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, 2006
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.)
60 Office Park Way
Pittsford, New York 14534
-------------------------
(Address of principal executive office)
(585) 385-0610
(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 |X| No|_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). 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 May 11, 2006, there were 20,034,965
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, 2006 (unaudited) and December 31,
2005 (audited) 3
Statements of Operations - (unaudited) for the three
month periods ended March 31, 2006 and 2005 4
Statements of Cash Flows - (unaudited) for the three month
periods ended March 31, 2006 and 2005 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 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURES 19
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-QSB 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 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. We undertake
no obligation to revise or update publicly any forward-looking statements for
any reason. The terms "we", "our", "us", or any derivative thereof, as used
herein refer to Infinite Group Inc., a Delaware corporation, and its
predecessors.
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INFINITE GROUP, INC.
Consolidated Balance Sheets
March 31, December 31,
2006 2005
----------------------------------------------------------------------------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 162,160 $ 109,090
Accounts receivable, net of allowance
of $53,000 ($53,000 - 2005) 801,204 875,538
Notes receivable, current portion 4,932 4,746
Inventories 26,677 24,664
Prepaid expenses and other current assets 67,889 49,516
------------ ------------
Total current assets 1,062,862 1,063,554
Property and equipment, net 187,373 190,520
Software development costs, net 204,633 207,348
Other assets:
Notes receivable 77,137 78,439
Deposits 16,703 16,703
------------ ------------
Total other assets 93,840 95,142
------------ ------------
Total assets $ 1,548,708 $ 1,556,564
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Note payable 30,000 30,000
Accounts payable 341,792 412,100
Accrued pension 180,647 152,050
Accrued payroll 264,598 186,863
Accrued interest payable 120,774 118,913
Accrued expenses-other 60,270 60,977
Current maturities of long-term obligations-bank 12,723 12,778
------------ ------------
Total current liabilities 1,010,804 973,681
Long-term obligations:
Bank notes payable 47,449 50,600
Notes payable-related parties 1,260,124 1,260,124
Accrued pension expense 2,435,312 2,405,612
------------ ------------
Total liabilities 4,753,689 4,690,017
------------ ------------
Commitments and contingencies
Stockholders' deficiency:
Common stock, $.001 par value, 60,000,000
(20,000,000 - 2005) shares authorized;
19,856,881 (19,856,881 - 2005) shares issued
and outstanding 19,857 19,857
Additional paid-in capital 28,552,616 28,523,334
Common stock, 178,084 shares authorized,
not issued (175,084 - 2005) 56,448 56,028
Accumulated deficit (28,787,047) (28,685,817)
Accumulated other comprehensive loss (3,046,855) (3,046,855)
------------ ------------
Total stockholders' deficiency (3,204,981) (3,133,453)
------------ ------------
Total liabilities and stockholders' deficiency $ 1,548,708 $ 1,556,564
============ ============
See notes to consolidated financial statements.
3
INFINITE GROUP, INC.
Consolidated Statements of Operations (Unaudited)
Three Months Ended
March 31,
----------------------------
2006 2005
------------------------------------------------------------------------------
Sales $ 1,623,436 $ 2,124,727
Cost of services 1,305,859 1,514,881
------------ ------------
Gross profit 317,577 609,846
------------ ------------
Costs and expenses:
General and administrative 373,238 356,391
Selling 412,534 894
Research and development 68,122 71,681
Depreciation and amortization 13,039 11,181
------------ ------------
Total costs and expenses 866,933 440,147
------------ ------------
Operating income (loss) (549,356) 169,699
------------ ------------
Other income (expense):
Interest income 268 34,062
Interest expense:
Related parties (29,296) (21,857)
Other (13,634) (66,994)
------------ ------------
Total interest expense
(42,930) (88,851)
Other income-settlement of litigation 498,088 --
------------ ------------
Total other income (expense) 455,426 (54,789)
------------ ------------
Income (loss) from continuing operations before
income tax expense (93,930) 114,910
Income tax expense (7,300) (1,300)
------------ ------------
Income (loss) from continuing operations (101,230) 113,610
Discontinued operations:
Income from discontinued operations -- 7,254
------------ ------------
Net income (loss) $ (101,230) $ 120,864
============ ============
Net income (loss) per share-basic:
Income (loss) from continuing operations $ (.01) $ .01
Income (loss) from discontinued operations .00 .00
------------ ------------
Net income (loss) $ (.01) $ .01
============ ============
Net income (loss) per share-diluted:
Income (loss) from continuing operations $ (.01) $ .01
Income from discontinued operations .00 .00
------------ ------------
Net income (loss) $ (.01) $ .01
============ ============
Weighted average number of shares outstanding:
Basic 19,856,881 18,611,354
============ ============
Diluted 19,856,881 19,846,464
============ ============
See notes to consolidated financial statements.
4
INFINITE GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
----------------------
2006 2005
--------------------------------------------------------------------------------
Operating activities:
Net income (loss) $(101,230) $ 120,864
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Income from discontinued operations -- (7,254)
Common stock options and warrants expensed 29,282 --
Depreciation and amortization 13,039 11,181
(Increase) decrease in assets:
Accounts receivable 74,334 (492,547)
Inventories (2,013) --
Other current assets (18,373) (3,250)
Increase (decrease) in liabilities:
Accounts payable (70,308) (72,893)
Accrued expenses 78,889 70,929
Accrued pension obligations 58,297 53,744
--------- ---------
Net cash provided by (used in) operating activities 61,917 (319,226)
--------- ---------
Investing activities:
Purchase of property and equipment (7,177) (40,132)
Proceeds from notes receivable 1,116 73,052
Increase in restricted funds -- (11,250)
--------- ---------
Net cash provided by (used in) investing activities (6,061) 21,670
--------- ---------
Financing activities:
Net repayments of bank notes payable (3,206) (21,071)
Proceeds from exercise of stock options 420 --
Proceeds from short-term notes payable-other -- 214,292
Repayment of long-term obligations -- (43,786)
Proceeds from issuance of common stock, net of costs -- 80,000
--------- ---------
Net cash provided by (used in) financing activities (2,786) 229,435
--------- ---------
Net increase (decrease) in cash 53,070 (68,121)
Cash - beginning of period 109,090 97,297
--------- ---------
Cash - end of period $ 162,160 $ 29,176
========= =========
Supplemental disclosure:
Cash paid for:
Interest $ 43,770 $ 58,256
========= =========
Income taxes $ 7,300 $ 1,300
========= =========
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 (U.S.) 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 U.S. 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, 2005 and the notes thereto included in
the Company's Annual report on Form 10-KSB filed with the U.S. Securities and
Exchange Commission. Results of consolidated operations for the three month
period ended March 31, 2006 are not necessarily indicative of the operating
results that may be expected for the year ending December 31, 2006. 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 December 31, 2005 audited consolidated
financial statements presents a summary of significant accounting policies.
The Company reclassified certain prior year amounts to conform with the current
year's presentation
Note 3. Discontinued Operations and Reclassifications
The statements of operations and cash flows for the three months ended March 31,
2005 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 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.
In accordance with FASB 144, the disposal of the Photonics segment has been
accounted for as a disposal of a business segment and accordingly, the operating
results are segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows and consist of
income from discontinued operations of $7,254 for the three months ended March
31, 2005.
6
Note 4. Stock Option Plans
As of March 31, 2006 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 5,626,500 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 the options including the
exercise price, expiration date, number of shares, and vesting provisions.
In December 2004, the Financial Accounting Standards Board issued SFAS 123R,
Share-Based Payment ("SFAS 123R"). SFAS 123R supersedes SFAS 123, Accounting for
Stock Based Compensation, and Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees ("APB 25) and its related implementation guidance.
On January 1, 2006, we adopted the provisions of SFAS 123R using the modified
prospective transition method. Under this method, the Company is required to
record compensation expense for all stock based awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain
outstanding as of the beginning of the adoption. Prior period financial
statements have not been restated. Under SFAS 123R, compensation expense related
to stock based payments is recorded over the requisite service period based on
the grant date fair value of the awards.
Prior to the adoption of SFAS 123R, the Company accounted for employee stock
options using the intrinsic value method in accordance with APB 25. Accordingly,
no compensation expense was recognized for stock options issued to employees as
long as the exercise price is greater than or equal to the market value of the
common stock at the date of grant. In accordance with SFAS 123, the Company
disclosed the summary of pro forma effects to reported net income or net loss as
if the Company had elected to recognize compensation costs based on the fair
value of the awards at the grant date.
The compensation cost that has been charged against income for options granted
under the plans was $23,585 for the three-months ended March 31, 2006. The
impact of this expense was to increase basic and diluted net loss per share from
$(.00) to $(.01) for the three months ended March 31, 2006. The adoption of SFAS
123R did not have an impact on cash flows from operating or financing
activities. A deduction is not allowed for income tax purposes until the option
are exercised. The amount of this deduction will be the difference between the
fair value of the Company's common stock and the exercise price at the date of
exercise. Accordingly, there is a deferred tax asset recorded related for the
tax effect of the financial statement expense recorded. The tax effect of the
income tax deduction in excess of the financial statement expense will be
recorded as an increase to additional paid-in capital. Due to the uncertainty of
the Company's ability to generate sufficient taxable income in the future to
utilize the tax benefits of the options granted, the Company has recorded a
valuation allowance to reduce its gross deferred tax asset to zero. As a result,
for the three months ended March 31, 2006, there is no income tax expense impact
from recording the fair value of options granted.
The Company uses volatility of 100% when computing the value of stock options
and warrants. This is based on a combination of both historical and implied
volatility since the historical volatility has trended downward especially
during the period from July 2005, when the Company brought current its public
information in filings with the SEC. In addition, the Company's volume of shares
traded has increased in the past several months which the Company believes has
provided more liquidity and less volatility than was previously experienced. The
expected dividend yield is zero percent and the expected life on the options is
ten years. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
The Company recorded expense of $23,585 for employee stock options and $5,697
for options and warrant issued to independent service providers for the three
months ended March 31, 2006.
7
(A) summary of all stock option activity for the three months ended March 31,
2006 follows:
Weighted Weighted-
Average Average Aggregate
Number of Exercise Remaining Intrinsic
Options Price Contractual Term Value
---------- ---------- ---------------- ----------
Outstanding at December 31, 2005 4,020,900 $ .16
==========
Options issued 260,000 $ .25
==========
Options expired (912,900) $ .15
==========
Options exercised (3,000) $ .14
---------- ==========
Outstanding at March 31, 2006 3,365,000 $ .18 8.4 years $ 818,990
========== ========== ================ ==========
Exercisable at March 31, 2006 3,146,334 $ .17 8.3 years $ 784,790
========== ========== ================ ==========
The weighted average fair value of options granted during the three-month period
ended March 31, 2006 was approximately $.23 ($.08 during the three months ended
March 31, 2005). The total intrinsic value of options exercised during the three
months ended March 31, 2006 was $480 and no options were exercised during the
three months ended March 31, 2005.
A summary of the status of nonvested stock option activity for the three months
ended March 31, 2006 follows:
Weighted Average
Fair Value
Nonvested Shares Shares at Grant Date
------------------------------ -------- ----------------
Nonvested at December 31, 2005 50,666 $ .20
Granted 260,000 .23
Vested (86,667) .23
Forfeited (5,333) .30
--------
Nonvested at March 31, 2006 218,666 $ .22
========
At March 31, 2006, there was approximately $51,000 of total unrecognized
compensation cost related to non-vested options granted under the plan. That
cost is expected to be recognized over a weighted average period of 1.7 years.
The total fair value of shares vested during the three months ended March 31,
2006 was approximately $20,000.
Prior to 2006, the Company had adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123 -"Accounting for
Stock-Based Compensation, " and, accordingly the financial statements for the
three months ended March 31, 2005 have not been restated. Had compensation
expense for employee stock options granted under the plan been determined based
on the fair value at the grant date consistent with SFAS 123R, the Company's pro
forma net income and loss per share from continuing operations would have
increased as follows for the three months ended March 31, 2005.
Results of Operations 2005
------
Net income -as reported (000's) $ 121
Total stock based employee compensation expense determined
under the fair value method for all awards (000's) 128
------
Net (loss) - pro forma (000's) $ (7)
======
Income per share as reported - basic and diluted $ .01
======
Loss per share pro forma - basic and diluted $ (.00)
======
8
Note 5. Business Segments
Prior to 2002, the Company's business was 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. As a result, in accordance with FASB
144, the disposal of the Photonics segment has been accounted for as a disposal
of a business segment and accordingly the operating results were 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 U.S. There were
no revenues from customers in foreign countries during 2005 and 2006. 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 three months ended March 31, 2006 and 2005, respectively, is
set forth as follows.
------------------------------------------ ---------------- ------------------ ------------
Photonics Group IT Services Group Consolidated
------------------------------------------ ---------------- ------------------ ------------
Three Months ended March 31, 2006
------------------------------------------ ---------------- ------------------ ------------
Sales to unaffiliated customers $ -- $ 1,623,436 $ 1,623,436
------------------------------------------ ---------------- ------------------ ------------
Operating loss $ -- $ (549,356) $ (549,356)
------------------------------------------ ---------------- ------------------ ------------
Income from discontinued operations $ -- $ -- $ --
------------------------------------------ ---------------- ------------------ ------------
Three Months ended March 31, 2005
------------------------------------------ ---------------- ------------------ ------------
Sales to unaffiliated customers -- $ 2,124,727 $ 2,124,727
------------------------------------------ ---------------- ------------------ ------------
Operating income -- $ 169,699 $ 169,699
------------------------------------------ ---------------- ------------------ ------------
Income from discontinued operations $ 7,254 $ -- $ 7,254
------------------------------------------ ---------------- ------------------ ------------
Note 6. Supplemental Cash Flow Information
Non-cash investing and financing transactions, including non-monetary exchanges,
consist of the conversion of $2,250 of accounts payable to common during the
three months ended March 31, 2005.
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. Stock options with exercise prices
that exceeded the average fair market value of the Company's common stock had an
antidilutive effect and therefore, were excluded from the computation of
earnings per share. 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.
9
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
===========
For the three months ended March 31, 2006, the Company had 19,856,881 weighted
average shares of its common stock outstanding. If the Company had generated
earnings during the three months ended March 31, 2006, 1,705,113 common stock
equivalent shares would have been added to the weighted average shares
outstanding. These additional shares represent the assumed exercise of common
stock options and warrants whose exercise price is less than the average of the
Company's stock during the period. The proceeds of the exercise are assumed to
be used to purchase common shares for treasury and the incremental shares are
added to the weighted verge shares outstanding.
Item 2. Management's Discussion and Analysis or Plan of Operations
Overview
Beginning in the second quarter of 2003 we commenced operations in the field of
information technology (IT) consulting services and biometric technology, and we
opened an office in the Washington DC metropolitan area. In March 2006, we
opened a regional office in Jackson, Mississippi with the objective of
developing new business in that area of the U.S. We now provide business and
technology integration and systems support primarily to U.S. government clients.
We focus on aligning business processes with technology for delivery of
solutions to meet our clients' exact needs and providing expert management
services to the lifecycle of technology-based projects.
We sold or closed our prior businesses on or before December 31, 2004. We are
now solely focused in the fields of IT consulting services and biometric
technology.
The following discussion relates to the businesses that were sold or closed and
the current effect on our operations and financial position.
Osley & Whitney, Inc. Retirement Plan
Since our sale of Osley & Whitney, Inc. (O&W) in 2002, we have remained the
sponsor of the O&W Retirement Plan. At March 31, 2005, the O&W defined benefit
pension plan had an accrued pension obligation liability of $2,435,312 and an
accumulated other comprehensive loss of $3,046,855 which we recorded as a
reduction of stockholders' equity. The market value of plan assets increased
from $3,315,524 at December 31, 2005 to $3,432,232 at March 31, 2006. The
increase was comprised of an investment return of $220,746 offset by payment of
benefits of $101,174 and expenses paid of $2,866 during the three months ended
March 31, 2006.
We were required to contribute amounts in 2004, 2005 and 2006 and are required
to make contributions in future years to fund the deficiency. We did not make
contribution during 2004 and 2006 and we currently do not have the funds
available to make the required contributions which currently approximate $1.4
million. During 2005, we made contributions of $6,439 and 500,000 shares of our
common stock, which were valued on the contribution date at $175,000 using the
closing market price. We recorded defined benefit pension expense of
approximately $45,000 and $75,000 for the three months ended March 31, 2006 and
2005, respectively. In March 2005, we filed a funding waiver application
requesting waivers of the minimum funding standard for the 2005 plan year of
$513,551 and for the 2004 plan year of $979,328 (which includes quarterly cash
disbursements aggregating approximately $455,000 for the year ended December 31,
2004 and unfunded prior year amounts). We recently provided additional
information for consideration in connection with our waiver application. We are
also implementing strategies to improve the plan's performance.
10
IT Consulting and Biometric Strategy
Our IT services include strategic staffing, program management, project
management, network services, technical engineering, software development, and
enterprise resource planning. Beginning in 2003, we have entered into several
subcontract agreements with a number of prime contractors to several U.S.
government agencies.
In December 2003, we were awarded a Federal Supply Schedule Contract by the U.S.
General Services Administration (GSA) for IT consulting services. Having a GSA
Contract allows us to compete for and secure prime contracts with all executive
agencies of the U.S. Government as well as other national and international
organizations. We have one prime contract under GSA.
In 2003, we entered into a License Agreement with Ultra-Scan Corporation, a
privately held technology company headquartered in Buffalo, New York. The
License Agreement gives us the ability to use, market and sell certain
proprietary fingerprint recognition technology. We have completed the
development of an access control terminal and related software called
Touch-Thru(TM) incorporating that technology. We intend to market and sell that
product beginning in 2006 in a variety of industries and markets, including the
federal, state and local government, health care, travel and general security
and access control.
Future Trends
We believe that our operations, as currently structured, together with our
current financial resources, will result in improved financial performance in
future years.
There is no assurance, that our current resources will be adequate to fund the
liabilities for the O&W retirement plan or our current operations and business
expansion or that we will be successful in raising additional working capital.
Our failure to raise necessary working capital could force us to curtail
operations, which would have a material adverse effect on our financial
condition and results of operations.
11
Results of Operations
Comparison of the three months ended March 31, 2006 and 2005
The following table compares our statement of operations data for the three
months ended March 31, 2006 and 2005. We commenced the operations of our IT
Services Group in the second quarter of 2003. The trends suggested by this table
are not indicative of future operating results due to the relatively short track
record that we have in focusing on the IT Services Group. The Company
reclassified certain prior year amounts to conform with the current year's
presentation.
Three Months Ended March 31,
----------------------------------------------------------------------------
As a % of Net As a % of Net Increase
2006 Revenues 2005 Revenues (Decrease)
----------- ------------- ----------- ------------- -----------
Sales $ 1,623,436 100.0% $ 2,124,727 100.0% (23.6)%
Cost of services 1,305,859 80.4 1,514,881 71.3 (13.8)
----------- ------------- ----------- ------------- -----------
Gross profit 317,577 19.6 609,846 28.7 (47.9)
----------- ------------- ----------- ------------- -----------
General and administrative 373,238 23.0 356,391 16.8 4.7
Selling 412,534 25.4 894 0.0 46,044.7
Research and development 68,122 4.2 71,681 3.4 (5.0)
Depreciation and amortization 13,039 0.8 11,181 0.5 16.6
----------- ------------- ----------- ------------- -----------
Total operating expenses 866,933 53.4 440,147 20.7 97.0
----------- ------------- ----------- ------------- -----------
Operating income (loss) (549,356) (33.8) 169,699 8.0 (423.7)
Interest expense, net (42,662) (2.6) (54,789) (2.6) (22.1)
Other income 498,088 30.7 -- 0.0
Income tax expense (7,300) (0.4) (1,300) (0.1) 461.5
----------- ------------- ----------- ------------- -----------
Income from continuing operations (101,230) (6.2) 113,610 5.3 (189.1)
Income from discontinued operations -- 0.0 7,254 0.3 (100.0)
----------- ------------- ----------- ------------- -----------
Net income (loss) $ (101,230) (6.2)% $ 120,864 5.7 % (183.8)%
=========== ============= =========== ============= ===========
Net income (loss) per share-basic $ (.01) $ .01
=========== ===========
Net income (loss) per share-diluted $ (.01) $ .01
=========== ===========
Sales
Sales for the three months ended March 31, 2006 decreased by $501,291 to
$1,623,436 as compared to sales for the three months ended March 31, 2005 of
$2,124,727. In March 2006, one of our subcontracts for services to the U.S.
government ended when required additional funds were not approved. We earned
approximately $2.2 million or 26% of our revenue from this subcontract during
the year ended December 31, 2005. One other subcontract had staffing reductions.
Due to the nature of certain of our contracts, contract terminations occur when
projects are completed or when appropriations of funds are used and new
appropriations are not approved. We have submitted proposals and have identified
opportunities for other new contracts to replace sales that do not continue in
the ordinary course of business, as well as to increase our sales.
When we experience contract terminations or reductions in customer staffing
requirements, we attempt to identify other revenue generating project
opportunities with our existing prime contractors or others to redeploy those
employees who are no longer providing billable services. In March 2006, in
response to the termination of the contract discussed above, we placed several
formerly billable employees on unpaid leave, realigned positions of our business
development staff, and redirected our selling and marketing activities towards
those opportunities that heighten the probability of increased sales in 2006,
while preserving our long term business development initiatives. We are focusing
on a Tactical Program that seeks to grow business with existing clients and a
Strategic Program that aligns us with major procurement activity for long term
growth.
We are actively pursuing opportunities to develop additional sales in new and
existing target markets. In March 2006 we opened a regional office in Jackson,
Mississippi, and hired a new business development employee to pursue state and
local government business opportunities within the Gulf Coast region. We also
retained a lobbying firm to assist us in that effort. Moreover, we are also
channeling energies towards forming alliances with large systems integrators,
who are mandated by federal policy to direct defined percentages of their work
to small business subcontractors. In addition, we are currently working on
proposals for contract awards that we believe will enhance our posture as a
government contractor.
12
Early successes in our 2006 initiatives are evident in the preferred
relationships we have earned with several large systems integrators and one
major product house. In addition, we are a member of one of only seven teams
that won the U.S. Army's recent Strategic Services Sourcing (S3) Government-Wide
Acquisition Contract. Under our agreement with the prime contractor, we are
identified as a primary Earned Value Management resource, as well as a provider
of network and software services. However, although our future prospects are
robust, the lengthy government financing and procurement processes may result in
temporary operating losses until revenue increases to support our infrastructure
and provides consistent profitability.
Cost of Services and Gross Profit
Cost of services represents the cost of employee services related to the IT
Services Group. Cost of services for the three months ended March 31, 2006 was
$1,305,859 or 80.4% of sales as compared to $1,514,881 or 71.3% for the three
months ended March 31, 2005. Gross profit was $317,577 or 19.6% of sales for the
three months ended March 31, 2006 compared to $609,846 or 28.7% of sales for the
three months ended March 31, 2005. The decrease in gross profit is due to a
change in the mix of our business resulting from the termination of one
contract, a reduction in staffing for another contract, and the costs of
employees who did not generate billable revenue after contract reductions. In
addition, we recorded $14,093 of expense (.8% of net sales) as a result of
adopting SFAS 123R. Although our objective is to maintain an overall gross
margin of approximately 30%, in the future we may submit bids on new work with
lower gross profit margins to generate opportunities for long-term, larger
volume contracts and more stable sales.
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, O&W pension plan expense, and office
expenses. General and administrative expenses for the three months ended March
31, 2006 increased by $16,847 or 4.7% to $373,238. As a percentage of sales,
general and administrative expense was 23% for 2006 and 16.8% for 2005; the
principal change in this statistic was due to a decline in sales for the three
months ended March 31, 2006 compared to 2005.
General and administrative expenses include increases in legal expenses for 2005
of approximately $25,000 due to administering our contracts.
General and administrative expenses include expenses (including pension expense,
professional services, waiver application filing fees, and interest costs)
associated with the Osley & Whitney defined benefit retirement plan. These
expenses decreased by approximately $30,000 to approximately $45,000 for the
three months ended March 31, 2006 compared to approximately $75,000 for the
three months ended March 31, 2005. The reduction was principally due to filing
fees and professional fees incurred in 2005 in connection with preparing the
request for waiver of the minimum funding standard for the 2005 plan year of
$513,551 and for the 2004 plan year of $979,328.
We anticipate that the amount of general and administrative expenses will
increase as we continue to implement our business strategy and incur travel and
other expenses associated with managing a larger business. We expect that legal
and accounting expenses for auditing and Securities and Exchange Commission
reporting and compliance will decrease in the future since our public filings
for several years were brought current in July 2005. However, we may experience
an increase in other legal fees due to the growth of our business and the
associated volume of new contracts and contract administration.
Selling Expenses
For the three months ended March 31, 2006 we incurred selling expenses of
$412,534 associated with growing the business in our IT Services Group compared
to $894 for the three months ended March 31, 2005. Beginning in the second
quarter of 2005, we added new employees and changed the work assignment of one
employee and added sales consultants to focus on generating new sales leads and
new contract opportunities. Selling expenses consist of our business development
staff including salaries, benefits, sales consultants, and travel expenses. As a
result of the termination of one subcontract during the first quarter of 2006,
we reduced certain salaried selling positions resulting in expense reductions of
approximately $20,000 per month, which will be fully realized beginning in the
second quarter of 2006. We expect to add additional sales personnel in the
future as sales increase or as specific new sales opportunities are realized.
13
Research and Development
For the three months ended March 31, 2006 we continued to incur research and
development expenses related to our biometrics applications and recorded $68,122
of expense compared to $71,681 for the three months ended March 31, 2005. 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 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.
Depreciation and Amortization
Depreciation and amortization expense increased by $1,858 to $13,039 for the
three months ended March 31, 2006 compared to $11,181 for the three months ended
March 31, 2005. We have continued to acquire office equipment such as personal
computers as we hire additional personnel. We relocated our Washington, D.C.
regional office in the third quarter of 2005 and acquired additional office
equipment. The increase is due to depreciation and amortization of these
recently acquired assets.
Income (Loss) From Operations
For the three months ended March 31, 2006 our operating loss was $(549,356)
compared to operating income of $169,699 for the three months ended March 31,
2005; a reduction of $719,055. This is principally attributable to three
factors. First, our sales declined from $2,124,727 in 2005 to $1,623,436 in
2006, a decrease of $501,291; second, our gross profit declined by $292,269; and
third, our selling expenses increased by $411,640.
Interest Expense
Net interest expense was $42,622 for the three months ended March 31, 2006
compared to $54,789 for 2005. The reduction of $12,127 is principally due to a
reduction in factoring fees of approximately $21,000 offset by an increase in
related party borrowings and additional interest expense of approximately
$9,000. Proceeds from accounts receivable collections and a legal settlement
were used for working capital purposes, which reduced the volume of third party
financings in 2006.
Other Income
The Company was 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, the Company asserted that
by fraud and in breach of fiduciary duties owed, Spectra and its president,
Nabil Lawandy, caused the Company to sell to Spectra shares of Spectra's Series
A Preferred stock at a substantial discount to fair market value. The Company
alleged that in entering into the transaction it relied on various
representations made by Spectra and Mr. Lawandy, which were untrue at the time
they were made. The trial was completed in February 2005, and the jury returned
a verdict in favor of the Company in the amount of approximately $600,000. The
Company appealed the amount of the verdict and entered into a settlement with
the defendants in January 2006. As a result the Company received and recorded
other income of approximately $498,088, net of legal fees and expenses of
$164,412, in the first quarter of 2006.
Income Taxes
Income tax expense was $7,300 and $1,300 for the three months ended March 31,
2006 and 2005, respectively, consisting of estimated federal minimum tax of
$2,000 in 2006 and state taxes.
14
Income (loss) from Discontinued Operations
The financial statements for 2005 reflect management's decision to sell the
assets, certain liabilities and businesses of LF and IPI. Accordingly, the
operating results were classified as income (loss) from discontinued operations
in 2005. We recorded income from discontinued operations of $7,254 in 2005 as
the remaining assets and liabilities of the sold businesses were resolved.
Net Income
For the three months ended March 31, 2006, we recorded a net loss of $(101,230)
or $(.01) per share. For the three months ended March 31, 2005, this compares to
net income from continuing operations of $113,610 or $.01 per share and net
income of $120,864 or $.01 per share (the difference of $7,254 is from
discontinued operations).
The decrease in net income of $222,094 is attributable to a decrease in gross
profit of $292,269 and an increase in selling expenses of $411,640, which were
substantially offset by other income of $498,088. We also recorded expense of
$23,585 as a result of adopting SFAS 123R in 2006 and expense of $5,697 in 2006
as a result of warrants and stock options issued to consultants.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued SFAS 123R,
Share-Based Payment ("SFAS 123R"). SFAS 123R supersedes SFAS 123, Accounting for
Stock Based Compensation, and Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees ("APB 25) and its related implementation guidance.
On January 1, 2006, we adopted the provisions of SFAS 123R using the modified
prospective transition method. Under this method, we are required to record
compensation expense for all stock based awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain
outstanding as of the beginning of the adoption and prior period financial
statements have not been restated. Under SFAS 123R, compensation expense related
to stock based payments is recorded over the requisite service period based on
the grant date fair value of the awards.
Prior to the adoption of SFAS 123R, we accounted for employee stock options
using the intrinsic value method in accordance with APB 25. Accordingly, no
compensation expense was recognized for stock options issued to employees as
long as the exercise price is greater than or equal to the market value of the
common stock at the date of grant. In accordance with SFAS 123, the Company
disclosed the summary of pro forma effects to reported net income or net loss as
if we had elected to recognize compensation costs based on the fair value of the
awards at the grant date.
Our board of directors and stockholders have approved stock options plans, which
have authority to grant options to purchase up to an aggregate of 5,626,500
shares at March 31, 2006. Such options may be designated at the time of grant as
either incentive stock options or nonqualified stock options.
The compensation cost that has been charged against income for options granted
to employees under the plan was $23,585 for the three-months ended March 31,
2006. The impact of this expense was to increase basic and diluted net loss per
shares from $(.00) to $(.01) for the three months ended March 31, 2006. The
adoption of SFAS 123R did not have an impact on cash flows from operating or
financing activities. A deduction is not allowed for income tax purposes until
the option are exercised. The amount of this deduction will be the difference
between the fair value of the Company's common stock and the exercise price at
the date of exercise. Accordingly, there is a deferred tax asset recorded
related for the tax effect of the financial statement expense recorded. The tax
effect of the income tax deduction in excess of the financial statement expense
will be recorded as an increase to additional paid-in capital. Due to the
uncertainty of our ability to generate sufficient taxable income in the future
to utilize the tax benefits of the options granted, we have recorded a valuation
allowance to reduce gross deferred tax asset to zero. As a result for the three
months ended March 31, 2006, there is no income tax expense impact from
recording the fair value of options granted.
We recorded expense of $23,585 for employee stock options and $5,697 for
warrants and stock options issued to consultants for the three months ended
March 31, 2006.
15
Liquidity and Capital Resources
At March 31, 2006, we had cash of $162,160 available for our working capital
needs and planned capital asset expenditures.
At March 31, 2006, we had working capital of approximately $52,000 and a current
ratio of 1.05. At December 31, 2005 we had working capital of approximately
$90,000. Our objective is to improve our working capital position from
profitable operations. If we incur operating losses or net losses, we may
experience working capital shortages that impair our business operations and
growth strategy. Presently, we have sufficient cash flow and short-term
financing sources, secured by accounts receivable, to pay our payrolls and
recurring invoices on a timely basis.
We have financed the activity of our new IT Services Group through the issuance
of notes payable to third parties and to related parties, private placements of
common stock and financing of our accounts receivable.
We established in 2004 a financing line of up to $800,000 with a financial
institution that allows us to sell selected accounts receivable invoices to the
financial institution with full recourse against the company. We pay fees based
on the length of time that the invoice remains unpaid. At March 31, 2006, we had
approximately $520,000 of availability under this line and could finance up to
another approximately $250,000 based on selected accounts receivable at March
31, 2006.
We have used our common stock to provide compensation to certain employees and
consultants and to fund liabilities. During the three months ended March 31,
2006 we issued options to acquire 100,000 shares of our common stock to an
investment banking group and warrants to acquire 50,000 shares of common stock
to a firm that is assisting us in generating new sales.
We were required to contribute amounts in 2004, 2005 and 2006 to the O&W
Retirement Plan and are required to make contributions in future years to fund
the deficiency. We did not make contribution during 2004 and 2006 and we
currently do not have the funds available to make required contributions which
currently approximate $1.4 million. During 2005, we made contributions of $6,439
and 500,000 shares of our common stock, which were valued on the contribution
date at $175,000 using the closing market price. We recorded defined benefit
pension expense of approximately $45,000 and $75,000 for the three months ended
March 31, 2006 and 2005, respectively. In March 2005, we filed a funding waiver
application requesting waivers of the minimum funding standard for the 2005 plan
year of $513,551 and for the 2004 plan year of $979,328 (which includes
quarterly cash disbursements aggregating approximately $455,000 for the year
ended December 31, 2004 and unfunded prior year amounts). We recently provided
additional information for consideration in connection with our waiver
application. We are also implementing strategies to improve the plan's
performance.
We have financed the activity of our new IT Services Group through the issuance
of notes payable to related parties, private placements of common stock and
issuance of stock options and warrants. We also have a line 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 for the year ended December 31, 2005 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.
16
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 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 and chief financial officers, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control over Financial Reporting. There were no changes in
our internal controls over financial reporting 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 not presently involved in any material legal proceedings.
We were 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 asserted 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 alleged 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. The trial was completed
in February 2005, and the jury returned a verdict in our favor in the amount of
approximately $600,000. We appealed the amount of the verdict and settled with
the defendants in January 2006. As a result, in the quarter ended March 31,
2006, we received and recorded other income of $498,088, net of legal fees and
expenses of $169,412, in the first quarter of 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For a period of one year beginning January 1, 2006, we have engaged the services
of an investment banking group on a non-exclusive basis to provide advice
concerning financial planning, corporate organization and structure, business
combinations, and related services. In connection wiht the engagement, we issued
them a warrant to acquire 100,000 shares of common stock exercisable at $.50 per
share and expiring on December 31, 2010. In addition, we agreed to provide
additional compensation contingent upon closing a business combination
introduced by the investment banking group. No principal underwriter was used.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders was held on February 28, 2006. There were
present at the meeting, either in person or by proxy, holders of 15,032,176
common shares. Stockholders re-elected the three directors nominated in our
February 1, 2006 Proxy Statement, to serve for one-year terms, each to hold
office until his successor is duly elected and qualified.
17
At the Annual Meeting, the stockholders also:
o approved our 2005 Stock Option Plan;
o approved an amendment to our certificate of incorporation to increase the
number of shares of authorized common stock from 20,000,000 to 60,000,000;
and
o ratified the appointment of Freed Maxick & Battaglia, CPAs, PC as our
independent auditors for the fiscal years 2002, 2003, 2004 and 2005.
Results of stockholder voting follow:
Election of Directors For Withheld
--------------------- ---------- ----------
Michael S. Smith 14,475,991 556,185
Paul J. Delmore 14,475,991 556,185
Allan M. Robbins 14,475,991 556,185
========== ==========
Broker
For Against Abstain Non-Votes
---------- ---------- --------- ---------
Approval of our
2005 Stock Option Plan 9,645,538 1,099,743 3,600 4,282,295
========== ========== ========= =========
For Against Abstain
---------- --------- ---------
Approval to amend our Certificate of
Incorporation to increase the number of shares
authorized from 20,000,000 to 60,000,000 13,882,118 1,142,713 7,345
========== ========= =========
For Against Abstain
Ratify the appointment of ---------- --------- ---------
Freed Maxick & Battaglia, CPAs, PC
as our independent auditors 14,418,301 5,440 608,435
for the fiscal years 2002, 2003, 2004 and 2005 ========== ========= =========
Item 5. Other Information.
We relocated our corporate headquarters to newly leased office space effective
May 1, 2006 located at 60 Office Park Way, Pittsford, New York 14534. We
executed a three year lease for 2,942 square feet of office space with annual
rent of $27,820 and escalations after the first year for property tax increases.
We have two renewal options, each for a term of three years, with base rents
escalating at 3.5% for each three year period. We are responsible for paying
heating, cooling, and electric utilities.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer and pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
18
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 May 12, 2006 /s/ Michael S. Smith
--------------------
Chief Executive Officer
Date May 12, 2006 /s/ Michael S. Smith
--------------------
Chief Financial Officer
(Principal Financial Officer)
19