Note 2. Management Plans - Capital Resources
The Company reported net losses of $2,788,725 and $838,536 for the nine months ended September 30, 2022 and 2021, respectively, and stockholders’ deficiencies of $6,367,284 and $4,097,889 at September 30, 2022 and December 31, 2021, respectively. The Company had a working capital deficit of approximately $5.46 million at September 30, 2022. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern within one year of issuance of the financial statements.
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.
At September 30, 2022, the Company is in default on principal and interest payments on the Mast Hill Fund, L.P. and Talos Victory Fund, LLC, financing arrangements. The noteholders have been notified of the failure to pay and have taken no action against the Company at this time.
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, a portion of the net proceeds of which was expected to be used for the Pratum Acquisition. Following the termination of the Pratum Agreement, the Company determined to proceed with the offering.
In October 2022, the Company filed an amended S-1 for a public offering of $15.3 million of common stock and redeemable warrants, which was expected to be used for working capital needs including software development and repayment of debt. The completion of this offering did not occur. The Company is reevaluating its capital needs and anticipates that it will continue to 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 at September 30, 2022 as well as cash available from additional funding from the public and private markets including related party loans, if needed, provide sources to fund its ongoing operations and to support the internal growth of the Company. The Company is evaluating and is in process of extending 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 its remaining notes payable based on its cash flow. Therefore, unless the Company is successful with some of these alternatives, the substantial doubt about our ability to continue as a going concern will not be alleviated.
Note 3. Summary of Significant Accounting Policies
There are several accounting policies that the Company believes are significant to the presentation of its financial statements. These policies require management to make complex or subjective judgments about matters that are inherently uncertain. Note 3 to the Company’s audited financial statements for the year ended December 31, 2021 presents a summary of significant accounting policies as included in the Company’s Annual Report on Form 10-K as filed with the SEC.
Reclassifications – 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 at September 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 September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Managed support services | | $ | 1,138,418 | | | $ | 1,114,851 | | | $ | 3,343,032 | | | $ | 3,243,183 | |
| Cybersecurity projects and software | | | 573,794 | | | | 704,889 | | | | 1,732,742 | | | | 2,096,403 | |
| Other IT consulting services | | | 0 | | | | 17,000 | | | | 0 | | | | 119,000 | |
| Total sales | | $ | 1,712,212 | | | $ | 1,836,740 | | | $ | 5,075,774 | | | $ | 5,458,586 | |
Managed support services
Managed support services consist of revenue primarily from our subcontracts with Peraton (which purchased Perspecta in May 2021) for services to its end clients, principally a major establishment of the U.S. Government for which we manage one of the nation’s largest physical and virtual Microsoft Windows environments.
We generate revenue primarily from these subcontracts through fixed price service and support agreements. Revenues are earned and billed weekly and are generally paid within 45 days. The revenues are recognized at time of service.
Cybersecurity projects and software
Cybersecurity projects and software revenue includes the selling of licenses of Nodeware® and third-party software, principally Webroot™ as well as performing cybersecurity assessments, 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.
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 nine months ended September 30, 2022, sales to one client, including sales under subcontracts for services to several entities, accounted for 66.5% and 65.9%, respectively, of total sales (60.7% and 59.0%, respectively for the three and nine months ended September 30, 2021) and 11.0% of accounts receivable at September 30, 2022 (15.6% at December 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 9.85% at September 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 nine months ended September 30, 2022, the Company sold approximately $3,098,000 ($2,471,000 – for the nine months ended September 30, 2021) of its accounts receivable to the Purchaser. As of September 30, 2022, approximately $228,000 ($148,000 - December 31, 2021) of these receivables remained outstanding. Additionally, as of September 30, 2022, the Company had $0 available under the financing line with the Purchaser ($66,000 at December 31, 2021). After deducting estimated fees, allowance for bad debts and advances from the Purchaser, the net receivable from the Purchaser amounted to approximately $23,000 at September 30, 2022 ($15,000 at December 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 $38,128 for the nine months ended September 30, 2022 ($24,247 – for the nine months ended September 30, 2021). These financing line fees are classified on the statements of operations as interest expense.
Note 5. Capitalization of Software for Resale
As of September 30, 2022, there were $844,410 of costs capitalized ($678,973 as of December 31, 2021) and $421,528 of accumulated amortization ($261,323 as of December 31, 2021). During the three and nine months ended September 30, 2022, there was $53,402 and $160,205 respectively, of amortization expense recorded ($42,291 and $117,085 respectively, for the three and nine months ended September 30, 2021). Costs incurred prior to reaching technological feasibility are expensed as incurred. During the three and nine months ended September 30, 2022, there was approximately $55,100 and $165,400, respectively, of labor amounts capitalized related to these development costs ($59,200 and $176,200, respectively, for the three and nine months ended September 30, 2021). During the three and nine months ended September 30, 2022, there was approximately $13,405 and $29,521, respectively, of labor amounts expensed related to these development costs ($43,800 and $131,500, respectively, for the three and nine months ended September 30, 2021).
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 ended September 30, 2022 and 2021, that was included in the deferred revenue balances at the beginning of the respective periods, was approximately $201,600 and $233,400, respectively. Revenue recognized during the nine months ended September 30, 2022 and 2021 that was included in the deferred revenue balances at the beginning of the respective periods was approximately $331,500 and $323,800, 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 September 30, 2022, total remaining non-cancelable performance obligations under the Company’s contracts with customers was approximately $1,068,000. The Company expects to recognize $808,500 of this revenue over the next 12 months.
Note 7. Debt Obligations
On November 3, 2021, the Company entered into a financing arrangement (the “First Mast Hill Loan”) with Mast Hill Fund, L.P. (“Mast Hill”), a Delaware limited partnership. In exchange for a promissory note, Mast Hill agreed to lend the Company $448,000, which bears interest at a rate of eight percent (8%) per annum, less $44,800 original issue discount. Under the terms of the First Mast Hill Loan, payments of $53,760, including principal and interest, came due on February 3, 2022, and continue for each month thereafter with the final payment due on November 3, 2022. Debt issuance cost of $69,960 were incurred and are being amortized over a twelve-month period ending October 2022. At September 30, 2022, the Company paid the first three payments per the terms of the First Mast Hill Loan. 7.50 per share. At September 30, 2022, the principal and accrued interest amount was approximately $302,000.
During the nine months ended September 30, 2022, the Company entered into a financing arrangement (the “Second Mast Hill Loan”) with Mast Hill Fund. 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 Mast Hill Loan, payments of $44,400, including principal and interest, came due on June 15, 2022, and continue for each month thereafter with the final payment due on February 15, 2023.Debt issuance cost of $54,650 were incurred and are being amortized over a twelve-month period ending February 2023. At September 30, 2022, the Company is in default on principal and interest payments. Mast Hill has been notified of the failure to pay and has taken no action against the Company at this time. The principal or interest on this loan which is not paid when due shall bear interest at the rate 12% per annum. Per the Second Mast Hill Loan, upon the occurrence of default, this note shall become immediately due and payable, and the Company shall pay to Mast Hill, in full satisfaction of its obligations hereunder, an amount equal to the Principal Amount then outstanding plus accrued interest (including any Default Interest) through the date of full repayment multiplied by 115% or accept payment part in common stock and part in cash. The default provisions in the Second Mast Hill Loan allows for the conversion of all or any portion of the then outstanding and unpaid principal and accrued interest into fully paid and non-assessable shares of Common Stock at $7.50 per share. At September 30, 2022, the principal and accrued interest amount was approximately $450,000.
The Company also entered into a financing arrangement (the “Talos Loan”) with Talos Victory Fund, LLC (“Talos”), a Delaware 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, came due on August 12, 2022, and continue for each month thereafter with the final payment due on April 12, 2023. Debt issuance cost of $45,920 were incurred and are being amortized over a twelve-month period ending April 2023. At September 30, 2022, the Company is in default on principal and interest payments. Talos has been notified of the failure to pay and has taken no action against the Company at this time. The principal or interest on this loan which is not paid when due shall bear interest at the rate 12% per annum. Per the Talos Loan, upon the occurrence of default, this note shall become immediately due and payable, and the Company shall pay to Talos, in full satisfaction of its obligations hereunder, an amount equal to the Principal Amount then outstanding plus accrued interest (including any Default Interest) through the date of full repayment multiplied by 115% or accept payment part in common stock and part in cash. The default provisions in the Talos Loan allows for the conversion of all or any portion of the then outstanding and unpaid principal and accrued interest into fully paid and non-assessable shares of Common Stock at $7.50 per share. At September 30, 2022, the principal and accrued interest amount was approximately $354,000.
The Company also entered into a financing arrangement (the “Third Mast Hill 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 Mast Hill Loan, payments of $42,600, including principal and interest, came due on September 27, 2022, and continue for each month thereafter with the final payment due on May 26, 2023. Debt issuance costs of $54,975 were incurred and are being amortized over a twelve-month period ending May 2023. At September 30, 2022, the Company is in default on the principal and interest payment. Mast Hill has been notified of the failure to pay and has taken no action against the Company at this time. The principal or interest on this loan which is not paid when due shall bear interest at the rate 12% per annum. Per the Third Mast Hill Loan, upon the occurrence of default, this note shall become immediately due and payable, and the Company shall pay to Mast Hill, in full satisfaction of its obligations hereunder, an amount equal to the Principal Amount then outstanding plus accrued interest (including any Default Interest) through the date of full repayment multiplied by 115% or accept payment part in common stock and part in cash. The default provisions in the First Mast Hill Loan allows for the conversion of all or any portion of the then outstanding and unpaid principal and accrued interest into fully paid and non-assessable shares of Common Stock at $7.50 per share. At September 30, 2022, the principal and accrued interest amount was approximately $419,000.
On August 8, 2022, Company entered into a financing arrangement (the “Celtic Bank Loan Agreement”) with Celtic Bank, a Utah corporation. Pursuant to the Celtic Bank Loan Agreement, Celtic Bank agreed to lend the Company $139,400.00 with a one-time fixed loan fee of $11,152 for a total obligation of $150,552. Under the terms of the agreement, payments became due on August 15, 2022, and consisted of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher. As of September 30, 2022, the outstanding balance was $124,267. Subsequent payments shall also consist of 25% of the Company’s receivables processed through Stripe, Inc.’s payment processing platform and then due and owing to the Company or $16,728 over a sixty day period, whichever is higher, with the final payment due on February 6, 2024. The loan is subject to customary events of default. No material relationship exists between the Company or its affiliates and Lender, other than in respect to the processing of credit card payments through Stripe, Inc.’s payment processing platform, and the Celtic Bank Loan Agreement.
On September 6, 2022, the Company and Donald W. Reeve, a director of the Company, entered into two note modification agreements with respect to the Promissory Note originally dated December 30, 2020 and the Promissory Note originally dated May 25, 2021. There were two payments of principal of $100,000 each due September 1, 2022. The Modification agreements each extended the previously amended due dates from September 1, 2022 to January 1, 2023.
On July 29, 2022, the “Company and Andrew Hoyen (“Lender”), a director and executive officer of the Company, entered into a note modification agreement (the “Modification”) with respect to the Line of Credit Note and Agreement in the original principal sum of up to $100,000.00, dated July 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 to July 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 on July 29, 2022 by Lender of certain options to acquire 5,334 shares of the Company’s common stock. The remaining accrued and unpaid interest on the Hoyen Note was $11,862 as of September 30, 2022. Except as set forth in the Modification Agreement, the terms of the Hoyen Note remain the same.
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.
The following table sets forth the computation of basic and diluted net loss per share for the three and nine months ended:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Numerator for basic and diluted net loss per share: | | | | | | | | | | | | |
| Net loss | | $ | (1,087,292 | ) | | $ | (269,806 | ) | | $ | (2,788,725 | ) | | $ | (838,536 | ) |
| Basic and diluted net loss per share | | $ | (2.41 | ) | | $ | (0.67 | ) | | $ | (6.28 | ) | | $ | (2.14 | ) |
| | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | | | | | | | | | | | | | | |
| Basic and diluted shares | | | 451,345 | | | | 399,829 | | | | 443,901 | | | | 392,398 | |
| | | | | | | | | | | | | | | | |
| Anti-dilutive shares excluded from net loss per share calculation | | | 311,977 | | | | 302,717 | | | | 311,977 | | | | 302,717 | |
Certain common shares issuable under stock options and convertible notes payable have been omitted from the diluted net loss per share calculation because their inclusion is considered anti-dilutive because the exercise prices were greater than the average market price of the common shares or their inclusion would have been anti-dilutive.
Note 9. Stock Option Plans and Agreements
The Company has approved stock option plans and agreements covering up to an aggregate of 217,260 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. 1,403 options were granted for the nine months ended September 30, 2022. 23,274 options were granted for the nine months ended September 30, 2021. The following assumptions were used for the nine months ended September 30, 2022.
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 $91,153 and $143,784 for the three and nine months ended September 30, 2022, respectively ($7,296 and $117,464 for the three and nine months ended September 30, 2021).
11,605 options vested during the nine months ended September 30, 2022.
The Company issued 10,000 performance-based stock options during 2021 at $18.375 per share to an executive of the Company. Certain revenue targets must be made to grant the options in three tranches of 3,334 shares each. In the three months ended June 30, 2022, the Company amended the targets for these options and recognized one third of the compensation in the amount of $45,275. In the three months ended September 30, 2022, the remaining compensation expense for these options in the amount of $90,550 was recognized due to likelihood of meeting the targets.
A summary of all stock option activity for the nine months ended September 30, 2022 follows:
| | Number of | | | Weighted | | | Remaining | | Aggregate | |
| | Options | | | Average | | | Contractual | | Intrinsic | |
| | Outstanding | | | Exercise Price | | | Term | | Value | |
Outstanding at December 31, 2021 | | | 143,427 | | | $ | 5.85 | | | | | | |
Granted | | | 1,403 | | | | 9.49 | | | | | | |
Exercised | | | (5,668 | ) | | | 3.00 | | | | | | |
Expired | | | (7,106 | ) | | | 4.87 | | | | | | |
| | | | | | | | | | | | | |
Outstanding at September 30, 2022 | | | 132,506 | | | $ | 6.06 | | | 2.9 years | | $ | 289,700 | |
| | | | | | | | | | | | | | |
At September 30, 2022- vested or | | | | | | | | | | | | | | |
expected to vest | | | 132,056 | | | $ | 6.06 | | | 2.9 years | | $ | 289,700 | |
| | | | | | | | | | | | | | |
Exercisable | | | 131,922 | | | $ | 6.06 | | | 2.9 years | | $ | 289,700 | |
Note 10. Warrants
On April 29, 2022, Mast Hill Fund, LP elected to purchase 18,667 warrant shares in a cashless exercise per the terms of the warrant agreement dated November 3, 2021. Based on the calculation per the agreement, 11,470 shares were issued to Mast Hill Fund, LP.
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 September 30, 2022 and December 31, 2021 is as follows:
| Description | | Classification | | September 30,
2022 | | | December 31,
2021 | |
| | | | | | | | |
| Right of Use Asset - Lease, net | | Other assets (non-current) | | $ | 664,980 | | | $ | 41,490 | |
| | | | | | | | | | |
| Operating Lease Liability - Short Term | | Accrued liabilities | | | 74,911 | | | | 42,347 | |
| Operating Lease Liability - Long Term | | Other long-term liabilities | | | 592,521 | | | | 0 | |
| | | | | | | | | | |
| Total Operating Lease Liability | | | | $ | 667,432 | | | $ | 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 $152,200, at September 30, 2022 ($107,000 at December 31, 2021). An additional $111,364 of accrued interest to related parties is included with short and long-term debt and is due to be paid after September 30, 2023.
Note 13. Subsequent Events
On October 17, 2022, the Board of Directors (the “Board”) of Infinite Group, Inc. (the “Company”) approved a 75 to 1 reverse stock split of the Company’s issued and outstanding common stock and treasury stock, effective at 12:01 a.m. Eastern Time on October 19, 2022 (the “Effective Date”) (the “Reverse Stock Split”). On October 18, 2022, the Company filed a Certificate of Amendment to amend the Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware to effect the Reverse Stock Split.
The Reverse Stock Split was previously approved by the Company’s shareholders at the Company’s January 26, 2022 annual meeting of stockholders and does not affect the total number of shares of Common Stock that the Company is authorized to issue.
The Reverse Stock Split was announced by FINRA (the Financial Industry Regulatory Authority) on October 18, 2022, and becomes effective at the commencement of trading on the Effective Date, whereupon the shares of common stock will begin trading on a split adjusted basis.
As a result of the Reverse Stock Split, every seventy-five (75) shares of the issued and outstanding common stock of the Company will be converted into one (1) share of common stock. Any and all fractional shares resulting from the Reverse Split will be rounded up to the nearest whole share.
All share and per share data in the accompanying financial statements have been retroactively restated to reflect the effect of the reverse stock split.
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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 the SEC 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.
Our Business
Headquartered in Pittsford, 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 to more 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 North America; |
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| · | 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; |
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| · | Provide managed support services related to information security, principally as a subcontractor for Peraton, a large information technology provider and U.S. government contractor, by providing 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 |
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.
In June 2021, we created IGI 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 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.
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 in the United States and abroad. We intend to rely on both registration and common law protection for our trademarks.
In May 2016, we filed a provisional patent application for our proprietary product, Nodeware, and launched it commercially in November 2016. In May 2017, we filed a utility patent application for Nodeware: U.S. Patent No. 10,999,307, was issued on May 4, 2021, for NETWORK ASSESSMENT SYSTEMS AND METHODS THEREOF U.S. Patent Application Serial No. 15/600,297, filed May 19, 2017, claiming priority of U.S. Provisional Patent Application Serial No. 62/338,904, filed May 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, is July 19, 2037.
In December 2019, we filed a second provisional patent application and in December 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.
The U.S. patent system permits the filing of provisional and non-provisional patent applications. A non-provisional patent application is examined by the United States Patent and Trademark Office 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.
Technology and Product Development
Our goal is to position our products and solutions to enable vertical and other Application Programming Interface (API) based integration, with other industry solutions. We have a technology and product development strategy aligned with our business strategy. We continue to identify other technical partners in the cybersecurity market to integrate Nodeware into, through either API or full stack integration.
Cybersecurity Services
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, in North 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.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2022 and 2021
The following table compares our statements of operations data for the three and nine months ended September 30, 2022 and 2021. The trends suggested by this table are not indicative of future operating results.
| | Three Months Ended September 30, | |
| | | | | | | | | | | | | | 2022 vs 2021 | | | | |
| | | | | As a % of | | | | | | As a % of | | | Amount of | | | % Increase | |
| | 2022 | | | Sales | | | 2021 | | | Sales | | | Change | | | (Decrease) | |
| | | | | | | | | | | | | | | | | | |
Sales | | $ | 1,712,212 | | | | 100.0 | % | | $ | 1,836,740 | | | | 100.0 | % | | $ | (124,528 | ) | | | (6.8 | )% |
Cost of sales | | | 1,060,872 | | | | 62.0 | | | | 1,136,931 | | | | 61.9 | | | | (76,059 | ) | | | (6.7 | ) |
Gross profit | | | 651,340 | | | | 38.0 | | | | 699,809 | | | | 38.1 | % | | | (48,469 | ) | | | (6.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
General and administrative | | | 529,695 | | | | 30.9 | | | | 528,424 | | | | 28.8 | | | | 1,271 | | | | 0.2 | |
Selling | | | 713,173 | | | | 41.7 | | | | 502,389 | | | | 27.4 | | | | 210,784 | | | | 42.0 | |
Total cost and expenses | | | 1,242,868 | | | | 72.6 | | | | 1,030,813 | | | | 56.1 | | | | 212,055 | | | | 20.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating loss | | | (591,528 | ) | | | (34.5 | ) | | | (331,004 | ) | | | (18.0 | ) | | | (260,524 | ) | | | (78.7 | ) |
Other income | | | - | | | | - | | | | 120,505 | | | | 6.6 | | | | (120,505 | ) | | | 100.0 | |
Interest expense (net) | | | (495,764 | ) | | | (29.0 | ) | | | (59,307 | ) | | | (3.2 | ) | | | (436,457 | ) | | | (735.9 | ) |
Net loss | | $ | (1,087,292 | ) | | | (63.5 | )% | | $ | (269,806 | ) | | | (14.7 | )% | | $ | (817,486 | ) | | | (303.0 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss per share - basic and diluted | | $ | (2.41 | ) | | | | | | $ | (0.67 | ) | | | | | | $ | (1.74 | ) | | | | |
| | Nine Months Ended September 30, | |
| | | | | | | | | | | | | | 2022 vs 2021 | | | | |
| | | | | As a % of | | | | | | As a % of | | | Amount of | | | % Increase | |
| | 2022 | | | Sales | | | 2021 | | | Sales | | | Change | | | (Decrease) | |
| | | | | | | | | | | | | | | | | | |
Sales | | $ | 5,075,774 | | | | 100.0 | % | | $ | 5,458,586 | | | | 100.0 | % | | $ | (382,812 | ) | | | (7.0 | )% |
Cost of sales | | | 3,241,751 | | | | 63.9 | | | | 3,319,069 | | | | 60.8 | | | | (77,318 | ) | | | (2.3 | ) |
Gross profit | | | 1,834,023 | | | | 36.1 | | | | 2,139,517 | | | | 39.2 | % | | | (305,494 | ) | | | (14.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
General and administrative | | | 1,746,995 | | | | 34.4 | | | | 1,534,527 | | | | 28.1 | | | | 212,468 | | | | 13.8 | |
Selling | | | 1,973,755 | | | | 38.9 | | | | 1,397,156 | | | | 25.6 | | | | 576,599 | | | | 41.3 | |
Total cost and expenses | | | 3,720,750 | | | | 73.3 | | | | 2,931,683 | | | | 53.7 | | | | 789,067 | | | | 26.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating loss | | | (1,886,727 | ) | | | (37.2 | ) | | | (792,166 | ) | | | (14.5 | ) | | | (1,094,561 | ) | | | (138.2 | ) |
Other income | | | - | | | | - | | | | 120,505 | | | | 2.2 | | | | (120,505 | ) | | | 100.0 | |
Interest expense (net) | | | (901,998 | ) | | | (17.8 | ) | | | (166,875 | ) | | | (3.1 | ) | | | (735,123 | ) | | | (440.5 | ) |
Net loss | | $ | (2,788,725 | ) | | | (54.9 | )% | | $ | (838,536 | ) | | | (15.4 | )% | | $ | (1,950,189 | ) | | | (232.6 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss per share - basic and diluted | | $ | (6.28 | ) | | | | | | $ | (2.14 | ) | | | | | | $ | (4.17 | ) | | | | |
Sales
Our managed support service sales increased by 2.1% from $1,114,851 during the three months ended September 30, 2021 to $1,138,418 during the corresponding period of 2022. For the nine month period ended September 30, managed support service sales increased 3.1% from $3,243,183 in 2021 to $3,343,032 for the same period in 2022. Managed support service sales comprised approximately 66% of our sales in both the three and nine months ended September 30, 2022, and approximately 61% for the three months ended September 30, 2021, and 59% for the nine months ended September 30, 2021. The increase in our managed support service sales during the three and nine months ended September 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.
Our cybersecurity projects and software sales, primarily to SMEs, decreased by 18.5% to $573,794 during the three months ended September 30, 2022, from $704,889 during the corresponding period in 2021. These same sales decreased by 17.3% to $1,732,742 during the nine months ended September 30, 2022, from $2,096,403 for the nine month period ended September 30, 2021, respectively. The decrease in cybersecurity projects and software sales during the three and nine months ended September 30, 2022 was attributable to the timing of the completion of projects for revenue recognition. We expect the revenue to grow due to increased projects in the sales pipeline, completion of projects in the coming months, and increased orders for Nodeware.
Other IT consulting services sales declined during the three months ended September 30, 2022, decreasing by $17,000 from the same period in 2021. These same sales declined during the nine months ended September 30, 2022 by $119,000 from the same period in 2021. The decline in other IT consulting services sales for the three and nine months ended September 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 6.7% to $1,060,872 during the three months ended September 30, 2022 from $1,136,772 during the corresponding period of 2021. The decrease in cost of sales during the three months ended September 30, 2022 from 2021 was due to a reduction in headcount of marketing and sales personnel. Cost of sales decreased during the nine months ended September 30, 2022 from the same period in 2021, by 2.3%, decreasing from $3,318,989 to $3,241,751.
Our gross profit decreased by $48,468 to $651,341 from the three months ended September 30, 2021 to 2022. Gross profit decreased by $305,494 to $1,834,023 from the nine months ended September 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 $529,695 for the three months ended September 30, 2022 increased slightly from $528,424 for the same quarter of 2021. During the comparative three month periods, there was an increase in legal and accounting expenses including other public company related fees, of $70,000. Rental and lease expenses also increased $21,000. These were offset in part by decreases in consulting fees of $39,000, corporate marketing expenses of $13,000, and salary expense reductions of $45,000 resultant from the transfer of certain personnel from the administrative group to the sales group. The balance of the changes were minor and distributed across multiple expense categories.
For the nine months ended September 30, 2022, general and administrative costs were 13.8% higher than the same period in 2021, increasing to $1,746,995 from $1,534,527. These were primarily due to an increase in legal and accounting expenses including other public company related fees, of $363,000. Rental and lease expenses also increased $42,000. These were offset in part by decreases in consulting fees of $65,000, a decrease in corporate marketing expenses of $41,000, and salary expense reductions of $80,000 resultant from the transfer of certain personnel from the administrative group to the sales group. The balance of the changes were minor and distributed across multiple expense categories.
Selling Expenses
Selling expenses of $713,173 for the three months ended September 30, 2022 increased 42% from $502,389 for the same quarter of 2021. The hiring of new personnel contributed approximately $32,000 to the quarter over quarter increase, while increased marketing expenses were $90,000, and stock option expenses of approximately $91,000 were recognized in the third quarter of 2022. For the nine months ended September 30, 2022, Selling expenses of $1,973,755 increased 41% from $1,397,156 for the same period in 2021. This increase is primarily related to the hiring of additional salespeople during 2021 which resulted in an increase over the prior year of approximately $281,000. In addition, marketing expenses were up by $184,000 over the same nine months in 2021, and recognition of stock option expenses were up by approximately $106,000 over the prior year. The balance of the changes were minor and distributed across multiple expense categories.
Operating Income (Loss)
For the three months ended September 30, 2022 and 2021, operating loss was $591,528 and $331,004, respectively, for an increase in the loss by $260,524. For the nine months ended September 30, 2022, the operating loss was $1,886,727, an increase in the loss by $1,094,561 from $792,166 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 nine months ended September 30, 2022 as compared to 2021, as discussed above.
Interest Expense
Net interest expense of $495,764 for the three months ended September 30, 2022, increased 736% from expense of $59,307 for the same quarter of 2021. Net interest expense of $901,998 for the nine months ended September 30, 2022, increased 441% from expense of $166,875 for the same period of 2021. The increase in interest expense is primarily attributable to the bridge loans taken in the last four quarters. The net interest expense for the three months ended September 30, 2022 included additional interest due to the default on the four bridge loans. The amount of this additional interest was approximately $205,000.
Net Loss
For the three months ended September 30, 2022 and 2021, net loss was $1,087,292 and $269,806, respectively, an increase in the loss by $817,486. For the nine months ended September 30, 2022 and 2021, net loss was $2,788,725 and $838,536, respectively. The increase is in both comparable periods is attributable primarily to the selling, general and administrative, and interest items discussed above.
Liquidity and Capital Resources
At September 30, 2022, we had cash of $6,584. At September 30, 2022, we had a working capital deficit of approximately $5,460,000 and a current ratio of 0.12.
During 2022, our primary source of liquidity is cash provided by collections of accounts receivable, bridge loans and our factoring line of credit. We maintain an accounts receivable financing line of credit with an independent financial institution that allows us to sell selected accounts receivable invoices to the financial institution with full recourse against us in the amount of $2,000,000, including a sublimit for one major client of $1,500,000. This provides us with the cash needed to finance certain of our on-going costs and expenses. At September 30, 2022, based on eligible accounts receivable, we had $0 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.
At September 30, 2022, we had current notes payable of $229,000 to related parties. $100,000 of this debt is due on January 1, 2023. The remaining $129,000 are in the form of demand notes with an interest rate of 6%.
At September 30, 2022, we had current notes payable of approximately $1,248,000 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 on June 30, 2016 but not paid by then. This note was issued in payment of software we purchased in February 2016 and secured by a security interest in the software. To date, the holder has not taken any action to collect the amount past due on this note or to enforce the security interest in the software.
Also included in the current notes payable are three Bridge Loans with Mast 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. At September 30, 2022, the unamortized balance of the deferred notes costs was approximately $221,000. See Note 6 of the 2021 Audited Financial Statements for more information regarding the first Bridge Loan. See our Form 8-K from February 15, 2022 for more information regarding the second Bridge Loan. See our Form 8-K from May 31, 2022 for more information regarding the third Bridge Loan. The gross notes payable to Mast Hill amount at September 30, 2022 was approximately $963,000. Currently, we are in default on principal and interest payments on these loans for a total of approximately $381,000 at September 30, 2022. The noteholder has taken no action against the Company at this time.
Notes payable also includes a bridge loan from Talos Victory Fund, LLC., with an initial principal amount of $296,000, which bears interest at a rate of 8%. A total of approximately $129,000 was recorded as deferred note costs associated with the loan. As of September 30, 2022, the unamortized balance of the deferred note cost was approximately $69,000. See our Form 8-K from April 12, 2022, for more information regarding this loan. The gross note payable to Talos amount at September 30, 2022 was approximately $296,000. Currently, we are in default on principal and interest payments on this loan of approximately $71,000 at September 30, 2022. The noteholder has taken no action against the Company at this time.
Notes payable also includes a loan from Celtic Bank, with an initial obligation amount of $150,552. This includes funds received of $139,400 plus a fixed one-time loan fee of $11,152. See our Form 8-K from August 8, 2022, for more information regarding this loan. As of September 30, 2022, the gross note payable to Celtic Bank was approximately $124,000.
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 $75,000 through January 2, 2023 and $100,000 through July 31, 2022. At September 30, 2022, we had approximately $15,000 of availability under the LOC Agreements.
During the 2021, we issued demand notes to two board members for $55,000 in total. The demand notes bear a 6% interest rate. These were outstanding as of September 30, 2022.
At September 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 on January 1, 2018 (plus accrued interest of approximately $240,700), and approximately $500,000 due on December 31, 2021 which have not been renewed or amended.
At September 30, 2022, we had $295,000 of current maturities of long-term obligations to related parties. $200,000 is due on January 1, 2023. $70,000 is due on January 2, 2023. $25,000 is due on June 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 on August 31, 2026. The balance was $499,000 at September 30, 2022.
The following table sets forth our cash flow information for the periods presented:
| | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | |
Net cash used by operating activities | | $ | (699,104 | ) | | $ | (84,256 | ) |
Net cash used by investing activities | | | (166,405 | ) | | | (192,811 | ) |
Net cash provided by financing activities | | | 772,661 | | | | 300,830 | |
Net increase (decrease) in cash | | $ | (92,848 | ) | | $ | 23,763 | |
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 $2,788,725 for the nine months ended September 30, 2022, was offset in part by non-cash expenses and credits of $780,544. In addition, the cash impact of our net loss was further offset by a decrease in accounts receivable and other assets of $174,611. Combined with increases in accrued payroll, deferred revenue and other expenses payable, for a total of $377,460, and an increase in accounts payable of $757,007, resulted in cash used by operating activities of $699,103.
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, as needed.
Cash Flows Used by Investing Activities
In the quarters ended September 30, 2022 and 2021, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The decrease of $26,405 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
On August 8, 2022, the Company entered into a loan agreement with Celtic Bank. We received $139,400 from this loan, which is comprised of a gross obligation of $150,552, less one-time fees of $11,152. Through September 30, 2022, we have paid $26,285 against the obligation.
During the nine months ended September 30, 2022, we received $865,455 from various bridge loans from the Mast Hill Fund L.P. and Talos 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 approximately 210,000 on the Mast Hill Fund L.P. bridge loan established in November 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. At September 30, 2022, we had financing availability, based on eligible accounts receivable, of approximately $0 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 of September 30, 2022.
During May 2019, we originated a line of credit note payable for $500,000 with a related party and borrowed $499,000 and have $1,000 available to borrow for working capital. This agreement matures in August 2026.
During 2017, we originated two lines of credit with related parties totaling $175,000. At June 30, 2021, we had $15,000 available under these financing agreements. The maturity date of the $75,000 line of credit is January 2023, whereas the maturity date of the $100,000 line of credit has been extended to July 2023.
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.
We plan to evaluate alternatives which may include renegotiating the terms of our notes, seeking conversion of the notes to shares of common stock and seeking funds to repay our notes. We continue to evaluate repayment of our notes payable based on our cash flow. Therefore, there is currently substantial doubt about our ability to continue as a going concern.