Annual Report for Fiscal Year Ending 12-31, 2024 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary statement identifying important factors that could cause our actual results to differ from those projected in forward-looking statements.

Readers of this report are advised that this document contains both statements of historical facts and forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward-looking statements. Examples of forward-looking statements include, but are not limited to (i) projections of sales, income or loss, earnings per share, capital expenditures, dividends, capital structure, and other financial items, (ii) statements of our plans and objectives with respect to business transactions and enhancement of stockholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects.

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.

Business

Headquartered in Pittsford, New York, Infinite Group 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 MSPs, MSSPs, agents and distributors and government contractors, whom we refer to collectively as our channel partners. We also sell directly to end customers.

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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 SaaS solutions that can be deployed in myriad environments. Software and services are initially developed in our wholly-owned subsidiary, IGI 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.

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 Nodeware; 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 across a wide variety of networks and the ability to integrate it into existing and new cybersecurity solutions, 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 2023 and 2024 we made significant investments in CyberLabs and 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 2025.

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.

Recent Developments

During the year ended December 31, 2024, we had sales of approximately $6.6 million, an operating loss of approximately $0.9 million, due primarily to increased investment in sales and marketing for Nodeware and related services, and a net loss of approximately $1.6 million, primarily due to the previously stated operating loss along with significant interest expense, offset by one-time gain from the Employee Retention Credit. We had full year sales of approximately $7.0 million in 2023, generating operating loss of approximately $1.9 million and net loss of approximately $1.9 million.

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On February 3, 2023, the Company, as borrower, entered into a financing arrangement with Mast Hill Fund, L.P. In exchange for a promissory note, Mast Hill agreed to lend the Company $118,000, which bears interest at a rate of eight percent (8%) per annum, less $11,800 original issue discount. Under the terms of the Loan, amortization payments are due beginning June 3, 2023, and each month thereafter with the final payment due on February 3, 2024. Additionally, in the event of a default under the Loan or if the Company elects to pre-pay the Loan, the Lender has the right to convert any portion or all of the outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company's common stock at a conversion price of $2.00 per share. The conversion price is subject to adjustment under certain circumstances, including issuances of Company common stock below the conversion price. The Company is not required to issue additional shares to Lender in the event an adjustment to the conversion price occurs. Except for the option to convert the note in the event of a pre-payment, there is no pre-payment penalty associated with the promissory note. The Loan is subject to customary events of default, including cross-defaults on the Loan agreements and on other indebtedness of the Company, violations of securities laws (including Regulation FD), and failure to issue shares upon a conversion of the note. Amounts due under the Loan are subject to a 15% penalty in the event of a default. As additional consideration for the financing, the Company issued Lender a 5-year warrant to purchase 59,000 shares of Company common stock at a fixed price of $2.00 per share, subject to price adjustments for certain actions, including dilutive issuances, representing 100% warrant coverage on the principal amount of the Loan. The Company has granted the Lender customary "piggy-back" registration rights with respect to the shares issuable upon conversion of the promissory note and exercise of the warrant. No material relationship exists between the Company or its affiliates and Lender, other than in respect of the Loan and similar loans between the Company and Lender entered into on November 3, 2021, February 11, 2022, May 31, 2022, and November 23, 2022, respectively. J.H. Darbie & Co., Inc., a registered broker-dealer, acted as a finder in connection with the Loan, and was paid a cash fee of $3,100 (2.92% of the gross proceeds of the Loan) and issued a 5-year warrant to purchase 3,098 shares of Company common stock at a fixed price of $2.40 per share (120% of the exercise price of the warrant issued in connection with the Loan), subject to price adjustments for certain actions, including dilutive issuances, representing 7% warrant coverage on the gross proceeds of the Loan. The Company has granted the Finder customary "piggy-back" registration rights with respect to the shares issuable upon exercise of the warrant. The Company and the Lender are parties to promissory notes dated November 3, 2021, February 11, 2022, May 27, 2022, and November 23, 2022. On February 3, 2023, the Company and the Lender entered into an amendment with respect to the February 11, 2022 Note (the "Note") waiving any Event of Default (as defined in the Note) under Section 4.17 of the Note that occurred prior to February 3, 2023. In addition, the amendment extended the maturity date of the Note to May 30, 2023. The Company shall pay $200,000 of the existing balance of the Note on or before March 31, 2023, to reduce the balance of the note by $200,000. If the company fails to make the payment, then the (i) the principal of the Note shall be increased by $30,000 (the "Increased Principal Portion") as of April 1, 2023, and (ii) the Company shall repay the Increased Principal Portion on or before April 16,2023. Except as set forth above, the terms of the Notes remain the same.

On March 17, 2023, the Company, as borrower, entered into an Amended and Restated Line of Credit Note and Agreement (the "New Note") effective as of October 1, 2022, which amended and restated that certain Line of Credit Note and Agreement dated March 14, 2016 (the "Original Note") by and between the Company and James V. Leonardo (the "Holder," together with the Company the "Parties"). The New Note has a principal amount of $250,000 (the 'Principal Amount") and accrues interest on the unpaid Principal Amount at a rate of ten percent (10%) per annum. Also on March 17, 2023, James Villa, the Company's Chief Executive Officer, entered into a personal guarantee with the Holder to personally guarantee the obligations of the Company under the New Note. Under the terms of the New Note, the Company has agreed to make a one-time payment of $16,667 for interest accrued on the Original Note for the four-month period covering June 2022 through September 2022. The Company has also agreed to make quarterly interest payments of $6,250, commencing on December 31, 2022, and continuing through and including September 30, 2023. For consideration received by the Parties for entry into the New Note, the Parties, along with James Villa and RES Exhibit Services, LLC ("RES"), an entity owned by the Holder, entered into a Letter Agreement (the "Agreement") on March 17, 2023. Under the terms of the Agreement, all prior amounts owed to the Company by RES were set off against amounts owed by the Company to the Holder under the Original Note.

On March 29, 2023, the Company, as seller, received a $1,330,464 as a purchase price (the "Purchase Price") for the sale of the Company's rights, title and interest per a Risk Participation of ERC Claim Agreement, dated March 27, 2023 ("Agreement") by and between the Company and 1861 Acquisition LLC (the "Buyer," together with the Company the "Parties"). The Agreement transferred all of the Company's rights to receive any and all payments, proceeds or distributions of any kind (without set-off, deduction or withholding of any kind), including interest, from the United States Internal Revenue Service (the "IRS") in respect of the employee retention credits duly and timely claimed by Seller on account of qualified wages paid by Seller and identified as a "Claim for Refund" under Form 941-X Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund for the third (3rd) and fourth (4th) quarters of 2020, and the first (1st), second (2nd) and third (3rd) quarters of 2021 (the "Tax Refund Claim") in the aggregate amount of $1,662,698 ("Transferred Interests"). Notwithstanding anything to the contrary contained in the Agreement, (i) the relationship between Company and Buyer under the Agreement with respect to the Transferred Interests is that of seller and purchaser, with the Company having irrevocably transferred to Buyer the right to receive from the Company 100% of the monies or property received by the Company with respect to the Tax Refund Claim in exchange for the Purchase Price, and (ii) the Agreement shall not constitute an assignment or transfer or agreement to assign or transfer all or any part of the Company's legal title in and to the Tax Refund Claim. During 2023, the Company received the ERC Claim in the amount of $1,733,397 including interest of $70,699. Per the Agreement, the Company transferred this amount to the Buyer.

On August 25, 2023, the Company, as borrower, entered into a business loan arrangement with WebBank. In exchange for the loan, WebBank agreed to lend the Company $150,000, with a payment plan of $2,671 per week for 78 weeks effective August 28, 2023. The effective interest rate of the Loan is 46.8%. If the loan is prepaid, the unpaid portion of the finance charge of $58,350 will be due to WebBank. In September 2024, WebBank forgave the remaining payments on the business loan for $60,295. This forgiveness of debt resulted in a gain of approximately $12,800.

On September 14, 2023, the Company, as borrower, entered into a Financing and Security Agreement ("Agreement") with Celtic Bank Corporation (the "Celtic"). In exchange for a line of credit ("LOC"), Celtic agreed to lend the Company $200,000, with a payment plan of $20,892 per month for 12 months effective October 16, 2023. The annual percentage rate of the LOC is 48.4%. If LOC is prepaid, the unpaid interest accrued will be due to Celtic. If an additional draw on the LOC is requested, a draw fee will be imposed. On December 26, 2023, the Company, as borrower, requested and received a draw against the LOC. The amount of the draw was $42,224 with a payment plan of $4,420 per month for 12 months effective January 16, 2024. A draw fee of $967 was imposed. In October 2024, Celtic Bank Corporation forgave the remaining payments on the subordinated business loan for $93,381. This forgiveness of debt resulted in a gain of approximately $45,200.

On December 15, 2023, the Company, as borrower, entered into a Sale of Future Receipts Agreement ("Agreement") with Fresh Funding Solutions, Inc. ("Fresh"). The Company is selling a portion of a future revenue stream to Fresh at a discount. The purchase price paid to the Company was $120,000. The net amount funded to the Company was $118,765 net of fees with a payment plan of $3,250 per week for 48 weeks. The effective interest rate of the agreement is 58.6%. In October 2024, Fresh Funding forgave the remaining payments on the subordinated business loan for $64,750. This forgiveness of debt resulted in a loss of approximately $1,500.

On December 19, 2023, U.S. Patent number 11,848,954 was issued for NETWORK ASSESSMENT SYSTEMS AND METHODS THEREOF.

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On February 16, 2024, the Company received funding from a future receivables purchase agreement with UFS West LLC. The purchase price amount was $150,000 with a fixed fee of $4,500. A payment plan of $5,824 per week for 34 weeks effective February 23, 2024. The effective interest rate of the agreement is 87.5%. In August 2024, UFS West LLC forgave the remaining payments on the subordinated business loan for $51,500. This forgiveness of debt resulted in a gain of approximately $29,900.

On March 8, 2024, the Company received funding from a subordinated business loan and security agreement with Agile Lending, LLC. The term loan amount was $185,500 with a fixed fee of $10,500. A payment plan of $11,285 per week for 24 weeks effective March 18, 2024. The effective interest rate of the agreement is approximately 170%. In August 2024, Agile Lending LLC forgave the remaining payments on the subordinated business loan for $60,000. This forgiveness of debt resulted in a gain of approximately $43,600.

On April 3, 2024. The Company formed Nodeware Inc. in the state of Delaware. It is a wholly owned subsidiary to support the Company's Nodeware solution.

On May 20, 2024, the Company formed Nodeware Inc. in the state of Nevada. It is a wholly owned subsidiary to support the Company's Nodeware solution

On June 4, 2024, the Company received funding from a loan agreement with Stripe and Celtic Bank. The loan amount was $150,500 plus a fixed fee of $17,157. The repayment amount of $167,657 will be repaid at a repayment rate of 20% of the Company's receivables automatically withheld by Stripe. There is no financing percentage. The repayment start date was June 11, 2024, with a minimum payment amount of $18,629 over every 60-day period. The final repayment date is December 3, 2025, if total repayment amount is not paid as of that date. This loan agreement also eliminates the remaining balance of $33,815 from the previous Stripe loan dated October 11, 2023, as the remaining balance was rolled into this new loan.

On August 16, 2024, the Company entered into an amended and restated loan and security agreement (the "Agreement"), dated as of August 16, 2024, by and between the Company and the Company's President's brother, Harry Hoyen (the "Lender"), pursuant to which the Company may borrow up to an aggregate amount of $2,000,000 (the "Loan") at 8% per annum. Pursuant to the Agreement, on August 16, 2024, the Company borrowed $1,200,000 from the Lender and issued to the Lender a secured promissory note evidencing such portion of the Loan having a maturity date of August 16, 2028. The Agreement's payment plan is for 48 payments of $52,500 per month.

Commencing on September 1, 2024, the Company may borrow up to an additional $800,000 from the Lender to be evidenced by secured promissory notes. Additional amounts of $80,000, $70,000, $555,000 and $50,000 were borrowed on October 15, 2024, October 16, 2024, November 13, 2024, and October 27, 2025, respectively.

On September 30, 2024, the Company did not make the scheduled payment due under its financing agreement with the Lender, resulting in a technical default under the terms of the agreement as well as violating several other loan covenants. The payment default and violated covenants have been waived by the Lender through November 15, 2026.

In September 2024, CAN Capital LLC (successor to a WebBank loan dated August 23, 2023) forgave the remaining payments on the subordinated business loan for $60,295. This forgiveness of debt resulted in a gain of approximately $12,800.

In October 2024, Celtic Bank Corporation forgave the remaining payments on the subordinated business loan for $93,381. This forgiveness of debt resulted in a gain of approximately $45,200.

On December 6, 2024, ASM Technologies Division LLC. was organized in the state of Delaware.

On January 1, 2025, Infinite Group Inc. was admitted as the initial member with 100% of the membership interests in ASM Technologies Division LLC.

On March 12, 2025, the Company received funding from a loan agreement with Stripe and Celtic Bank. The loan amount was $241,500 plus a fixed fee of $23,667. The repayment amount of $265,167 will be repaid at a repayment rate of 30% of the Company's receivables automatically withheld by Stripe. There is no financing percentage. The repayment start date was March 17, 2025, with a minimum payment amount of $29,463 over every 60-day period. The final repayment date is September 8, 2026, if the total repayment amount is not paid as of that date. This loan agreement also eliminates the remaining balance of $30,029 from the previous Stripe loan dated June 3, 2024, as the remaining balance was rolled into this new loan.

On March 12, 2025, Infinite Group, Inc. (the "Company") entered into an Asset Purchase Agreement (this "Agreement") with Opti9 Technologies LLC, a Delaware limited liability company ("Buyer") for the sale of assets related to the division of business known as the Ace Server Management division. Under this division the Company provides IT managed infrastructure services, to a US government agency as a subcontractor to Peraton Enterprise Solutions LLC (f/k/a Perspecta Enterprise Solutions LLC ("Peraton")).

The purchase price was $7,500,000 plus the assumption of liabilities under the contract with Peraton going forward, and subject to customary adjustments prior to closing. The purchase price will be funded by immediately available funds at the closing. The Agreement contemplated payment of a number of third party creditors which proceeds will be applied at the closing.

The closing was expected to take place in June 2025. The closing of the transaction is subject to customary conditions, including, among other things, (i) approval by the Company's stockholders; (ii) consent of Peraton; (iii) consent of a number of the Company's debtholders; (iv) no temporary or permanent judgment issued by any governmental entity of competent jurisdiction or law or other legal restraint or prohibition preventing or prohibiting the consummation shall be in effect; (v) that no event or circumstance with a material adverse effect on the Ace server management business division shall have occurred; and, (vi) other customary conditions for a transaction of this nature.

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The Agreement contained representations, warranties and covenants of the parties customary for a transaction of this type, including a 4 year non-competition covenant from competing with the Buyer in providing services to the U.S. government agency that was subject of the Peraton subcontract, and providing 24x7x365 Windows and/or Linux operating system and hardware support and monitoring services to other parties.

Concurrently with the execution of the Agreement, certain stockholders were to enter into voting agreements (the "Voting Agreements") with Buyer. Pursuant to the terms of the Voting Agreements, these stockholders were to agree to vote their shares in favor of the transaction and the Company's upcoming stockholders meeting, to not solicit any other acquisition proposals and to vote their shares against any competing acquisition proposals. The shares subject to the Voting Agreements comprised approximately 28% of all outstanding shares. The Voting Agreements would terminate in certain circumstances, including upon termination of the Agreement.

The Company planned to present the transaction for the sale of these assets for approval at its upcoming annual meeting of stockholders which was tentatively scheduled for June 4, 2025.

On April 22, 2025, The Company received verbal communication from Peraton that the ASM contract was to be cancelled for convenience on May 17, 2025.

On May 8, 2025, the Company received a request in writing to answer an RFP that would retain certain employees of the Company that previously provided service under the ASM contract and would move the Company to a time and materials subcontract with Peraton serving the US government agency.

During April and May 2025, the Company executed layoffs constituting a material reduction in the workforce because of this change. During 2025, the Company received task orders and executed time and materials subcontracts with Peraton to retain certain employees serving the US Government agency.

On July 31, 2025, the Company received a notice of termination of the Asset Purchase Agreement.

On August 15, 2025, the Company received funding from Business Loan and Security Agreement with WebBank. The funding provided was $150,000 with a fixed fee of $3,000. A payment plan of $2,558 per week for 78 weeks effective August 21, 2025. The effective interest rate of the agreement is 42.6%.

On September 23, 2025, the Company received funding from a business installment loan with OnDeck Capital, LLC. The funding provided was $200,000 with a fixed fee of $5,000. A payment plan of $3,844 per week for 78 weeks effective September 30, 2025. The effective interest rate of the agreement is 61.6%.

Results of Operations - Comparison of the years ended December 31, 2024 and 2023

The following discussion analyzes our results of operations for the years ended December 31, 2024 and 2023. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.

The following table compares our statements of operations data for the years ended December 31, 2024 and 2023. Certain trends suggested by this table are not indicative of future operating results.

		Years Ended December 31,
																		2024 vs 2023
						As a % of								As a % of				Amount of				% Increase
		2024				Sales				2023				Sales				Change				(Decrease)
Sales		$	6,563,309				100.0	%		$	6,954,020				100.0	%		$	(390,711	)			(5.6	)
Cost of sales			3,772,371				57.5				3,916,806				56.3				(144,435	)			(3.7	)
Gross profit			2,790,938				42.5				3,037,214				43.7	%			(246,276	)			(8.1	)
General and administrative			1,869,214				28.5				2,209,956				31.8				(340,742	)			(15.4	)
Selling			1,817,770				27.7				2,731,535				39.3				(913,765	)			(33.5	)
Total cost and expenses			3,686,984				56.2				4,941,491				71.1				(1,254,507	)			(25.4	)
Operating loss			(896,046	)			(13.7	)			(1,904,277	)			(27.4	)			1,008,231				52.9
Other Income (loss)			127,811				1.9				1,757,829				25.3				(1,630,018	)			(92.7	)
Interest expense (net)			(879,683	)			(13.4	)			(1,708,076	)			(24.6	)			828,393				48.5
Net loss		$	(1,647,918	)			(25.1	)%		$	(1,854,524	)			(26.7	)%		$	206,606				11.1
Net loss per share - basic and diluted		$	(3.16	)						$	(3.70	)						$	0.54

Our managed support service sales decreased by 2% from $4,419,775 during the twelve months ended December 31, 2023 to $4,315,393 during the corresponding period of 2024. Managed support service sales accounted for approximately 66% of our sales in 2024 and approximately 64% for the same period in 2023. The decrease in our managed support service sales during 2024 was due to the termination of a minor scope project in services provided to our largest customer. We expect our Managed Information Security Services sales to grow slightly in 2025.

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Nodeware sales increased from $705,561 in 2023 to $869,378 in 2024, an increase of over 23%. This increase was due to the internal reorganization of our sales team in 2023 and 2024, as well as more focused marketing expenditures. We expect to see continued significant growth of Nodeware sales throughout 2025.

Sales of Webroot decreased from $559,215 in 2023 to $457,080 in 2024. This is a legacy third party offering which we are no longer aggressively marketing.

Our cybersecurity services sales, primarily to SMEs, decreased by 27% to $921,458 during the twelve months ended December 31, 2024 from $1,269,469 during the corresponding period of 2023. The decrease in cybersecurity software and services sales during 2024 was attributable to delayed timing on completion of several projects late in the year, as well as a reduction of sales orders. We expect our cybersecurity software and services business to grow in 2025 due to our increased spend in channel and marketing programs.

Cost of Sales and Gross Profit

Cost of sales principally represents the compensation expense for our employees (primarily the cost of our IT services group). To a lesser degree, but still significant, we also incurred cost of sales for third party software licenses for our commercial SME partners. Cost of sales decreased by 4% to $3,772,371during the twelve months ended December 31, 2024 from $3,916,806 during the corresponding period of 2023. The decrease in cost of sales during the twelve months ended December 31, 2024 from 2023 was due to several cost reductions, but also partially offset by several increases. The cost of supplying Webroot software decreased from $317,653 in 2023 to $258,621 in 2024, due to a reduction in sales. The cost of labor to support cybersecurity projects decreased from $653,860 in 2023 to $519,563 in 2024 due to staff reductions. The cost of labor to support managed services decreased slightly from $2,034,031 in 2023 to $2,032,484 in 2024. Software expenses related to cost of sales decreased $274,290 in 2023 to 224,661 in 2024, primarily driven by the optimization of the way our transactional data was processed by an outside third party vendor, therefore, lowering our per transaction and total cost.

As a result of reduced revenue, gross profit decreased year over year, by 8% to $2,790,938 for 2024.

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 decreased by approximately $341,000 in 2024. The primary components of that change were a reduction in corporate marketing and consulting fees of approximately $159,000, a decrease in rent of approximately $59,000, with multiple other smaller changes netting the difference.

Selling Expenses

The decrease of $914,000 in selling expenses to approximately $1,818,000 in 2024 is principally due to a decrease in marketing expenses of $576,000, decreases in salaries and benefits of $225,000, decreases of commissions on cybersecurity projects and software of $100,000, with multiple other smaller changes netting the difference.

Operating Loss

Operating loss improved approximately $1,008,000 from 2023 to 2024. The decrease in our general and administrative expenses of $341,000, and the decrease in selling expenses of $914,000, both described in detail above, were the primary reasons for the improvement in operating loss.

Other Income

In 2024, the other income of $127,811 was related to the accounting gain of the change in our lease agreement of $15,350 for the partial lease termination and the net amount of debt forgiveness related to various debt instruments of $112,461. Other income in 2023 included a one-time refund of taxes of $1,662,698 related to the approval of the Employee Retention Credit by the IRS as well as the gain of $95,131 related to debt forgiveness.

Interest Expense, net

Interest expense decreased by approximately $828,000 and includes interest on indebtedness, amortization of loan fees, cost of stock options as part of debt agreements and fees for financing accounts receivable invoices. The decrease in interest expense is principally attributable to bridge loan financing considerations of approximately $836,000 and interest of approximately $266,000 associated with the borrowing on the ERC receivable in 2023. This was offset by interest associated with new borrowings in 2024.

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Net Loss

The improvement in net loss is attributable primarily to the selling, general and administrative items discussed above resultant from our focus on growing and developing the Nodeware product, and the decrease in the interest expense associated with loans from 2023.

Liquidity and Capital Resources

At December 31, 2024, we had cash of $168,937 available for working capital needs and planned capital asset expenditures and a working capital deficit of approximately $8,782,000 with a current ratio of 0.09.

During 2024, our primary sources of liquidity were cash provided by collections of accounts receivable and our factoring line of credit, and short term debt arrangements. 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 December 31, 2024, based on eligible accounts receivable, we had $151,000 available under this arrangement. We expect sales during 2025 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 December 31, 2024, we had current notes payable of $139,000 to related parties. $40,000 of this debt was due on January 1, 2023. The remaining $99,000 are in the form of demand notes with an interest rate of 6%.

At December 31, 2024, we have current notes payable of approximately $1,745,000 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.

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Also included in the current notes payable to third parties at December 31, 2023, are five bridge loans with Mast Hill Fund, L.P. All five loans bear interest at 8% and are subject to a 12% default interest rate as well as a 15% penalty in the event of a default. We used the proceeds from the bridge loans to substantially enhance marketing of our Nodeware solution, in order to significantly increase its growth. In 2022, a total of approximately $737,000 was recorded as deferred note costs. An additional amount of approximately $125,000 was recorded as deferred note costs associated with these loans in 2023. At December 31, 2024, the unamortized balance of the deferred note costs for all five loans was $0. See Note 5 of the 2023 Audited Financial Statements for more information.

Notes payable to third parties at December 31, 2024, includes a loan with Celtic Bank. In lieu of interest, this has a one-time up-front fixed fee of $12,391. This entire fee was recorded as deferred note costs. The remaining unamortized balance at December 31, 2024 was $0.

At December 31, 2024, we also have an accrued liability for the voluntary match portion of a former simple IRA plan, including interest, of approximately $310,000. We do not anticipate distributing this liability in the next year or two. Interest will continue to accrue.

We have approximately $925,000 of current maturities of long-term obligations to third parties. This is composed of six notes including long-term notes to third parties of $265,000 due on January 1, 2018, which has not been renewed or amended, $175.000 due on January 1, 2024, which has not been renewed or amended, $100,000 due on January 1, 2024, which has not been renewed or amended, $9,000 due on January 1, 2024, which has not been renewed or amended, $126,473 due on August 24, 2025, and $250,000 due on September 30, 2024. The accrued interest on these notes is approximately $384,000 at December 31, 2024.

We have approximately $1,187,000 of current maturities of long-term obligations to related parties. This is composed of $25,000 which was due on June 30, 2023, $90,000 which was due on July 31, 2023, an $146,300 due on January 1, 2024 to two officers of the Company. The amount also includes $328,000 due on January 1, 2024 to our Chairman and $70,000 which was due on January 1, 2023 to a non-officer insider. During 2024, we incurred a long-term debt agreement with the non-officer insider for approximately $1,905,000 with the amount due within the next twelve months of approximately $528,000. The accrued interest of these six notes is approximately $304,000 at December 31, 2024.

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 schedules maturities.

Our ability to raise the additional capital is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of development and business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price that is favorable to us. In addition, our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the recent or future disruptions to, and volatility in, the financial markets in the United States and worldwide. With regards to our existing debt, we plan to restructure the debt, convert debt to equity or pay down appropriate debt. We may also increase ownership via exercising of stock options and the potential sale of restricted stock. If adequate funds are not available when needed, we may need to significantly reduce our operations while we seek strategic alternatives, which could have an adverse impact on our ability to achieve our intended business objectives including new software initiatives.

We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.

There is substantial doubt of the Company to continue as a going concern and our audit report included this matter

Cash Flows

The following table summarizes our cash flow information for the years presented, described below, and should be read in conjunction with our financial statements appearing at Item 15, Page F-1, et seq., of this report.

		Years Ended December 31,
		2024				2023
Net cash provided (used) in operating activities		$	(984,991	)		$	294,709
Net cash provided (used) in investing activities			(188,552	)			1,193,992
Net cash provided (used) by financing activities			1,317,007				(1,486,415	)
Net increase in cash		$	143,464			$	2,286

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Cash Flows Used in 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 the majority of our clients or monthly after services are performed, depending on the contract terms. Our net loss of $1,647,918 for 2024 was increased by non-cash expenses for depreciation, amortization, bad debt expense, and amortization of debt discount, and decreased by non-cash recoveries of bad debt expense, for a net change of $282,197. In addition, a decrease in accounts payable and deferred revenue, with an increase in accrued expenses, totaling $822,285, offset by increases in accounts receivable and other assets of $310,744, and the other income gain of $130,811 resulted in net cash used by operating activities of $984,991.

We are increasing our marketing of Nodeware to our IT channel partners who resell to their customers. We are making 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 small 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 and incremental borrowings, as needed.

Cash Flows Used in Investing Activities

In 2024 and 2023, we incurred capital expenditures for computer hardware as well as software development labor for the enhancements to Nodeware. The decrease of $30,750 from 2023 was primarily due to a similar level of development activities in 2024 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.

In 2023, we sold the rights to our Employee Retention Credit claim to an outside third party, generating funds of $1,413,294.

Cash Flows Provided by Financing Activities

During 2024, we received $2,391,000 from various debt products, including a future receivables purchase agreement with UFS West LLC for $150,000 which is paid in 34 weekly installments, a subordinated business loan and security agreement with Agile Lending, LLC for $185,500 payable over 24 weeks, a restructured loan with Celtic Bank for $150,500, and an amended and restated loan and security with a related party for $1,905,000. We paid the principal of $816,490 on short term debt, $153,758 on long-term debt and $103,745 of related party short term debt.

As part of paying off the UFS West, LLC, Agile Lending, LLC, from above and the Fresh Funding and BlueVine agreements from 2023, we recorded a net gain on forgiveness of debt of approximately $115,000 in 2024.

During 2023, we received $118,000 from a bridge loan from the Mast Hill Fund L.P, with debt issuance costs of $17,900. We received two loans from Celtic Bank associated with Stripe payments for approximately $325,000, with debt issuance costs of $28,867. We received a line of credit of $200,000 from BlueVine and withdrew another $42,224 from the line after three months with debt issuance costs of $12,391. We also received $120,000 from a Sale of Future Receipts Agreement and $150,000 from a business loan agreement with Fresh Funding. These increases were partially offset by short term loan payments of $504,710.

In 2023, we also paid off our bridge loan to Talos Victory Fund. The negotiated payment was $200,000. We recorded a gain on forgiveness of debt of approximately $95,000 with the transaction.

We plan to evaluate alternatives which may include renegotiating the terms of the notes, seeking conversion of the notes to shares of common stock and seeking funds to repay the notes. We continue to evaluate repayment of our notes payable based on our cash flow.

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 December 31, 2024, we had financing availability, based on eligible accounts receivable, of approximately $151,000 under this line. We pay fees based on the length of time that the invoice remains unpaid. We also have approximately $16,000 of available credit under various lines of credit as of December 31, 2024.

During May 2019, we originated a line of credit note payable for a $500,000 with a related party and borrowed $499,000 and have $1,000 available to borrow for working capital. This agreement matures in August 2026.

During 2017, we originated two lines of credit with related parties totaling $175,000. At December 31, 2023, we had $15,000 available under these financing agreements which matured in January 2023 and July 2023, respectively. We are renegotiating terms with the debtholders.

We believe the capital resources available under our factoring line of credit, cash from additional related party loans and cash generated by improving the results of our operations will be sufficient to fund our ongoing operations for at least the next 12 months. 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; a refinancing of our accounts receivable credit facility.

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Critical Accounting Policies and Estimates

See Note 3 to the Financial Statements for a discussion of the Company's accounting policies and estimates including Capitalization of Software for Resale and management's assessment of going concern.