INFINITE GROUP, INC. The Company reported net losses of$1,701,434 and$568,730 for the six months endedJune 30, 2022 and 2021, respectively, and stockholders' deficiencies of$5,387,542 and$4,097,889 atJune 30, 2022 andDecember 31, 2021 , respectively. The Company had a working capital deficit of approximately$4.4 million atJune 30, 2022 . These factors raise substantial doubt about the entity's ability to continue as a going concern within one year. The Company has plans to issue stock via an equity raise of$15 million in the third quarter of 2022, restructure certain debt and anticipates significant growth of business. These plans, in management's opinion, will allow the Company to meet its obligations and alleviate the substantial doubt. The Company's mission is to drive shareholder value by developing and bringing to market automated, cost effective, and innovative cybersecurity technologies. The Company's strategy is to build its business by designing, developing, and marketing IT security-based products and solutions that fill technology gaps in cybersecurity. The Company's goal is to increase sales and generate cash flow from operations on a consistent basis. The Company's business plans require improving the results of its operations in future periods. The Company has renegotiated the terms of certain obligations, using operational cash flow to pay down balances and extending terms, and provided financing with the issuance of new loans. DuringApril 2022 , the Company entered into a financing arrangement withTalos Victory Fund, LLC , for$296,000 . Under the terms of the loan, amortization payments are due beginningAugust 12, 2022 , and each month thereafter with the final payment due onApril 12, 2023 . DuringMay 2022 , the Company entered into a financing arrangement withMast Hill Fund, L.P. for$355,000 . Under the terms of the loan, amortization payments are due beginningSeptember 27, 2022 , and each month thereafter with the final payment due onMay 26, 2023 . As previously reported, onJanuary 31, 2022 , the Company, entered into a Stock Purchase Agreement (the "Pratum Agreement"), by and among the Company, the David A. Nelson,Jr. Living Trust ("Seller"),David A. Nelson , Jr. (the "Beneficiary" and, together with Seller, the "Seller Parties"); andPratum, Inc. , anIowa corporation ("Pratum"), whereby the Company agreed to acquire all of the issued and outstanding equity securities of the Company from the Seller Parties (the "Pratum Acquisition"). Pursuant to the terms of the Pratum Agreement, the Agreement could be terminated under certain circumstances, including, among other things, if the Pratum Acquisition does not close byMarch 31, 2022 (the "Outside Date"). OnMarch 28, 2022 , the Company, the Seller Parties, and Pratum entered into an agreement whereby the parties agreed to extend the Outside Date, as set forth in Section 2.1 of the Pratum Agreement, toMay 15, 2022 . OnJune 15, 2022 , the Company, received notice of termination of the Pratum Agreement from the Seller Parties and Pratum pursuant to Section 8.1(a)(ii) of the Pratum Agreement on the basis that the Acquisition had not closed by the outside date ofMay 15, 2022 , as amended. During the first quarter of 2022, the Company filed an S-1 for a public offering of$15 million of common stock and redeemable warrants, which was expected to be used for the Pratum Acquisition and working capital needs. Following the termination of the Pratum Agreement the Company has been reevaluating its capital needs and structure of the offering. The completion of this offering is not a certainty. Should the offering not proceed or be further delayed, or should it occur in a reduced format, the Company anticipates that it will scale down spending to reduce costs and to increase cash flow while continuing to grow the operations at a slower pace. The Company believes the capital resources generated by anticipated improving operational results due to reduction of expenses, increased bookings and deposits in our Services business, and an influx of new Nodeware orders under contract atJune 30, 2022 as well as cash available under its factoring line of credit and from additional related parties and third-party loans, if needed, provide sources to fund its ongoing operations and to support the internal growth of the Company. The Company may need to extend existing debt agreements in order to provide resources for other purposes. If the Company experiences significant growth in its sales, the Company believes that this may require it to increase its financing line, finance additional accounts receivable, or obtain additional working capital from other sources to support its sales growth. The Company plans to continue to evaluate alternatives which may include continuing to renegotiate the terms of other notes, seeking conversion of the notes to shares of common stock and seeking funds to repay the notes. The Company continues to evaluate repayment of our remaining notes payable based on its cash flow. These plans, in management's opinion, will allow the Company to meet its obligations for a reasonable period of time from the date the financial statements are available to be issued. 8 Table of Contents
Note 3. Summary of Significant Accounting Policies
There are several accounting policies that the Company believes are significant to the presentation of its financial statements. These policies require management to make complex or subjective judgments about matters that are inherently uncertain. Note 3 to the Company's audited financial statements for the year endedDecember 31, 2021 presents a summary of significant accounting policies as included in the Company's Annual Report on Form 10-K as filed with theSEC .
Reclassifications - It is the Company's policy to reclassify prior year amounts to conform with the current year presentation.
Fair Value of Financial Instruments - The carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate short-term maturity of these financial instruments. The carrying value of notes payable and convertible notes payable approximates the fair value based on rates currently available from financial institutions and various lenders. Revenue The Company's total revenue recognized from contracts from customers was comprised of three major services: Managed support services, Cybersecurity projects, software and Other IT consulting services. The categories depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. There were no material unsatisfied performance obligations atJune 30, 2022 or 2021 for contracts with an expected original duration of more than one year. The following table summarizes the revenue recognized by the major services: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Managed support services$ 1,115,607 $ 1,057,431 $ 2,204,614 $ 2,128,331 Cybersecurity projects and software 580,885 689,073 1,158,948 1,391,515 Other IT consulting services 0 51,000 0 102,000 Total sales$ 1,696,492 $ 1,797,504 $ 3,363,562 $ 3,621,846 Managed support services
Managed support services consist of revenue primarily from our subcontracts with Peraton (which purchased Perspecta inMay 2021 ) for services to its end clients, principally a major establishment of theU.S. Government for which we manage one of the nation's largest physical and virtual Microsoft Windows environments.
We generate revenue primarily from these subcontracts through fixed price service and support agreements. Revenues are earned and billed weekly and are generally paid within 45 days. The revenues are recognized at time of service.
Cybersecurity projects and software
Cybersecurity projects and software revenue includes the selling of licenses of Nodeware® and third-party software, principally Webroot™ as well as performing cybersecurity assessments, testing and consulting as a CISO (Chief Information Security Officer).
Nodeware® and Webroot™ software offerings consist of fees generated from the use of the respective software by our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Substantially all customers are billed in the month of the service and is cancellable upon notice per the respective agreements. Substantially all payments are electronically billed, and the billed amounts are paid to the Company instantaneously via an online payment platform. If payments are made in advance, revenue related to the term associated with our software licenses is recognized ratably over the contractual period. Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our standalone selling price. Cybersecurity assessments and testing services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For substantially all these contracts, revenue is recognized when the specific performance obligation is satisfied. If the contract has multiple performance obligations, the revenue is recognized when the performance obligations are satisfied. Depending on the nature of the service, the amounts recognized are based on an allocation of the transaction price to each performance obligation based on a relative standalone selling price of the products sold. In substantially all agreements, a 50% to 75% down payment is required before work is initiated. Down payments received are deferred until revenue is earned. Upon completion of performance obligation of service, payment terms are 30
days.
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Other IT consulting services
Other IT consulting services consists of services such as project management and general IT consulting services.
We generate revenue via fixed price service agreements. These are based on periodic billings of a fixed dollar amount for recurring services of a similar nature performed according to the contractual arrangements with clients. The revenues are recognized at time of service.
Based on historical experience, the Company believes that collection is reasonably assured.
During the three and six months endedJune 30, 2022 , sales to one client, including sales under subcontracts for services to several entities, accounted for 65.8% and 65.5%, respectively, of total sales (58.8% and 58.1%, respectively for the three and six months endedJune 30, 2021 ) and 20.7% of accounts receivable atJune 30, 2022 (15.6% atDecember 31, 2021 ). Capitalization of Software for Resale -The Company capitalizes the software development costs for software to be sold, leased, or otherwise marketed. Capitalization begins upon the establishment of technological feasibility of a new product or enhancements to an existing product, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. Costs incurred after the enhancement has reached technological feasibility and before it is released in the market are capitalized and are primarily labor costs related to coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. Costs associated with major upgrade releases begin amortization in the month after release. The amortization period is three years. See Note 5 for further disclosure regarding capitalization of software for resale. Leases - At contract inception, the Company determines whether the arrangement is or contains a lease and determines the lease classification. The lease term is determined based on the non-cancellable term of the lease adjusted to the extent optional renewal terms and termination rights are reasonably certain. Lease expense is recognized evenly over the lease term. Variable lease payments are recognized as period costs. The present value of remaining lease payments is recognized as a liability on the balance sheet with a corresponding right-of-use asset adjusted for prepaid or accrued lease payments. The Company uses its incremental borrowing rate for the discount rate, unless the interest rate implicit in the lease contract is readily determinable. The Company has adopted the practical expedients to not separate non-lease components from lease components and to not present short-term leases on the balance sheet. See Note 11 for further disclosure regarding lease accounting.
Note 4. Sale of Certain Accounts Receivable
The Company has available a financing line with a financial institution (the Purchaser), which enables the Company to sell accounts receivable to the Purchaser with full recourse against the Company. Pursuant to the provisions of FASB ASC 860, the Company reflects the transactions as a sale of assets and establishes an accounts receivable from the Purchaser for the retained amount less the costs and fees of the transaction and less any anticipated future loss in the value of the retained asset. The retained amount is 10% of the total accounts receivable invoice sold to the Purchaser. The fee is charged at prime plus 3.6% (effective rate of 8.35% atJune 30, 2022 ) against the average daily outstanding balance of funds advanced. The estimated future loss reserve for each receivable included in the estimated value of the retained asset is based on the payment history of the accounts receivable customer and is included in the allowance for doubtful accounts, if any. As collateral, the Company granted the Purchaser a first priority interest in accounts receivable and a blanket lien, which may be junior to other creditors, on all other assets. The financing line provides the Company the ability to finance up to$2,000,000 of selected accounts receivable invoices, which includes a sublimit for one of the Company's customers of$1,500,000 . During the six months endedJune 30, 2022 , the Company sold approximately$1,062,000 ($1,778,000 - for the six months endedJune 30, 2021 ) of its accounts receivable to the Purchaser. As ofJune 30, 2022 , approximately$303,000 ($148,000 -December 31, 2021 ) of these receivables remained outstanding. Additionally, as ofJune 30, 2022 , the Company had$1,000 available under the financing line with the Purchaser ($66,000 atDecember 31, 2021 ). After deducting estimated fees, allowance for bad debts and advances from the Purchaser, the net receivable from the Purchaser amounted to$38,000 atJune 30, 2022 ($15,000 atDecember 31, 2021 ), and is included in accounts receivable in the accompanying balance sheets. There were no gains or losses on the sale of the accounts receivable because all were collected. The cost associated with the financing line totaled$22,306 for the six months endedJune 30, 2022 ($13,967 - for the six months endedJune 30, 2021 ). These financing line fees are classified on the statements of operations as interest expense.
Note 5. Capitalization of Software for Resale
As ofJune 30, 2022 , there were$789,350 of costs capitalized ($678,973 as ofDecember 31, 2021 ) and$368,126 of accumulated amortization ($261,323 as ofDecember 31, 2021 ). During the three and six months endedJune 30, 2022 , there was$53,402 and$106,803 respectively, of amortization expense recorded ($39,844 and 74,794 respectively, for the three and six months endedJune 30, 2021 ). Costs incurred prior to reaching technological feasibility are expensed as incurred. During the three and six months endedJune 30, 2022 , there was approximately$7,800 and$16,100 , respectively, of labor amounts expensed related to these development costs ($46,900 and$87,700 , respectively, for the three and six months endedJune 30, 2021 ). 10 Table of Contents
Note 6. Deferred Revenue and Performance Obligations
Deferred Revenue Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company's contracts with customers and is recognized as the revenue recognition criteria are met. Revenue recognized during the three months endedJune 30, 2022 and 2021, that was included in the deferred revenue balances at the beginning of the respective periods, was approximately$136,100 and$132,800 , respectively. Revenue recognized during the six months endedJune 30, 2022 and 2021 that was included in the deferred revenue balances at the beginning of the respective periods was approximately$278,300 and$210,300 , respectively
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to the remaining performance obligations represents all future, non-cancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods.
As of
Note 7. Debt Obligations During the six months endedJune 30, 2022 , the Company entered into a financing arrangement (the "Second MastHill Loan ") withMast Hill Fund, L.P. ("Mast Hill"), aDelaware limited partnership. In exchange for a promissory note, Mast Hill agreed to lend the Company$370,000 , which bears interest at a rate of eight percent (8%) per annum, less$37,000 original issue discount. Under the terms of the Second MastHill Loan , payments of$44,400 , including principal and interest, are due beginningJune 15, 2022 , and each month thereafter with the final payment due onFebruary 15, 2023 . As additional consideration for the Second MastHill Loan ), the Company issued the "Lender" a 5-year warrant to purchase 925,000 shares of Company common stock at a fixed price of$0.16 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary "piggy-back" registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately$131,600 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note. Debt issuance costs of$54,650 were incurred and are being amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note. AtJune 30, 2022 , the Company deferred theJune 15, 2022 payment per the terms of the Second MastHill Loan . OnApril 12, 2022 , the Company entered into a financing arrangement (the "Talos Loan") withTalos Victory Fund, LLC ("Talos"), aDelaware limited liability company. In exchange for a promissory note, Talos agreed to lend the Company$296,000 , which bears interest at a rate of eight percent (8%) per annum, less$29,600 original issue discount. Under the terms of the Talos Loan, payments of$35,520 , including principal and interest, are due beginningAugust 12, 2022 , and each month thereafter with the final payment due onApril 12, 2023 . As additional consideration for the Second MastHill Loan ), the Company issued the "Lender" a 5-year warrant to purchase 740,000 shares of Company common stock at a fixed price of$0.16 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary "piggy-back" registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of$74,000 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note. Debt issuance costs of$45,920 were incurred and are being amortized over a twelve-month period endingApril 2023 . OnMay 27, 2022 , the Company entered into a financing arrangement (the "Third MastHill Loan ") with Mast Hill. In exchange for a promissory note, Mast Hill agreed to lend the Company$355,000 , which bears interest at a rate of eight percent (8%) per annum, less$35,500 original issue discount. Under the terms of the Third MastHill Loan , payments of$42,600 , including principal and interest, are due beginningSeptember 27, 2022 , and each month thereafter with the final payment due onMay 26, 2023 . As additional consideration for the Second MastHill Loan ), the Company issued the "Lender" a 5-year warrant to purchase 887,500 shares of Company common stock at a fixed price of$0.16 per share, subject to price adjustments for certain actions, including dilutive issuances. The Company has granted the Lender customary "piggy-back" registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan. The Company evaluated the terms of the warrant under ASC 480 and ASC 815 and determined that they were to be treated as equity instruments. The value of the warrant (calculated using the Black-Scholes option pricing model to determine the estimated fair value of the warrant) of approximately$113,400 will be amortized to interest expense over the life of the Promissory Note and is recorded as a discount to the promissory note. Debt issuance costs of$54,975 were incurred and are being amortized over a twelve-month period endingMay 2023 . OnJune 30, 2022 , the Company andDonald W. Reeve , a director of the Company, entered into two note modification agreements with respect to the Promissory Note originally datedDecember 30, 2020 and the Promissory Note originally datedMay 25, 2021 . There were two payments of principal of$100,000 each dueJune 1, 2022 . The Modification agreements each extended the previously amended due dates fromJune 1, 2022 toSeptember 1, 2022 . Note 8. Earnings per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding during the periods presented. Diluted earnings per share is
based on the weighted average number of common shares outstanding, as well as
dilutive potential common shares which, in the Company's case, comprise shares
issuable under convertible notes payable and stock options. The treasury stock
method is used to calculate dilutive shares, which reduces the gross number of
dilutive shares by the number of shares purchasable from the proceeds of the
options and warrants assumed to be exercised. In a loss period, the calculation
for basic and diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.
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The following table sets forth the computation of basic and diluted net loss per share for the three months ended:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Numerator for basic and
diluted net loss per
share:
Net loss $ (833,200 ) $ (416,503 ) $ (1,701,434 ) $ (568,730 )
Basic and diluted net
loss per share $ (0.03 ) $ (0.01 ) $ (0.05 ) $ (0.02 )
Weighted average common
shares outstanding
Basic and diluted shares 33,296,434 29,238,323 33,000,304 29,150,590
Anti-dilutive shares
excluded from net loss
per share calculation 23,951,234 23,148,234 23,951,234 23,148,234
Certain common shares issuable under stock options and convertible notes payable
have been omitted from the diluted net loss per share calculation because their
inclusion is considered anti-dilutive because the exercise prices were greater
than the average market price of the common shares or their inclusion wouldhave been anti-dilutive.
Note 9. Stock Option Plans and Agreements
The Company has approved stock option plans and agreements covering up to an aggregate of 16,304,500 shares of common stock. Such options may be designated at the time of grant as either incentive stock options or nonqualified stock options. Stock based compensation consists of charges for stock option awards to employees, directors and consultants.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. 95,000 options were granted for the six
months ended
Risk-free interest rate 1.26%-3.35 % Expected dividend yield 0 % Expected stock price volatility 110%-130 % Expected life of options (years) 2.75 The Company recorded expense for options issued to employees and independent service providers of$51,708 and$52,631 for the three and six months endedJune 30, 2022 , respectively ($81,920 and$110,168 for the three and six months endedJune 30, 2021 ).
360,000 options vested during the six months ended
The Company issued 750,000 performance-based stock options during 2021 at$0.245 per share to an executive of the Company. Certain revenue targets must be made to grant the options in three tranches of 250,000 shares each. In the three months endedJune 30, 2022 , the Company amended the targets for these options and recognized one third of the compensation in the amount of$45,275 . The remaining unrecognized compensation expense for these options was approximately$90,550 atJune 30, 2022 . A summary of all stock option activity for the six months endedJune 30, 2022 follows: Number of Weighted Remaining Aggregate Options Average Contractual Intrinsic Outstanding Exercise Price Term Value Outstanding at December 31, 2021 10,755,000 $ .08 Granted 95,000 .13 Expired (347,500 ) .04 Outstanding at June 30, 2.9 years 2022 10,502,500 $ .08$ 870,900 AtJune 30, 2022 - vested or expected to vest 9,992,500 $ .07 2.9 years$ 870,900 Exercisable 9,992,500 $ .07 2.9 years$ 870,900 Note 10. Warrants
On
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Note 11. Lease
Beginning on August 1, 2016 , the Company leased its headquarters facility under
an operating lease agreement that was scheduled to expire on June 30, 2022 . Rent
expense was $80,000 annually during the first year of the lease term and
increased by 1.5% annually thereafter. The lease was terminated one month
early, and a new lease agreement, at the existing headquarters location,
commenced on June 1, 2022 . The term of the new lease agreement is 84 months.
The first year's rent will be $118,487 and will increase by 2% annually
thereafter.
Supplemental balance sheet information related to the leases on
June 30, December 31,
Description Classification 2022 2021
Right of Use Asset - Lease, net Other assets
(non-current) $ 684,552 $ 41,490
Operating Lease Liability - Short Term Accrued
liabilities 73,030 42,347
Operating Lease Liability - Long Term Other long-term
liabilities 612,136 0
Total Operating Lease Liability $ 685,166 $42,347
Discount Rate - Operating Lease 7.0 %
6.0 %
Note 12. Related Party Accrued Interest Payable
Included in accrued interest payable is amounts due to related parties of
approximately
Note 13. Subsequent Events
OnJuly 29, 2022 , the "Company andAndrew Hoyen ("Lender"), a director and executive officer of the Company, entered into a note modification agreement (the "Modification Agreement") with respect to the Line of Credit Note and Agreement in the original principal sum of up to$100,000 ,datedJuly 18, 2017 , issued by the Company to the Lender (the "Hoyen Note"). The Note and the Modification Agreement was approved by the disinterested members of the Company's Board of Directors. The Modification Agreement extends the due date of the Note toJuly 31, 2023 , on which date the current outstanding principal balance of$90,000 and accrued and unpaid interest will be due. Pursuant to the Modification Agreement, the Company agreed to repay to Lender$16,000 of the accrued interest on the Hoyen Note and off-set such repayment against the exercise onJuly 29, 2022 by Lender of certain options to acquire 400,000 shares of the Company's common stock. The remaining accrued and unpaid interest on the Hoyen Note was$10,930 as ofJuly 29, 2022 . Except as set forth in the Modification Agreement, the terms of the Hoyen Note remain the same OnAugust 10, 2022 , the Company received funding from a loan agreement withStripe andCeltic Bank . The loan amount was$139,400 plus a fixed fee of$11,152 . The repayment amount of$150,522 will be repaid at a repayment rate of 25% of the Company's receivables automatically withheld by Stripe. There is no financing percentage. The repayment start date isAugust 15, 2022 , with a minimum payment amount of$16,728 over every 60-day period. The final repayment date isFebruary 6, 2024 , if total repayment amount is not paid as of that
date.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements, the accuracy of which involves risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons including, but not limited to, those discussed under the heading "Forward Looking Statements" above and elsewhere in this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report.
Overview Impact of COVID-19
The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption. It has already disrupted global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19 and its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 has continued to disrupt business activity globally. New strains and variants of the coronavirus continue to spread around the world. The ongoing rollout of vaccines around the globe is encouraging, but their long-term impact on the political environment, business environment, and the Company is still uncertain. Please see Part II Item 1A of this Report and our other filings with theSEC for additional information regarding certain risks associated with the COVID-19 pandemic. During the first six months of 2022, our managed support services and software license revenues were minimally affected by the impact of the COVID-19 pandemic on our customers' operational priorities. However, the many governmental restrictions that were in place in 2020 and 2021, which limited in-person and group meetings, constrained our ability to interact with new clients in the area of cybersecurity projects, and this has had a material impact on our 2022 cybersecurity project revenue. We are continuing to adapt our operations to meet the challenges of this uncertain and rapidly evolving situation, including remote working arrangements for our employees, limiting non-essential business travel, and utilizing virtual sales and marketing events. Our sales and marketing expenses increased during the first six months of 2022. We expect these expenses to continue to grow, but we expect these expenses will be lower compared to prior year periods pre-COVID-19 pandemic on travel and in-person marketing events. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition. 14 Table of Contents Our Business Headquartered inPittsford, New York , IGI is a developer of cybersecurity software and related cybersecurity consulting, advisory, and managed information security services. We principally sell our software and services through indirect channels such as Managed Service Providers ("MSPs"), Managed Security Services Providers ("MSSPs"), agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also
sell
directly to end customers.
We believe our ability to succeed depends on how successful we are in
differentiating ourselves in the cybersecurity market at a time when competition
and consolidation in these markets are on the rise. Our strategy to
differentiate our cybersecurity software and services from our competitors is to
combine customized software and professional services, and grow our business by
designing, developing, and marketing cybersecurity software-as-a-service
("SaaS") solutions that can be deployed in myriad environments. Software and
services are initially developed in our wholly-owned subsidiary, IGI CyberLabs
("CyberLabs"), to fill technology gaps we identify, and then we bring these
software and services to market through our existing channel partner and
customer relationships. Our software and services are designed to simplify and
manage the security needs of our customers and channel partners in a variety of
environments. We focus on the small and medium-sized enterprises market. We
support our channel partners by providing recurring-revenue business models for
both services and through our cybersecurity SaaS solutions. Products may be sold
as standalone solutions or integrated into existing environments to further
automate the management of cybersecurity and related IT functions.
As part of these software and service offerings we:
· Internally developed and brought to market Nodeware®, a patented SaaS
solution that automates network asset identification, and cybersecurity
vulnerability management and monitoring. Nodeware simply and affordably
enhances security by proactively identifying, monitoring, and addressing
potential cybersecurity vulnerabilities on networks, which creates enhanced
security to safeguard against hackers and ransomware. Nodeware provides an
economical solution for small and medium-sized enterprises as compared tomore costly solutions focused on enterprise-sized customers and is designed
to accommodate the varying network needs of our end customers' organizations
and networks. Nodeware's flexibility allows it to span from a single network
to several subnetworks, as well as accommodating larger, more complex
organizations with more advanced network needs. Nodeware is sold as a SaaS
solution and continuously releases enhancements, updates, and upgrades to
stay current with security needs and changes in the market. Nodeware is also
designed to be integrated into other technology platforms. We primarily sell
Nodeware through our channel partners, with a small percentage being sold
directly to end customers. We intend to continue to develop our intellectual
property to serve as the core to our proprietary software and services. In
addition to our proprietary software and services we also act as a master
distributor for other cybersecurity software, principally Webroot a
cloud-based endpoint security platform solution, where we market to and
provide support for over 225 small channel partners across
· Provide cybersecurity consulting and advisory services to channel partners
and direct customers across different markets, including banking,
manufacturing, supply chain, and technology. As part of our consulting and
advisory services, we are contracted to support existing information
technology and executive teams at both the customer and channel partner level
and provide security leadership and guidance. We validate overall corporate
and infrastructure cybersecurity with the goal of maintaining and securing
the integrity of confidential client information, preserving the continuity
of services, and minimizing potential data damage from threats and incidents;
and
· Provide managed support services related to information security, principally
as a subcontractor for Peraton, a large information technology provider and
analysis, and technical and security support, commonly referred to as Level 2
support, for mission critical technical infrastructure from the server level
to the end user interface application in a critical government environment.
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Business Strategy
We have a threefold business strategy composed of:
· providing differentiated cybersecurity software and services to small to
mid-sized enterprises who lack the internal resources to focus on
cybersecurity related matters by combining customized software and
professional services;
· designing, developing, and marketing cybersecurity SaaS solutions,
including our Nodeware solution; and
· identifying other cybersecurity companies to acquire as part of a
strategic roll-up strategy.
We believe our ability to succeed depends on how successful we are in
differentiating ourselves in the market at a time when competition and
consolidation in these markets is on the rise. Our software and services are
designed to simplify the security needs of our customers and channel partners,
with a focus on the small to mid-sized enterprises, and we believe our ability
to integrate our product and service offerings differentiates them from our
competitors. In addition, we support our channel partners by providing
recurring-revenue business models for both services and our cybersecurity SaaS
solutions.
Cybersecurity is a constantly evolving field, so we devote significant efforts
in developing proprietary software and services to meet our customer and channel
partners' evolving needs. These efforts have resulted in the development of our
patented and patent-pending Nodeware solution. We expect to continue to make
significant investments in developing other intellectual property to serve as
the core to other proprietary software and services.
Historically, a significant portion of our revenues has been derived through our
managed support services, however, we believe our cybersecurity SaaS solutions,
including Nodeware, present an opportunity for significant growth. We believe
that Nodeware's ability to be deployed in an underserved market segment, across
a wide variety of networks and the ability to integrate it into existing and new
cybersecurity software and services, will allow us to significantly grow this
segment of our business. Similarly, we believe Nodeware's SaaS recurring revenue
business model and its flexibility as a standalone or integrated solution makes
it an attractive part of our channel partners' portfolio of products.
Accordingly, in 2021 we made significant investments in Nodeware sales and
marketing to grow our team of cybersecurity sales and technical consultants. As
a result, we believe we are seeing the pipeline growth expected from focused
efforts, which we anticipate will convert to revenue growth in 2022 and beyond.
We believe the market for cybersecurity services for small and medium-sized
enterprises is fragmented and does not currently meet the needs of this customer
base. The market is fragmented and is beginning to consolidate, which is why we
are seeking to strategically acquire other cybersecurity technology and services
companies.
The following sections define specific components of our business strategy.
Nodeware® Nodeware is a patented SaaS solution that automates network asset identification, and cybersecurity vulnerability management and monitoring. Nodeware simply and affordably enhances security by proactively identifying, monitoring, and addressing potential cybersecurity vulnerabilities on networks, which creates enhanced security to safeguard against hackers and ransomware. Nodeware's flexibility allows it to span from a single network to several subnetworks, as well as accommodating larger, more complex organizations with more advanced network needs. Nodeware assesses vulnerabilities in a computer network using proprietary scanning technology to capture a comprehensive view of the security exposure of a network infrastructure. Users receive alerts and view network information through a proprietary, web enabled dashboard. Continuous and automated internal scanning and external on demand scanning are components of this offering. As described below, Nodeware has one patent and one patent pending. We intend to develop other intellectual property that serve as the core to other proprietary software and services to market through a channel of domestic and international partners and distributors. Nodeware provides an economical solution for small and medium-sized enterprises as compared to costly solutions focused on enterprise sized customers, and is designed to accommodate the varying network needs of our end customers' organizations and networks. Nodeware is sold as a SaaS solution and continuously releases enhancements, updates, and upgrades to stay current with security needs and changes in the market. Nodeware is also designed to be integrated into other technology platforms. We primarily sell Nodeware through our channel partners, with a small percentage being sold directly to end customers. Nodeware creates an opportunity for our channel partners to sell and use a product that provides greater visibility into the network security of an end customer. Since 2018, we have continued to expand our portfolio of channel partners, which now includes Telarus, TD SYNNEX, Staples, and a growing list of MSPs, MSSPs, agents and distributors and government contractors. InJune 2021 , we createdIGI CyberLabs, LLC , a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs's overarching mission is to drive sales of Nodeware, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements across other current future subsidiaries as IGI's strategic roll up of cybersecurity companies comes to fruition. This also enhances our ability to bring new cloud and SaaS cybersecurity related solutions to market through our growing channel partner relationships. Cybersecurity Services
In addition to Nodeware, we provide cybersecurity consulting services that include incident response, security awareness training, cybersecurity risk management, IT governance and compliance, security assessment services, (CISOTaaS ™) and PenLogic™ penetration testing services offerings to channel partners and direct customers across different markets, including banking, manufacturing, supply chain, and technology, inNorth America . Our cybersecurity consulting projects leverage different technology platforms and processes, such as Nodeware, to create documentation and processes that a customer can use to continually improve overall IT governance and corporate security. We validate overall network and infrastructure security with the goal of maintaining the integrity of confidential client information, preserving the continuity of services, and minimizing potential data damage from cybersecurity threats and incidents. We continue to enhance our cybersecurity services based on feedback from customers and changes in the market.Managed Support Services We also provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider andU.S. government contractor, where we assume the responsibility for providing a defined set of cybersecurity services. These services typically include in-depth troubleshooting, backend analysis, and technical and security support, commonly referred to as Level 2 support, for mission critical technical infrastructure from the server level to the end user interface application in a critical government environment. Intellectual Property
We believe that our intellectual property is an asset that will contribute to the growth and profitability of our business. We rely on a combination of patented, patent-pending and confidentiality procedures, trademarks and contractual provisions to establish and protect our intellectual property rights inthe United States and abroad. We intend to rely on both registration and common law protection for our trademarks. 16 Table of Contents
InMay 2016 , we filed a provisional patent application for our proprietary product, Nodeware, and launched it commercially inNovember 2016 . InMay 2017 , we filed a utility patent application for Nodeware:U.S. Patent No. 10,999,307, was issued onMay 4, 2021 , for NETWORK ASSESSMENT SYSTEMS AND METHODS THEREOFU.S. Patent Application Serial No. 15/600,297, filedMay 19, 2017 , claiming priority ofU.S. Provisional Patent Application Serial No. 62/338,904, filedMay 19, 2016 . The patent will remain in effect for four years from the date of issue and may be extended for up to twenty years from the filing date. Therefore, the expiration date of the subject patent, assuming all milestones to extend are met, isJuly 19, 2037 . InDecember 2019 , we filed a second provisional patent application and inDecember 2020 we filed the subsequent action on the patent on Nodeware. In 2020 and 2021, we created updates and improvements to the platform in response to COVID-19 needs and impact such as a downloadable Windows executable version along with Windows, Mac, and Linux Agents that could be downloaded to a remote PC or server. A number of enhancements related to data management, threat intelligence, and user functionality were part of these updates.
The efforts we have taken to protect our intellectual property may not be sufficient or effective. As a result of this uncertainty and overall significance to the financial statements, these costs have been expensed.
TheU.S. patent system permits the filing of provisional and non-provisional patent applications. A non-provisional patent application is examined by the United States Patent and Trademark Office and can mature into a patent once that office determines that the claimed invention meets the standards for patentability. Our current patent and trademark portfolio consists of a patent for the Nodeware solution and process for scanning for vulnerabilities and a pending patent covering the methodologies associated with identifying and cataloging the assets on or across any physical or cloud network, together with a registered trademark for the "Nodeware" name and other trademarks and tradenames associated with our company and products. We intend to continue to work to enhance our intellectual property position on the Nodeware solution and in other appropriate cybersecurity technology we generate. Research and Development Our research and development efforts are focused on ensuring our software and services continually adapt to ever-evolving cybersecurity threats, developing new and improved functionality to meet our customers' needs, and to enable robust and efficient integration with other industry solutions. Our research and development team is responsible for the design, development, testing and quality of our software, including Nodeware, and works to ensure that our software is available, reliable and stable. We believe the timely development of new features and the enhancement of our existing solution(s) that address continuously evolving cybersecurity risks is essential to maintaining our competitive position. Our research and development team works closely with our channel partners, customers, and internal teams to collect user feedback to enhance our development process to continually incorporate suggestions and feedback. We also believe our research and development teams' focus on developing new products will help us expand our business and improve our market position. We invest substantial resources in research and development to ensure that the functionalities of Nodeware can be robustly and efficiently integrated with other industry solutions because we believe this is key to our ability to expand the presence of Nodeware and our other software and services in the cybersecurity market. We utilize an agile development process to deliver numerous releases, fixes and feature updates on a regular basis and capitalize qualifying costs of developing larger scale projects. Our research and development team is primarily based inPittsford, New York , and we maintain additional research and development capabilities in certain other locations who supplement our core team. InJune 2021 , we createdIGI CyberLabs, LLC , a wholly owned subsidiary, to support our Nodeware solution and continued software development. CyberLabs's overarching mission is to drive sales of our Nodeware solution, which we believe will drive monthly and annualized recurring revenue. CyberLabs will also drive product and platform enhancements in Nodeware and new cloud and SaaS cybersecurity related products that will be brought to market through our growing direct customer and channel partner relationships. We believe a continued focus on intellectual property development creates differentiation in the market for cybersecurity.
Costs incurred prior to reaching technological feasibility are expensed as incurred, and subsequently they are capitalized until product launch.
Results of Operations
Comparison of the Three and Six Months Ended
The following table compares our statements of operations data for the three and six months endedJune 30, 2022 and 2021. The trends suggested by this table are not indicative of future operating results. Three Months Ended June 30, 2022 vs 2021 As a % of As a % of Amount of % Increase 2022 Sales 2021 Sales Change (Decrease) Sales$ 1,696,492 100.0 %$ 1,797,504 100.0 %$ (101,012 ) (5.6 )% Cost of sales 1,059,639 62.5 1,109,223 61.7 (49,584 ) (4.5 ) Gross profit 636,853 37.5 688,281 38.3 % (51,428 ) (7.5 ) General and administrative 613,317 36.2 541,711 30.1 71,606 13.2 Selling 612,957 36.1 507,042 28.2 105,915 20.9 Total cost and expenses 1,226,274 72.3 1,048,753 58.3 177,521 16.9
Operating loss (589,421 ) (34.7 ) (360,472 ) (20.1 ) (228,949 )
(63.5 )
Interest
expense (net) (243,779 ) (14.4 ) (56,031 ) (3.1 ) (187,748 ) (335.1 )
Net loss
Net loss per share - basic and diluted$ (0.03 ) $ (0.01 )
$ (0.02 ) Six Months Ended June 30, 2022 vs 2021 As a % of As a % of Amount of % Increase 2022 Sales 2021 Sales Change (Decrease) Sales$ 3,363,562 100.0 %$ 3,621,846 100.0 %$ (258,284 ) (7.1 )% Cost of sales 2,180,879 64.8 2,182,138 60.2 (1,259 ) (0.1 ) Gross profit 1,182,683 35.2 1,439,708 39.8 % (257,025 ) (17.9 ) General and administrative 1,217,300 36.2 1,006,103 27.8 211,197 21.0 Selling 1,260,582 37.5 894,767 24.7 365,815 40.9 Total cost and expenses 2,477,882 73.7 1,900,870 52.5 577,012 30.4 Operating loss (1,295,199 ) (38.5 ) (461,162 ) (12.7 ) (834,037 ) (180.9 ) Interest expense (net) (406,235 ) (12.1 ) (107,568 ) (3.0 ) (298,667 ) (277.7 ) Net loss$ (1,701,434 ) (50.6 )%$ (568,730 ) (15.7 )%$ (1,132,704 ) (199.2 )% 17 Table of Contents Sales
Our managed support service sales increased by 5.5% from$1,057,431 during the three months endedJune 30, 2021 to$1,115,607 during the corresponding period of 2022. For the six month period endedJune 30 , managed support service sales increased 3.6% from$2,128,331 in 2021 to$2,204,614 for the same period in 2022. Managed support service sales comprised approximately 66% of our sales in both the three and six months endedJune 30, 2022 , and approximately 59% for the same two periods in 2021. The increase in our managed support service sales during the three and six months endedJune 30, 2022 was due to additional projects requested by Perspecta, offset by the continued decline of virtualization subcontract projects assigned to us by VMWare due to projects coming to a conclusion in 2021. The decline in virtualization subcontract projects has been a trend occurring since 2015 that we expect to continue for the duration of 2022.
Our cybersecurity projects and software sales, primarily to SMEs, decreased by 15.7% to$580,885 during the three months endedJune 30, 2022 , from$689,073 during the corresponding period of 2021. These same sales decreased by 16.7% to$1,158,948 during the six months endedJune 30, 2022 , from$1,391,515 for the six-month period endedJune 30, 2021 , respectively. The decrease is primarily due to a temporary decline in the number of cybersecurity projects, the mix of recurring versus one-time projects, and the completion of those projects for revenue recognition. This was offset primarily by the growth of 76% in Nodeware revenue for the six-month period endedJune 30, 2022 over 2021. We expect the revenue to grow due to increased projects in the sales pipeline and completion of projects in the coming months. Other IT consulting services sales declined during the three months endedJune 30, 2022 , decreasing by$51,000 from the same period in 2021. These same sales declined during the six months endedJune 30, 2022 by$102,000 from the same period in 2021. The decline in other IT consulting services sales for the three and six months endedJune 30, 2022 was due to the termination of a consulting contract, which occurred during the second quarter of 2021.
Cost of Sales and Gross Profit
Cost of sales principally represents compensation expense for our employees. Cost of sales decreased by 4.5% to$1,059,639 during the three months endedJune 30, 2022 from$1,109,223 during the corresponding period of 2021. The decrease in cost of sales during the three months endedJune 30, 2022 from 2021 was due to a reduction in headcount of marketing and sales personnel. Cost of sales decreased slightly during the six months endedJune 30, 2022 from the same period in 2021, by 0.1%, decreasing from$2,182,138 to$2,180,879 . 18 Table of Contents Our gross profit decreased by$51,428 to$636,853 from the three months endedJune 30, 2021 to 2022. Gross profit decreased by$257,025 to$1,182,683 from the six months endedJune 30, 2021 to 2022. In both periods, the decrease was primarily due to the decrease in sales previously referenced above.
General and Administrative Expenses
General and administrative expenses include corporate overhead such as compensation and benefits for executive, administrative and finance personnel, rent, insurance, professional fees, travel, and office expenses. General and administrative expenses of$613,317 for the three months endedJune 30, 2022 increased 13% from$541,711 for the same quarter of 2021. For the six months endedJune 30, 2022 , general and administrative costs were 21% higher than the same period in 2021, increasing to$1,217,300 from$1,006,103 . These were primarily due to the increases to professional fees for legal, accounting and consulting services of approximately$108,000 , for the comparative three-month periods, and$198,000 for the comparative six month period. Selling Expenses Selling expenses of$612,957 for the three months endedJune 30, 2022 increased 21% from$507,042 for the same quarter of 2021. The increase in selling expenses is due to the hiring of additional salespeople during 2021 to sell our cybersecurity services and software, and investments in consultants and partners to identify and sell more of our services and software. The increase in selling expenses from the hiring of new personnel was approximately$109,000 higher for the three months endedJune 30, 2022 as compared to 2021 and spending on consulting partners was approximately$22,000 higher for the same respective periods. For the six months endedJune 30, 2022 , Selling expenses of$1,260,582 increased 41% from$894,767 for the same period in 2021. This increase is primarily related to the hiring of additional salespeople during 2021 as well as investment in consultants and partners. Operating Income (Loss) For the three months endedJune 30, 2022 and 2021, operating loss was$589,421 and$360,472 , respectively, for an increase in the loss by$228,949 . For the six months endedJune 30, 2022 , the operating loss was$1,295,199 , an increase in the loss by$834,037 from$461,162 in the same period of 2021. The increase in our operating loss from the previous year is principally attributable to the decrease in sales, growth of our sales team and the associated costs, and investment in the growth of our business as well as professional fees incurred for the six months endedJune 30, 2022 as compared to 2021, as discussed above. Interest Expense
Net interest expense of$243,779 for the three months endedJune 30, 2022 , increased 335% from expense of$56,031 for the same quarter of 2021. Net interest expense of$406,235 for the six months endedJune 30, 2022 , increased 278% from expense of$107,571 for the same period of 2021. The increase in interest expense is primarily attributable to the bridge loans taken in the
last three quarters. Net Loss For the three months endedJune 30, 2022 and 2021, net loss was$833,200 and$416,503 , respectively, an increase in the loss by$416,696 . For the six months endedJune 30, 2022 and 2021, net loss was$1,701,434 and$568,730 , respectively. The increase in both comparable periods is attributable primarily to the selling, general and administrative, and interest items discussed above.
Liquidity and Capital Resources
At
During 2022, our primary source of liquidity is cash provided by collections of accounts receivable and our factoring line of credit. We maintain an accounts receivable financing line of credit with an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of$2,000,000 , including a sublimit for one major client of$1,500,000 . This provides us with the cash needed to finance certain of our on-going costs and expenses. AtJune 30, 2022 , based on eligible accounts receivable, we had$1,000 available under this arrangement. We expect sales during 2022 to generate additional accounts receivable eligible for factoring, that will support our operations. We pay fees based on the length of time that the invoice remains unpaid. AtJune 30, 2022 , we had current notes payable of$229,000 to related parties.$100,000 of this debt was extended formJune 1, 2022 and is now due onSeptember 1, 2022 . The remaining$129,000 are in the form of demand notes with an interest rate of 6%. 19 Table of Contents
AtJune 30, 2022 , we had current notes payable of approximately$944,000 to third parties, which includes convertible notes payable of approximately$150,000 . Also included is$12,500 in principal amount of a note payable due onJune 30, 2016 but not paid by then. This note was issued in payment of software we purchased inFebruary 2016 and secured by a security interest in the software. To date, the holder has not taken any action to collect the amount past due on this note or to enforce the security interest in the software. Also included in the current notes payable are three Bridge Loans withMast Hill Fund , L.P, which each bear interest at a rate of 8%. We plan to use the proceeds from the Bridge Loans to substantially enhance our marketing of CyberLab's Nodeware solution, in order to significantly increase its growth. A total of approximately$658,000 was recorded as deferred note costs associated with these transactions. AtJune 30, 2022 , the unamortized balance of the deferred notes costs was approximately$385,000 . See Note 6 of the 2021 Audited Financial Statements for more information regarding the firstBridge Loan . See our Form 8-K fromFebruary 15, 2022 for more information regarding the secondBridge Loan . See our Form 8-K fromMay 31, 2022 for more information regarding the thirdBridge Loan . The gross notes payable to Mast Hill amount atJune 30, 2022 was approximately$971,000 .
Notes payable also includes a bridge loan from
A
total of approximately$129,000 was recorded as deferred note costs associated with the loan. As ofJune 30, 2022 , the unamortized balance of the deferred note cost was approximately$101,000 . See our Form 8-K fromApril 12, 2022 , for more information regarding this loan. The gross note payable to Talos amount atJune 30, 2022 was approximately$296,000 .
We entered into unsecured lines of credit financing agreements (the "LOC
Agreements") with two related parties in previous years. The LOC Agreements
provide for working capital of up to
During the 2021, we issued demand notes to two board members for
AtJune 30, 2022 , we had$765,000 of current maturities of long-term obligations to third parties. This is comprised of various notes including long-term notes to third parties of$265,000 due onJanuary 1, 2018 (plus accrued interest of approximately$234,200 ), and approximately$500,000 due onDecember 31, 2021 which have not been renewed or amended. AtJune 30, 2022 , we had$225,000 of current maturities of long-term obligations to related parties.$100,000 is due onSeptember 1, 2022 .$100,000 is due
onJanuary 1, 2023 .$25,000 is due onJune 30, 2023 . We plan to renegotiate the terms of the various notes payable, seek funds to repay the notes or use a combination of both alternatives. We cannot provide assurance that we will be able to repay current notes payable or obtain extensions of maturity dates for long-term notes payable when they mature or that we will be able to repay or otherwise refinance the notes at their scheduled maturities. We have a note payable agreement for up to$500,000 with a related party. The note has an interest rate of 7.5% and is due onAugust 31, 2026 . The balance was$499,000 atJune 30, 2022 . During the first quarter of 2022, the Company filed an S-1 for a public offering of$15 million of common stock and redeemable warrants, which was expected to be used for the Pratum Acquisition and working capital needs. Following the termination of the Pratum Agreement the Company has been reevaluating its capital needs and structure of the offering. The completion of this offering is not a certainty. Should the offering not proceed or be further delayed, or should it occour in a reduced format, the Company anticipates that it will scale down spending to reduce costs and to increase cash flow while continuing to grow the operations at a slower pace. We are currently revising our S-1 filing for$15 million and intend to refile in the third quarter of 2022. The following table sets forth our cash flow information for the periods presented: Six Months Ended
2022 2021
Net cash used by operating activities$ (636,906 ) $ (12,380 ) Net cash used by investing activities (111,347 ) (129,897 ) Net cash provided by financing activities 650,415
113,930 Net decrease in cash$ (97,838 ) $ (28,347 )
Cash Flows Used by Operating Activities
Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. We bill our clients weekly or monthly after services are performed as well as collect down payments depending on the contract terms. The cash impact of our net loss of$1,701,434 for the six months endedJune 30, 2022 , was offset in part by non-cash expenses and credits of$425,359 . In addition, the cash impact of our net loss was further offset by a decrease in accounts receivable and other assets of$94,288 , a decrease in accrued payroll, deferred revenue and other expenses payable of$4,784 , and an increase in accounts payable of$549,665 resulting in cash used by operating activities of$636,906 . We have increased our marketing of Nodeware to our IT channel partners who resell to their customers. We have made investments in our cyber security team for penetration testing, CISOTaaS and other services. Due to the lengthy lead times typically needed to generate these new sales, we do not expect to realize a return from our sales and marketing personnel for one or more quarters. As a result, we may continue to experience operating income or operating losses from these investments in personnel until sufficient sales are generated. We expect to fund the cost for the new sales personnel from our operating cash flows, incremental borrowings and funds from the planned offering described above,
as
needed.
20
Table of Contents
Cash Flows Used by Investing Activities
In the quarters endedJune 30, 2022 and 2021, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The slight decrease from 2021 was primarily due to less development activities in 2022 that were capitalized. We expect to continue to invest in computer hardware and software to update our technology to support the growth of our business. We do not anticipate our continued investment to be significant.
Cash Flows Provided by Financing Activities
During the six months endedJune 30, 2022 , we received$865,455 from various bridge loans from theMast Hill Fund L.P. andTalos Victory Fund, LLC . This is comprised of gross proceeds of$1,021,000 less debt issuance costs of$155,545 . We also paid principal of$215,040 of principal on theMast Hill Fund L.P. bridge loan established inNovember 2021 . Credit Resources We maintain an accounts receivable financing line of credit from an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of$2,000,000 , including a sublimit for one major client of$1,500,000 . This provides us with the cash needed to finance certain costs and expenses. AtJune 30, 2022 , we had financing availability, based on eligible accounts receivable, of approximately$1,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately$16,000 of available credit under various lines of credit as ofJune 30, 2022 . DuringMay 2019 , we originated a line of credit note payable for a$500,000 with a related party and borrowed$499,000 and have$1,000 available to borrow for working capital. This agreement matures inAugust 2026 . During 2017, we originated two lines of credit with related parties totaling$175,000 . AtJune 30, 2021 , we had$15,000 available under these financing agreements. The maturity date of the$75,000 line of credit isJanuary 2023 , whereas the maturity date of the$100,000 line of credit has been extended
toJuly 2023 . We believe the capital resources available under our factoring line of credit, cash from additional related party loans and cash generated by improving the results of our operations will be sufficient to fund our ongoing operations for at least the next 12 months. The funds from the equity raise will allow us to support and accelerate the internal growth of our operations and offer additional opportunities if they arise. We anticipate financing growth from acquisitions of other businesses, if any, and our longer-term internal growth through one or more of the following sources: issuance of equity; cash from collections of accounts receivable; additional borrowing from related and third parties; use of our existing accounts receivable credit facility; or a refinancing of our accounts receivable credit facility.
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