FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Nine Month Period Ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-21816
INFINITE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1490422
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2364 Post Road, Warwick, RI 02886
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (401) 738-5777
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 14, 2002 there were 6,270,125 shares of the registrant's common
stock, par value $0.001 per share, outstanding.
Transitional Small Business Disclosure Format: Yes |_| No |X|
1
INFINITE GROUP, INC.
Form 10-QSB
INDEX
Page
----
PART I. Unaudited Consolidated Financial Statements
Item 1. Consolidated Balance Sheets- September 30, 2002 and December 31, 2001.........2
Consolidated Statements of Operations - Three Months and Nine Months
Ended September 30, 2002 and 2001.............................................3
Consolidated Statements of Cash Flows -Nine Months
Ended September 30, 2002 and 2001.............................................4
Notes to Consolidated Financial Statements....................................5
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations..........................................11
Item 4. Controls and Procedures.......................................................17
PART II. OTHER INFORMATION
Items 1-5 ..............................................................................N/A
Item 6. Exhibits.....................................................................17
SIGNATURES .............................................................................18
1
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
Sept. 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 217,616 $ 130,242
Restricted funds 1,303,581 86,318
Accounts receivable, net of allowance 1,375,149 1,498,463
Inventories 104,191 129,824
Other current assets 575,674 112,728
Assets of discontinued operations 21,606 2,566,674
------------ ------------
Total current assets 3,597,817 4,524,249
Property and equipment, net 4,056,233 4,463,122
Other assets:
Prepaid other 376,654 --
Note receivable 150,000 --
Prepaid pension cost 849,673 904,673
Intangible assets, net 1,044,809 1,045,959
------------ ------------
Total other assets 2,421,136 1,950,632
------------ ------------
$ 10,075,186 $ 10,938,003
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 251,703 $ 282,206
Stockholders/officers 87,000 124,906
Accounts payable 1,875,220 1,146,016
Accrued expenses 724,419 708,762
Current maturities of long-term obligations 1,723,078 841,878
Current maturities of long-term obligations - stockholders -- 120,000
Liabilities of discontinued operations 974,141 2,986,904
------------ ------------
Total current liabilities 5,635,561 6,210,672
Long-term obligations 2,260,232 2,586,696
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized: 6,270,125 and 5,119,047 shares
issued and outstanding 6,270 5,119
Additional paid-in capital 27,773,426 25,585,864
Accumulated deficit (25,600,303) (23,450,348)
------------ ------------
Total stockholders' equity 2,179,393 2,140,635
------------ ------------
$ 10,075,186 $ 10,938,003
============ ============
See notes to unaudited consolidated financial statements.
2
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(As Restated) (As Restated)
Sales $ 3,749,716 $ 2,318,504 $ 8,964,539 $ 6,406,637
Cost of goods sold 3,241,552 1,490,449 7,541,530 4,244,810
----------- ----------- ----------- -----------
Gross profit 508,164 828,055 1,423,009 2,161,827
Costs and expenses:
General and administrative 689,364 802,801 2,045,462 2,015,419
Depreciation and amortization 197,353 249,341 654,202 603,352
Selling 52,662 66,748 201,744 238,977
Research and development 18,860 220,563 105,648 404,677
----------- ----------- ----------- -----------
Total costs and expenses 958,239 1,339,453 3,007,056 3,262,425
----------- ----------- ----------- -----------
Operating loss (450,075) (511,398) (1,584,047) (1,100,598)
Other income (expense):
Interest expense:
Stockholder (7,724) (25,041) (17,317) (86,027)
Other (151,561) (14,006) (309,650) (244,734)
Gain on disposition of assets -- -- 137,418 --
Impairment loss -- -- (45,670) --
Other income (expense) 2,216 (6,752) (7,200) (3,818)
----------- ----------- ----------- -----------
Total other expense (157,069) (45,799) (242,419) (334,579)
----------- ----------- ----------- -----------
Loss from continuing operations before
income tax provision (607,144) (557,197) (1,826,466) (1,435,177)
Income tax expense (8,021) -- (15,411) --
----------- ----------- ----------- -----------
Loss from continuing operations (615,165) (557,197) (1,841,877) (1,435,177)
Loss from discontinued operations, including
$92,211 and $307,365 loss on disposal in three
and nine months ended 2002 (Note 4) (92,211) (180,564) (308,078) (328,183)
----------- ----------- ----------- -----------
Net loss $ (707,376) $ (737,761) $(2,149,955) $(1,763,360)
=========== =========== =========== ===========
Loss per share - basic and diluted:
Continuing operations $ (0.10) $ (0.13) $ (0.31) $ (0.36)
Discontinued operations $ (0.01) $ (0.04) $ (0.05) $ (0.08)
----------- ----------- ----------- -----------
Net loss $ (0.11) $ (0.17) $ (0.36) $ (0.44)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - basic and diluted 6,270,125 4,389,251 5,896,504 3,989,547
=========== =========== =========== ===========
See notes to unaudited consolidated financial statements.
3
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Sept. 30, Sept. 30,
2002 2001
----------------- -------------
(As Restated)
Operating activities:
Net loss $(2,149,955) $(1,763,360)
Adjustments to reconcile net loss to net cash
used in operating activities of continuing operations:
Loss from discontinued operations 308,078 328,183
Depreciation and amortization 654,202 603,352
Amortization of discount on note payable 37,073 25,778
Expenses satisfied via issuance of equity instruments 194,943 29,200
Gain on disposition of assets (137,418) --
Impairment loss 45,670 --
(Increase) decrease in assets:
Accounts receivable 123,314 (600,418)
Inventories 25,633 44,282
Other current assets and prepaid other 88,620 (64,042)
Prepaid pension cost 55,000 30,000
Increase in liabilities:
Accounts payable and accrued liabilities 747,128 908,846
----------- -----------
Net cash used by operating activities of continuing operations (7,712) (458,179)
Net cash provided by operating activities of discontinued operations 23,744 130,894
----------- -----------
Net cash provided (used) by operating activities 16,032 (327,285)
Investing activities:
Decrease in restricted funds for asset addition, net 60,320 21,643
Purchase of property and equipment (276,743) (416,988)
Purchase of intangible assets (84,839) (443,565)
Proceeds from the disposition of assets 270,000 7,500
----------- -----------
Net cash used by investing activities of continuing operations (31,262) (831,410)
Net cash provided (used) by investing activities of discontinued operations 1,530,745 (155,973)
----------- -----------
Net cash provided (used) by investing activities 1,499,483 (987,383)
Financing activities:
Net repayments of bank notes payable (30,503) (418,771)
Proceeds from notes payable - stockholders/officers -- 144,616
Repayment of notes payable - stockholders/officers (37,906) --
Proceeds from the issuance of convertible notes payable, net of costs 1,374,000 --
Increase in restricted funds for financing proceeds, net (1,277,583) --
Repayments of long-term obligations (326,464) (138,732)
Repayments of long-term obligations - stockholder -- (129,644)
Proceeds from the issuance of common stock, net of expenses 256,132 1,176,039
----------- -----------
Net cash provided (used) by financing activities of continuing operations (42,324) 633,508
Net cash provided (used) by financing activities of discontinued operations (1,385,817) 574,981
----------- -----------
Net cash provided (used) by financing activities (1,428,141) 1,208,489
----------- -----------
Net increase (decrease) in cash and cash equivalents 87,374 (106,179)
Cash and cash equivalents - beginning of period 130,242 185,901
----------- -----------
Cash and cash equivalents - end of period $ 217,616 $ 79,722
=========== ===========
Supplemental continuing operations cash flow disclosures:
Cash paid (received) for:
Interest $ 366,269 $ 276,711
=========== ===========
Income taxes $ 6,465 $ 11,731
=========== ===========
See notes to unaudited consolidated financial statements.
4
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Infinite Group, Inc.
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. The quarterly consolidated
financial statements are unaudited. Operating results for the nine-month period
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2002. For further information, refer
to the Company's amended Annual Report on Form 10-KSB/A for the year ended
December 31, 2001, which includes audited financial statements and footnotes as
of and for the years ended December 31, 2001 and 2000.
NOTE 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Following is the Company's accounting policy relating to accounts
receivable, disclosed beginning in 2002 in accordance with AICPA Statement of
Position 01-6 "Accounting by Certain Entities (Including Entities with Trade
Receivables) that Lend to or Finance the Activities of Others". There has been
no change in the Company's accounting policy resulting from this disclosure.
The Company carries its accounts receivable net of an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes the allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
The Company's policy is not to accrue interest on trade receivables after
the invoice becomes past due. A receivable is considered past due if payments
have not been received by the Company after a significant amount of time has
past after the invoice due date. After the Company has exhausted its collection
efforts on a past due accounts receivable, the Company will turn the account
over to collections. Once the account is turned over for collections, the
Company will write the account off as uncollectible. If a payment is made after
it has been turned over for collection and written-off, the Company will reapply
the payment to the amount written-off.
NOTE 3. - RECLASSIFICATIONS
Certain amounts in the 2001 financial statements have been reclassified to
conform with the 2002 financial statement presentation.
NOTE 4. -DISCONTINUED OPERATIONS
In the fourth quarter of 2001, the Company's Board of Directors resolved
to dispose of Osley & Whitney (O&W) and Express Pattern (EP). These two
subsidiaries represented the Company's Plastics Group segment. The formal plan
consisted of shutting down the operations of the O&W subsidiary and selling the
net assets of the EP subsidiary.
Effective November 30, 2001, the Company shut down the operations of O&W
and terminated all of the employees. During 2002, the Company continued to
liquidate the assets of O&W. During the first quarter of 2002, all of the
inventory and equipment of O&W were sold at auction, resulting in net proceeds
of approximately $416,000 and a gain of approximately $27,000. The carrying
value of the O&W land and building was reduced by $151,000 as of June 30, 2002,
based on the estimated net proceeds at that time. The land and building were
sold at auction during the third quarter of 2002 for $650,000 less closing
costs, resulting in an additional loss of approximately $70,000. This closing
completed the liquidation of the O&W assets, resulting in a net obligation to
the secured lender, including accrued interest and closing expenses, of
approximately $211,000. This amount is evidenced by a new note issued by
5
O&W to the secured lender which has been guaranteed by the Company. The note
bears interest at 7.75% per annum, provides for twelve monthly payments of
$8,693 including interest, and requires a balloon payment of approximately
$145,000 in October 2003.
In addition to the above transactions, during the quarter ended June 30,
2002, O&W recorded an additional reserve for uncollectible receivables and
recognized additional obligations to creditors in the aggregate amount of
$124,000. Additional costs incurred related to the discontinued operations are
included in the loss on disposal of discontinued assets.
On March 14, 2002, the Company sold the net assets of its EP subsidiary
for $725,000, consisting of $575,000 in cash (of which $300,000 was paid to the
O&W secured lender) and a five-year 8% subordinated $150,000 note, due upon
maturity with quarterly interest payments. The purchasers included a former
employee of EP and, the Company's chief operating officer at the time of sale.
The sale was negotiated at "arm's length" by disinterested management with the
former employees and his financier. The gain resulting from this transaction
amounted to approximately $45,000.
In accordance with FAS 144, the disposal of the Plastics Group has been
accounted for as a disposal of a business segment and accordingly, the assets
and liabilities of O&W and EP have been segregated from the continuing
operations in the accompanying consolidated balance sheets as of September 30,
2002 and December 31, 2001 and classified as assets/liabilities of discontinued
operations. The operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows. The accompanying statements of operations and cash flows for the periods
ended September 30, 2001 have been restated to present separately the operating
results and cash flows of these discontinued operations.
The following is the summary of the financial position as of September 30,
2002 and December 31, 2001 for the disposed Plastics segment (O&W and EP):
September 30, December 31,
2002 2001
---- ----
Current assets $ 21,606 $ 580,799
Property and equipment, net -- 1,985,875
-------- ----------
Assets of discontinued operations $ 21,606 $2,566,674
======== ==========
Secured bank obligations $211,105 $1,550,038
Accounts payable and accrued expenses 763,036 963,646
Capital lease obligations -- 473,220
-------- ----------
Liabilities of discontinued operations $974,141 $2,986,904
======== ==========
The following is a summary of the results of operations for the periods
ending September 30, 2002 and 2001 for the disposed Plastics segment (O&W and
EP):
Three Months Ended September 30,
2002 2001
---- ----
Revenue $ -- $ 1,019,879
======== ===========
Loss from discontinued operations $ -- $ (180,564)
Loss on disposal of discontinued operations (92,211) --
-------- -----------
Net loss from discontinued operations $(92,211) $ (180,564)
======== ===========
6
Nine Months Ended September 30,
2002 2001
---- ----
Revenue $ 317,453 $ 4,199,722
========= ===========
Loss from discontinued operations $ (713) $ (328,183)
Loss on disposal of discontinued operations $(307,365) --
--------- -----------
Net loss from discontinued operations $(308,078) $ (328,183)
========= ===========
NOTE 5. - SALE OF ASSETS
On March 28, 2002, the Company sold all of the property and equipment of
its Mound Laser and Photonics Center subsidiary, including customer lists, to a
third party and ceased operations of this subsidiary. The sale price of $300,000
consisted of cash of $270,000 and a $30,000 promissory note, which bears
interest at 8% and was due in July 2002. This note receivable is included in
other current assets at September 30, 2002. The transaction resulted in a gain
of approximately $137,000.
NOTE 6. - LONG TERM OBLIGATIONS
On January 4, 2002, the Company entered into a securities purchase
agreement (the "Agreement") with the estate of a former stockholder of O&W (the
"Estate"), which was amended and restated during the quarter ended June 30,
2002. In accordance with the Agreement, as revised, the Estate purchased 379,253
shares of the Company's common stock, which were paid for by the cancellation of
certain indebtedness of the Company to the Estate amounting to $758,507 (the
"Indebtedness"). The Indebtedness related to past due consulting fees,
outstanding debt and related accrued interest owed to the Estate by the Company
at December 31, 2001, and fees incurred by the Estate relating to the Agreement.
The original provision of the Agreement, which provided the Company with an
option to repurchase certain of the shares and the Estate with the option to
sell certain of the shares back to the Company, was eliminated in the amended
and restated agreement. As a result, the Company is no longer obligated for the
Indebtedness and it has recorded the purchase of the securities as an increase
in equity in the accompanying balance sheet.
On February 5, 2002, the Company completed a $1 million debt financing
with Laurus Master Fund, Ltd. The Company received $1 million in cash, less fees
amounting to $89,000, in exchange for its issuance of a $1 million two-year
convertible note bearing interest and fees at the annual rate of 15%, originally
payable quarterly and amended to monthly during the second quarter. The annual
fees are subject to reduction by 1% for every $100,000 in note principal amount
converted, up to an aggregate 10%. The outstanding principal and interest is due
in full on February 5, 2004. The note was originally convertible, upon the
Company's consent, into shares of the Company's common stock at a price of $2.25
per share. During the second quarter the note was modified to reduce the
conversion price to $2.00 per share and to provide for its convertibility into
shares of the Company's common stock at the option of the holder. In the event
of a default by the Company, the conversion price is subject to downward
adjustment. The proceeds from this note are held in a secured deposit account.
Withdrawals from this account are restricted to funding expenses for work under
the Defense Advanced Research Projects Agency (DARPA) contract and for the
growth of accounts receivable with commercial customers in the operation of the
Company's Photonics subsidiary. The account balance as of September 30, 2002
amounted to $1,277,583 and is included in restricted funds in the accompanying
balance sheet. The note is secured by this restricted account, the accounts
receivable under the DARPA contract, and substantially all other assets of the
Company and its Infinite Photonics, Inc. subsidiary. In connection with this
transaction, detachable warrants to purchase 50,000 shares of the common stock
of the Company at $2.65 per share were issued to the investor. The exercise
price of the detachable warrants was reduced to $2.40 per share during the
second quarter. The warrants were immediately exercisable and expire five years
from the date of grant. A portion of the proceeds, amounting to approximately
$53,000, was allocated to the warrants and is reflected as additional paid-in
capital and as a note discount. The warrant value was determined using the
Black-Scholes option-pricing model. The note discount is being amortized to
interest expense over the term of the note.
On June 21, 2002, the Company completed an additional $500,000 debt
financing with the same investor. The
7
Company received $500,000 in cash, less fees amounting to $37,000, in exchange
for its issuance of a $500,000 two-year convertible note bearing interest and
fees at the annual rate of 15% payable monthly. The proceeds from this note are
unrestricted and are secured by substantially all other assets of the Company
and its Infinite Photonics, Inc. subsidiary. The annual fees are subject to
reduction by 1% for every $50,000 in note principal amount converted, up to an
aggregate 10%. This note is convertible into share of the Company's common stock
at the option of the holder at a price of $2.00 per share. In the event of a
default by the Company, the conversion price is subject to downward adjustment.
In connection with this transaction, detachable warrants to purchase 25,000
shares of the common stock of the Company at $2.40 per share were issued to the
investor. The warrants were immediately exercisable and expire five years from
the date of grant. A portion of the proceeds of the note amounting to
approximately $25,000 has been allocated to the warrants and is reflected as
additional paid-in capital and as a note discount. The warrant value was
determined using the Black-Scholes option-pricing model. The note discount is
being amortized to interest expense over the term of the note.
As discussed in Note 12 below, these facilities were terminated by the
lender in November 2002. As a result of this termination, the amounts associated
with the Company's obligations to the lender have been reclassified as a current
liability on the financial statements for the period ending September 30, 2002.
NOTE 7. - STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2002, the Company issued 75,000 shares
of common stock to accredited investors at a price of $2.00 per share, resulting
in proceeds of $150,000.
During the quarter ended March 31, 2002, employee stock options were
exercised, resulting in the issuance of 3,786 shares of common stock. Total
consideration resulting from these exercised options amounted to $6,132.
The Company issued 24,100 shares of common stock during the quarter ended
March 31, 2002 as satisfaction of outstanding payroll related liabilities
amounting to $51,333. The fair market value of the shares issued equaled the
amount of the recorded liability.
During the quarter ended March 31, 2002, the Company granted warrants to
purchase 200,000 shares of common stock in satisfaction of outstanding
liabilities arising from consulting services amounting to $58,826. The warrants
are exercisable at $3.00 per share, vested immediately and expire three years
from the date of grant.
On June 18, 2002, the Company entered into an agreement with a consulting
firm to provide investor and public relations services over a two-year period.
Under the agreement, the consulting firm is required to expend up to $500,000 in
furtherance of the Company's investor and public relations programs. As
consideration for these services, the Company agreed to issue the consulting
firm 500,000 shares of it common stock in a private placement transaction valued
at $750,000, which is being amortized ratably over the 24-month life of the
agreement. The prepaid consulting fees are included in other current assets and
other assets-prepaid other in the accompanying balance sheet at September 30,
2002.
During the quarter ended June 30, 2002, convertible notes payable to
former O&W shareholders, along with accrued interest and other outstanding
liabilities, aggregating $129,600, were converted into 68,936 shares of the
Company's common stock.
During the quarter ended September 30, 2002, the Company granted 400,000
Incentive Stock Options (ISO) to existing and new employees of the Company.
These options allow for the purchase of the common stock of the Company at
exercise prices ranging from $1.08 to $1.50 per share and will be accounted for
under APB 25. Accordingly, no compensation expense has been recognized in the
statements of income, since the option price was greater than or equal to the
market value of the Company's common stock at the measurement date.
NOTE 8. - DIRECTOR / OFFICER RESIGNATION
On June 27, 2002, a director/officer of the Company retired, but continues
to be affiliated with the Company pursuant to a consulting agreement. This
agreement defines the services to be provided by the consultant as those
8
similar to when he was as employee and provides for payments aggregating
$148,220 over its term, which expires January 30, 2005. In addition, the
agreement allows 591,619 outstanding Company stock options that the employee
holds from when he was an employee to remain exercisable through the term of the
consulting agreement. As a result of the change in grantee status, the Company
is required to recognize the value of the options as compensation expense over
the remaining vesting term of the options. The value of the options, utilizing
the Black-Scholes pricing model, aggregated approximately $504,000. Certain
options were fully vested as of June 30, 2002, resulting in compensation costs
and an increase in additional paid in capital of approximately $87,000 in the
second quarter of 2002. The remaining amount is being recognized as compensation
expense over the remaining vesting term of the options. The expense relating to
these options for the third quarter of 2002 amounted to approximately $57,000.
NOTE 9. - TERMINATION OF EQUITY LINE OF CREDIT
On July 23, 2002, the Company and Cockfield Holdings Limited (Cockfield)
agreed to terminate the equity line of credit agreement, which was previously
entered into on November 30, 2000. As a result of the termination, the Company
was released, and the Company released Cockfield, from any further obligation
under the terms. Unamortized capitalized costs associated with this transaction,
amounting to $67,269, were charged to expense during the quarter ended June 30,
2002 as a result of the termination.
As consideration for establishing the equity line of credit, the Company
granted Cockfield warrants to purchase up to 200,000 shares of its common stock.
As consideration for the services rendered by a placement agent in connection
with the equity line of credit, the Company granted the placement agent warrants
to purchase up to 100,000 shares of its common stock. These warrants, covering
300,000 shares of common stock, are exercisable at any time prior to November
20, 2003 for $3.135 per share and survived the termination of the agreement.
NOTE 10. - SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing transactions, including non-monetary
exchanges, consist of the following for the nine months ended September 30, 2002
and 2001:
2002 2001
--------- --------
Common stock, issued for prepaid services
to be provided in future periods $ 750,000 $ --
========= ========
Conversion of long-term obligation and related
accrued interest and fees to common stock,
net of capitalized costs written off $ 725,340 $ --
========= ========
Notes receivable issued in connection with
the sale of assets $ 180,000 $ --
========= ========
Conversion of long-term obligations -
stockholders and related accrued interest to
common stock $ 129,600 $119,131
========= ========
Value of detachable common stock warrants
issued with long-term obligations $ 103,872 $ --
========= ========
Common stock warrants issued as satisfaction
of accounts payable $ 58,826 $ --
========= ========
Satisfaction of obligations to stockholders and
related accrued interest in lieu of cash
payments as consideration for stock issued $ -- $532,340
========= ========
Acquisition of equipment in exchange for
services rendered $ -- $287,434
========= ========
Acquisition of equipment accounted for as a
capital lease $ -- $375,000
========= ========
9
NOTE 11. - BUSINESS SEGMENTS
Historically, the Company's businesses were organized, managed and
internally reported as three segments. The segments are determined based on
differences in products, production processes and internal reporting. During the
year ended December 31, 2001, the Company approved of a plan to discontinue the
operations of the Plastics Group (see Note 4). Currently, the Company's
businesses are organized, managed and internally reported as two segments.
All of the segments of the Company operate entirely within the United
States. Revenues from customers in foreign countries are minimal. Transactions
between reportable segments are recorded at cost. The Company relies on
inter-segment cooperation and management does not represent that these segments,
if operated independently, would report the results shown.
A summary of selected consolidated information for the Company's industry
segments during the periods ended September 30, 2002 and 2001, respectively, is
set forth as follows:
10
Laser Photonics Plastics Unallocated
Group Group Group Corporate Consolidated
----- ----- ----- --------- ------------
Three Months Ended September 30,2002
Sales to unaffiliated customers $ 1,466,765 $ 2,282,951 $ -- $ -- $ 3,749,716
============== ============= ============= ============= ===========
Operating loss, including corporate
overhead allocation $ (131,139) $ (132,122) $ -- $ (186,814) $ (450,075)
============== ============= ============= ============= ===========
Loss from discontinued operations $ -- $ -- $ (92,211) $ -- $ (92,211)
============== ============= ============= ============= ===========
Three Months Ended September 30, 2001
Sales to unaffiliated customers $ 1,951,064 $ 367,440 $ -- $ -- $ 2,318,504
============== ============= ============= ============= ===========
Operating loss, including
corporate overhead allocation $ (27,832) $ (122,489) $ -- $ (361,077) $ (511,398)
============== ============= ============= ============= ===========
Income (loss) from discontinued
operations, including corporate
overhead allocation $ -- $ -- $ (407,415) $ 226,851 $ (180,564)
============== ============= ============= ============= ===========
Nine Months Ended September 30, 2002
Sales to unaffiliated customers $ 4,461,019 $ 4,503,520 $ -- $ -- $ 8,964,539
============== ============= ============= ============= ===========
Operating loss, including
corporate overhead allocation $ (785,053) $ (127,736) $ -- $ (671,258) $(1,584,047)
============== ============= ============= ============= ===========
Income (loss) from discontinued
operations, including corporate
overhead allocation $ -- $ -- $ (340,974) $ 32,896 $ (308,078)
============== ============= ============= ============= ===========
Nine Months Ended September 30, 2001
Sales to unaffiliated customers $ 5,811,215 $ 595,422 $ -- $ -- $ 6,406,637
============== ============= ============= ============= ===========
Operating income (loss), including
corporate overhead allocation $ 147,175 $ (419,688) $ -- $ (828,085) $(1,100,598)
============== ============= ============= ============= ===========
Income (loss) from discontinued
operations, including corporate
overhead allocation $ -- $ -- $ (1,009,347) $ 681,164 $ (328,183)
============== ============= ============= ============= ===========
NOTE 12. - SUBSEQUENT EVENTS
Termination of DARPA Contract
On October 30, 2002, the Company received a Notice of Termination of its
DARPA Contract, #MDA972-02-C-0013. The Contract was terminated for the
Government's convenience under the clause entitled Termination, Federal
Acquisition Regulation (FAR) 52.249.6. The DARPA contract had provided
substantially all of the revenue of the Company's Photonics group. The Company
did not anticipate the termination of this contract and management expects that
it will have a significant adverse impact on revenues and cash flows beginning
in the fourth quarter.
Convertible Notes called by Laurus Master Fund, Ltd.
Termination of the DARPA contract resulted in an event of default under
the Company's financing agreements with Laurus Master Fund, Ltd. Upon occurrence
of this event, the $1.0 million two-year convertible note issued on February 5,
2002 and the $500,000 convertible note issued on June 21, 2002 became
immediately due and payable. As a result, Laurus Master Fund, Ltd. took
immediate possession of the funds held by the Photonics Group in restricted bank
accounts. Approximately $1.474 million was debited from these accounts and
applied in reduction of the outstanding
11
balance. The Company remains liable for a deficiency of approximately $26,000.
In the fourth quarter the Company will write off the remaining unamortized
capitalized costs associated with obtaining this financing which amounted to
$91,245 at September 30, 2002. Additionally, the Company will write-off the
unamortized note discount associated with the warrants that were granted in
connection with this agreement which amounted to $66,800 at September 30, 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-QSB are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 regarding the plans and objectives of management
for future operations. You can identify these forward-looking statements by our
use of the words "believes," "anticipates," "plans," "expects," "may," "will,"
"intends," "estimates" and similar expressions, whether in the negative or
affirmative. Such statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Our plans and objectives are
based, in part, on assumptions involving judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate.
Factors that could cause actual results to differ materially from those
expressed or implied by forward -looking statements include, but are not limited
to, the factors set forth in "Certain Factors That May Affect Future Growth,"
under Part I, Item 1, of the Company's Annual Report on Form 10-KSB/A for the
year ended December 31, 2001 as filed with the Securities and Exchange
Commission. In light of the significant uncertainties inherent in the
forward-looking statements included herein particularly in view of our early
stage operations, the inclusion of such information should not be regarded by us
or any other person that the objectives and plans of the Company will be
achieved.
Overview
We have two business segments, our Laser Group and our Photonics Group.
Our Laser Group provides comprehensive laser-based materials and processing
services (cutting, welding, drilling and assembly) to aerospace, power
generation and medical device customers. Our Photonics Group develops and
markets our grating coupled surface emitting laser (GCSELTM) diodes for source
and pump lasers and semiconductor optical amplifiers. Diode lasers and optical
amplifiers are very small semiconductor products used as the laser "light"
source in a variety of defense, telecommunications, material processing and
medical device applications.
Our Laser Group, which had been comprised of Laser Fare, Inc. (LF
-Smithfield, RI) and Mound Laser & Photonics Center, Inc. (MLPC- Miamisburg,
OH), provides comprehensive laser-based materials processing services and
laser-based manufacturing development services to leading manufacturers. In
March 2002 we sold MLPC. Our Photonics Group, which includes Infinite Photonics,
Inc. (IP - Orlando, FL) and the research and development portion of Advanced
Technology Group (ATG), researches, manufactures and markets our laser diodes.
The operations of MetaTek, Inc. of Albuquerque, NM and our Narragansett, RI
office were merged into Infinite Photonics, Inc in Orlando, FL in April 2002.
During 2001 and the first quarter of 2002, we also had a Plastics Group,
which consisted of two subsidiaries, Express Pattern, Inc. (EP) and Osley &
Whitney, Inc. (O&W). Our Plastics Group provided rapid prototyping services and
proprietary mold building services. In December 2001, our board of directors
determined to dispose of O&W and EP, respectively. Our plan consisted of closing
and liquidating O&W and selling the assets of EP. The sale of EP was consummated
on March 14, 2002. The O&W equipment was sold in March 2002. The O&W land and
building were
12
sold at auction on July 16, 2002 for $650,000. The sale closed on August 8,
2002. This closing completes the liquidation of the O&W assets, resulting in a
net obligation to the secured lender, including accrued interest and closing
expenses, of approximately $211,000. This amount is evidenced by a new note
issued by O&W to the secured lender which has been guaranteed by the Company.
The note bears interest at 7.75% per annum, provides for twelve monthly payments
of $8,693 including interest, and requires a balloon payment of approximately
$145,000 in October 2003.
For the first nine months of 2002, we have continued to experience
operating losses, due primarily to continued weakness in jet engine and turbine
parts revenues at our Laser Group and pre-production costs for our Photonics
Group. These losses resulted in reductions in cash flow and a negative working
capital position. We are currently focused on our two primary lines of business
and on raising additional capital from private equity sources, strategic
alliances, venture capital and investment banking sources.
During the quarter ending September 30, 2002 the Company added new
management and saw the resignation of the President of its Photonics Group.
Additionally, the Company decided not to renew the contract of its Chief
Financial Officer, which expired October 1, 2002, and is undertaking a search
for a new Chief Financial Officer.
Our financial statements included in this report have been prepared in
conformity with accounting principles generally accepted in the United States.
During 2001 and 2002, there was a number of new accounting standards issued by
the Financial Accounting Standards Board, which we have determined, did not have
a material effect on our financial statements in 2001 or 2002.
Subsequent Events Affecting Future Results
Termination of DARPA Contract
On October 30, 2002, we received a Notice of Termination of our DARPA
Contract, #MDA972-02-C-0013. The Contract was terminated for the Government's
convenience under the clause entitled Termination, Federal Acquisition
Regulation (FAR) 52.249.6. The DARPA contract had provided substantially all of
the revenue of our Photonics group. We did not anticipate the termination of
this contract and expect that it will have a significant adverse impact on
revenues and cash flows beginning in the fourth quarter.
Convertible Notes called by Laurus Master Fund, Ltd.
Termination of the DARPA contract resulted in an event of default per our
financing agreement with Laurus Master Fund, Ltd. Upon occurrence of this
default, the $1.0 million two-year convertible note issued on February 5, 2002
and the $500,000 convertible note issued on June 21, 2002 became immediately due
and payable. As a result, Laurus Master Fund, Ltd. took immediate possession of
the funds held by the Photonics Group in restricted bank accounts. Approximately
$1.474 million was debited from these accounts and applied in reduction of the
outstanding balance. We remain liable for the deficiency of approximately
$26,000. In the fourth quarter we will write off the remaining unamortized
capitalized costs associated with obtaining this financing which amounted to
$91,245 at September 30, 2002. Additionally, we will write-off the unamortized
note discount associated with the warrants that were granted in connection with
this agreement which amounted to $66,800 at September 30, 2002.
Forward-looking strategy
In light of the October 30, 2002 termination of the DARPA contract and the
nearly 100% repayment of the $1.5 million in convertible notes, the Company is
exploring various options to leverage its intellectual property position and
technical expertise. Simultaneously, we have initiated an aggressive cost
cutting effort at our Photonics facility. All personnel not directly involved in
Research and Development of our GCSEL(TM) and GCSOA(TM) laser technologies have
been terminated. We have maintained administrative personnel to support the
settlement process associated with the DARPA contract termination. As part of
the settlement process, we fully expect that the costs of these administrative
employees and all other allowable costs will be reimbursed by the government.
13
Our ability to continue the research, engineering, manufacturing,
marketing and commercialization efforts for our Photonics Group will be
adversely impacted unless we are able to raise additional funds through public
or private financings, including equity financings or other arrangements. We are
currently evaluating other options for us to continue our planned operations,
including a merger and/or acquisition strategy. We are seeking relationships
with potential partners who currently have the capacity to rapidly produce,
package and customize our devices for the commercial market. We are also
exploring licensing strategies that would enable us to quickly gain traction in
existing markets and make inroads into new markets.
Despite recent events, we remain confident in our Photonics technology. We
are committed to providing all available resources to bring this technology to
fruition; however we may not be successful in raising additional funds, finding
a merger partner or executing a licensing strategy.
Liquidity and capital resources
We have financed our product development activities and operations through
a series of private placements of debt and equity securities. As of September
30, 2002, we had unrestricted cash and cash equivalents of approximately
$218,000 available for our working capital needs and planned capital asset
expenditures. The increase in cash, cash equivalents and restricted funds from
2001 resulted from the proceeds of a $1.0 million, two-year convertible note
which closed on February 5, 2002, and a $500,000 two-year convertible note which
closed on June 21, 2002. We have also benefited from prompt collection of
governmental accounts receivable by electronic transfer. The proceeds from the
first $1.0 million note are held as restricted funds available to fund certain
operations and sub-contractor payments under the DARPA contract of our Photonics
Group. Restricted funds available at Infinite Photonics as of September 30, 2002
amounted to approximately $1,278,000; however, the repayment of the $1.5 million
convertible notes subsequent to the end of the September 30, 2002 quarter fully
depleted the balance of funds in restricted accounts. Cash remaining for
operations as of November 1, 2002 was approximately $100,000.
During the quarter ended September 30, 2002, revenues from the Photonics
Group exceeded revenues from our Laser Group and represented approximately 61%
of total revenue. As a result of the loss of the DARPA contract, we do not
expect that trend to continue. We anticipate revenue for the Photonics group to
decline significantly in the fourth quarter of 2002 and continue downward in
2003, unless we are successful in either securing another government contract or
in our other acquisition or licensing strategies.
At September 30, 2002 we had a working capital deficit of approximately
$2,038,000 ($1,085,000 after eliminating the assets and liabilities of our
discontinued operations). During the first nine months of 2002, cash and cash
equivalents have increased by $87,374 and restricted funds have increased by
$1,217,263. This resulted from the infusion of funds from the convertible notes
and prompt electronic payment to the restricted account by DARPA. Accounts
Receivable dropped by approximately $123,000 in the first nine months of 2002 as
a larger percentage of the Company's revenue was derived from the government
contract where, as noted, we have seen a much lower Days Sales Outstanding (DSO)
than we have with commercial accounts in our Laser Group. Unless we are able to
raise additional funds through public or private financings, or through an
acquisition strategy, we will face significant working capital deficits in the
fourth quarter of 2002 and into 2003.
During 2002, we have expended approximately $149,000 and $127,000 on
capital acquisitions for our Photonics Group and Laser Group, respectively.
Subsequent to September 30, we have suspended all additional capital
expenditures for our Photonics Group and we expect only minimal activity within
our Laser Group.
Risk of Nasdaq Delisting. Our common stock is currently traded on the Nasdaq
SmallCap Market. In order to maintain this listing, we must meet certain
requirements relating to our stock price and net tangible assets. As of
September 30, 2002 maintenance of $2.0 million in net tangible assets
(stockholders' equity, less unamortized goodwill) was required. Effective June
29, 2001, the SEC approved the Nasdaq amendment to change the current net
tangible assets standard to an equity standard listing. Companies listed on
Nasdaq as of the date of permanent approval of the amendment have
14
until November 1, 2002 to achieve compliance with the new equity requirement of
$2.5 million. Based on our equity as of September 30, 2002, the Company would
not be in compliance with the new standard. If we fail to meet these
requirements, our stock could be delisted. Last year we received a series of
letters from Nasdaq addressing our failure to satisfy the minimum net tangible
asset continued listing requirements for the SmallCap Market. On March 19, 2002,
we received a letter from Nasdaq that we were in compliance with the continued
listing requirements. Subsequent to the close of the September 30, 2002 quarter,
we received a notice from Nasdaq that our closing bid price for the previous 30
days was below the minimum $1.00 per share necessary for maintaining our Nasdaq
SmallCap listing status. The letter, dated November 4, 2002, stated that
according to Marketplace Rules, we would be provided with 180 days (or through
May 5, 2003) to regain compliance. If, at anytime before May 5, 2003, the bid
price our common stock closes at $1.00 per share or more for a minimum of 10
consecutive trading days, we would be considered in compliance with the rule.
There is no assurance that we will continue to meet the Nasdaq Small Cap listing
requirement in future periods.
Results of Operations
Laser Group
Revenues from our Laser Group for the quarter ended September 30, 2002
were $1,466,765 (versus $1,951,064 at September 30, 2001) with an operating loss
for the quarter of $131,139 (operating loss of $27,832 at September 30, 2001).
The decrease in Laser Group revenues year over year resulted from postponed
orders for gas turbine parts used for power generation and reduced or delayed
orders for jet engine components. Gross profit margin decreased in the 3rd
Quarter of 2002 to approximately 14% from 36% in 2001 due to increased set-up
costs with new customers to replace the postponed orders with other customers
and from the high fixed costs associated with our underutilized laser
workstations. With airline traffic and commercial demand for power generation
recovering from the tragedies of September 11, 2001, we expect a higher, but
indeterminate, proportion of those orders to return in the fourth quarter of
2002 and 2003. In addition to adding new customers, we continue to work with our
existing customer base to move older technologies to laser.
Photonics Group
Revenues related to the Photonics Group in the quarter ended September 30,
2002 were $2,282,951 (versus revenue of $367,440 at September 30, 2001) with an
operating loss of $132,122 (versus an operating loss of $122,489 at September
30, 2001). The increase of $1,915,511 in revenues for the quarter ended
September 30, 2002 compared to the quarter ended September 30, 2001 was
primarily due to continuing work on a $12.0 million DARPA contract signed on
January 23, 2002. Net profits are limited to approximately seven percent for
that government research contract. The operating loss was caused in part by
expenses associated with ramping up our business operations at the Photonics
facility. These expenses are generally not allowed to be charged to the
government contract.
Although we continue to receive inquiries from commercial accounts, DARPA
represented substantially all of the revenues of the Photonics Group in the
first nine months of 2002. However, as a result of the October 30th termination
of the DARPA contract, we expect revenues to decrease significantly for the
remainder of 2002.
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Consolidated revenues for the three months ended September 30, 2002 were
$3,749,716 on cost of sales of $3,241,552, resulting in a gross profit of
$508,164 for the quarter. Consolidated revenues for the three months ended
September 30, 2001 were $2,318,504 on cost of sales of $1,490,449, resulting in
a gross profit of $828,055. The $1,431,212 or 61.7% increase in consolidated
revenues for the quarter ended September 30, 2002, compared to the quarter ended
September 30, 2001, was due to significant research and development revenues
from the DARPA contract in our Photonics Group. This was offset by a reduction
in revenues of $484,299 at the Laser Group due to reduced orders for jet engine
and power generation parts. Gross profit dropped by $319,891 (38.6%) as the
Company continued to derive more revenue (60.9%) from the Photonics group, which
has a much higher cost of sales.
15
Research and development expenses were $18,860 for the three months ended
September 30, 2002, compared to $220,563 for the three months ended September
30, 2001. In light of the fact that we are in the contract research and
development business and mark up our services to reflect an anticipated profit
on such services, the majority of our research revenues and related costs are
reflected in sales and cost of goods sold, respectively. Research and
development reflects only internal costs associated with new product development
efforts. During the quarter ended September 30, 2001, we expended $220,563 in
development efforts primarily related to research needed to support our filing
of additional patent applications. Our internal research and development efforts
are focused on commercial applications for diode lasers that we anticipate will
be needed for the next generation of telecommunications devices, and on
commercial applications for the materials processing and medical device
industries. Subject to customer demand and funding by external capital
financing, we anticipate that internal research and development expenses will
increase in 2003, for expected GCSELTM product development efforts in our
Photonics Group.
General and administrative expenses were $689,364 for the three months
ended September 30, 2002 as compared to $802,801 for the three months ended
September 30, 2001. The decrease of approximately $113,440, or 14.1%, was
primarily attributed to a significant cost cutting measures initiated by our new
management team. Salaries for all corporate management were capped at $60,000
per annum. All non-direct expenses at our facilities were reviewed with many non
essential items eliminated. These cost cutting initiatives will continue in
earnest for the remainder of 2002. Compensation expense for stock options and
investor and public relations costs will increase through the remainder of 2002,
as those costs are recognized over the terms of their agreements. The expenses
will approximate $57,000 and $94,000, respectively, per quarter.
Selling expenses were $52,662 for the three months ended September 30,
2002 as compared to $66,748 for the three months ended September 30, 2001,
reflecting some minor staff reductions which occurred in the sales function
within our Laser Group..
Depreciation and amortization expense totaled $197,353 for the three
months ended September 30, 2002 as compared to $249,341 for the three months
ended September 30, 2001. The decrease was primarily due to a number of assets
that had been purchased by our Laser Group in 1992 becoming fully depreciated
prior to the third quarter of 2002. Interest expense to stockholders was $7,724
for the three months ended September 30, 2002 as compared to $25,041 for the
three months ended September 30, 2001. The decrease of $17,317 was due primarily
from the satisfaction of various stockholder obligations during 2001 and 2002.
Other interest expense was $151,561 for the three months ended September 30,
2002, compared to $14,006, reflecting the additional expense associated with the
15% coupon interest payments on the $1.5 million of convertible notes. As a
result of the action by the note holder subsequent to September 30, 2002
requiring the immediate payment of the notes, we would expect interest expense
to decrease in the fourth quarter. As noted, however, we are actively seeking
additional capital financing with the cost of the financing undetermined at this
time.
The loss from continuing operations was $615,165 for the three months
ended September 30, 2002 as compared to a loss of $557,197 for the three months
ended September 30, 2001. Additionally, there was a loss of $92,211 from the
disposal of discontinued operations related primarily to the sale of the land
and building at the O&W subsidiary during the quarter ended September 30, 2002.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Consolidated revenues for the nine months ended September 30, 2002 were
$8,964,539 on cost of sales of $7,541,530, resulting in a gross profit of
$1,423,009 for the year to date. Consolidated revenues for the nine months ended
September 30, 2001 were $6,406,637 on cost of sales of $4,244,810, resulting in
a gross profit of $2,161,827. The increase in consolidated revenues of
$2,557,902 or 39.9%, and the decrease in consolidated gross profit of $738,818
or 34.2% for the nine months ended September 30, 2002, compared to the nine
months ended September 30, 2001, was due to a significant increase in the
revenue associated with the Photonics group. The gross profit achieved on
contract research and development revenue from DARPA is restricted by agreement
to result in a net fee maximum of
16
6.7%. This increase in consolidated revenues was offset by a reduction in
revenues of $1,350,196 at the Laser Group which also directly impacted the
reduction in gross margins.
Research and development expenses were $105,648 for the nine months ended
September 30, 2002, compared to $404,677 for the nine months ended September 30,
2001. Due to the fact that we are in the contract research and development
business and mark up our services to reflect an anticipated profit on such
services, the majority of our research revenues and related costs are reflected
in sales and cost of goods sold, respectively. Research and development reflects
only internal costs associated with new product development efforts. During the
nine months ended September 30, 2001, we expended significant amounts for
efforts primarily related to research needed to support our filing of additional
patent applications. Our internal research and development efforts are focused
on commercial applications for diode lasers that we anticipate will be needed
for the next generation of telecommunications devices, and on commercial
applications for the materials processing and medical device industries. Subject
to customer demand and funded by external capital financing, we anticipate that
internal research and development expenses will increase in 2003, for expected
GCSELTM product development efforts in our Photonics Group
General and administrative expenses were $2,045,462 for the nine months
ended September 30, 2002 as compared to $2,015,419 for the nine months ended
September 30, 2001. The increase of approximately $30,043, or 1.5% was primarily
attributed to a reallocation of human resources from administrative positions to
research, engineering and scientific positions related to the growth of the
Infinite Photonics subsidiary, offset by approximately $87,000 in additional
compensation expense attributable to stock options of a former officer and
director of the Company, and amortization of investor and public relations
costs. We expect compensation expense from these stock options and investor and
public relations costs to increase through the remainder of 2002, as those costs
are recognized over the terms of their respective agreements.
Selling expenses were $201,744 for the nine months ended September 30,
2002 as compared to $238,977 for the nine months ended September 30, 2001,
reflecting lower commissions on lower jet engine and turbine parts revenues.
Depreciation and amortization expense totaled $654,202 for the nine months
ended September 30, 2002 as compared to $603,352 for the nine months ended
September 30, 2001. The increase was primarily due to depreciation expense for
new lasers acquired for medical device production and laser engineered net
shaping equipment (LENS) at our Laser Group, and increased depreciation of
leasehold improvements and equipment at our Photonics Group. Interest expense to
stockholders was $17,317 for the nine months ended September 30, 2002 as
compared to $86,027 for the nine months ended September 30, 2001. The decrease
of $68,710 was due primarily from the satisfaction of various stockholder
obligations during 2001 and 2002. Other interest expense was $309,650 for the
nine months ended September 30, 2002, compared to $244,734 for the prior year's
period, reflecting the additional expense associated with the 15% coupon
interest payments on the $1.5 million of convertible notes. As a result of the
action by the note holder subsequent to September 30, 2002 requiring the
immediate payment of the notes, we would expect interest expense to decrease in
the fourth quarter. As noted, however, we are actively seeking additional
capital financing with the cost of the financing undetermined at this time.
Gain (loss) on sale of assets includes an approximate gain of $137,000 on
the sale of assets from our Mound Laser and Photonics subsidiary. This gain has
been offset by an impairment loss amounting $45,670 for the nine months ended
September 30, 2002 ($0 for the nine months ended September 30, 2001), and
resulted from the write-off of intellectual property development that we are no
longer actively pursuing based on current quarterly impairment testing of
intangible assets under FAS 142. We review our patent development efforts on a
quarterly basis and test for possible impairment, based on our assessment of the
disallowance of patent applications during the quarter (if any), the likelihood
of continued develop of patent claims by our scientists and legal counsel, and
competitive technologies. There were no disallowances by the U.S. Patent and
Trademark office during the current quarter.
The loss from continuing operations was $1,841,877 for the nine months
ended September 30, 2002 as compared to a loss from continuing operations of
$1,435,177 for the nine months ended September 30, 2001. The net
17
loss for the first nine months ended September 30, 2002, was $2,149,955 compared
to a net loss of $1,763,360 in the first nine months of 2001, including a
$308,078 loss from discontinued operations in 2002, related primarily to the
sale of land and building at the O&W subsidiary, offset by gain on the sale of
related equipment in the first quarter 2002. Despite aggressive cost cutting
efforts, we expect losses to continue until the time that we can commercially
market our laser diodes. Our inability to execute an acquisition or licensing
strategy or if we are unable to expeditiously raise additional funding will
delay profitable operations.
Item 4. Controls and Procedures
Infinite Group's management, including its Chief Executive Officer and
Acting Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Rule 13a-14 and
15d-14 under the Securities Exchange Act of 1934, as amended. Based on that
evaluation, the Chief Executive Officer and acting Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and acting
Chief Financial Officer completed his evaluation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of CEO and acting CFO pursuant to 18 U.S.C.
Section 1350
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
November 14, 2002
INFINITE GROUP, INC.
By: ss/ Clifford G. Brockmyre II
--------------------------------
Clifford G. Brockmyre II, President,
Chief Executive Officer, and
acting Chief Financial Officer
18
INITE GROUP, INC.
CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Clifford G. Brockmyre II, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Infinite Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
ss/ Clifford G. Brockmyre II
-----------------------------
Clifford G. Brockmyre II
President and Chief Executive Officer
Date: November 14, 2002
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CERTIFICATION
I, Clifford G. Brockmyre II, certify that:
7. I have reviewed this quarterly report on Form 10-QSB of Infinite Group,
Inc.;
8. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
9. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
10. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(e) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
12. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
ss/ Clifford G. BrockmyreII
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Clifford G. Brockmyre II
acting Chief Financial Officer
Date: November 14, 2002
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