.
The Company's LF subsidiary had a $1,260,000 bank term promissory note that
required monthly principal and interest payments amounting to approximately
$13,000 through December 2014. The outstanding balance as of March 31, 2005
amounted to $956,234 and bore interest at the bank's prime rate plus .75%. We
continued to be in violation of certain covenants under the term of this note.
Accordingly, the entire outstanding portion of the note was classified as
current.
The Company's LF subsidiary was obligated under a capital lease for the LF
operating facility. The lease provides for monthly payments to an escrow account
in amounts sufficient to allow for the repayment of the principal of the
underlying tax-exempt bonds together with interest at 7.25% through June 2012.
The outstanding balance as of March 31, 2005 amounted to $445,000. Annual
payments of principal were $40,000 for fiscal 2004 and increased by $5,000
annually through June 2012. Under the terms of this credit facility, the Company
was prohibited from paying dividends or making other cash distributions.
According to the terms of the lease agreement, the Company was required to
comply with certain covenants. We continued to be in violation of these
covenants. Accordingly, the entire outstanding portion of this obligation was
classified as current.
The aggregate amount of the aforementioned notes payable and capital lease
obligations classified as current liabilities was $2,076,115 at March 31, 2005.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
a. Exhibits:
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Infinite Group Inc. (Registrant)
Date July 26, 2005 /s/ Michael S. Smith
--------------------
Chief Executive Officer
Date July 26, 2005
/s/ Michael S. Smith
--------------------
Chief Financial Officer
(Principal Financial Officer)
16