Notes to Condensed Consolidated Financial
Statements
As of March 31, 2014
(Unaudited)
1. History of the Company and Nature of the Business
History of the Company
Infrax Systems, Inc. (formerly OptiCon Systems,
Inc.) (
“the Company”, “Infrax”
) was formed as a Nevada corporation on October 22, 2004. On
July 29, 2005, the stockholders of the Company entered into an agreement to exchange 100% of the outstanding common stock of the
Company, for common and preferred stock of FutureWorld Energy, Inc. (formerly Isys Medical, Inc.), a publicly traded company, at
which time, the Company became a wholly owned subsidiary of FutureWorld Energy, Inc..
FutureWorld Energy, Inc. (
“FutureWorld”
),
Infrax’s parent company, announced its intention to spin off Infrax (formerly OptiCon Systems, Inc.) through the payment
of a stock dividend. In connection with the proposed spinoff, Infrax’s board of directors approved a stock dividend
of 99,118 shares to FutureWorld, its sole shareholder. On August 31, 2007, FutureWorld paid a stock dividend to its
stockholders, consisting of 100% of the outstanding common stock of the Company, at the rate of one share of Infrax’s stock
for every two shares they own of FutureWorld. As of August 31, 2007, Infrax ceased being a subsidiary of FutureWorld.
Nature of Business
Since its inception, the Company had been dedicated
to selling and/or licensing a fiber optic management software system under the name OptiCon Network Manager, originally developed,
and acquired from Corning Cable System, Inc. through a related company, FutureTech Capital, LLC. In October 2009, the Company
began developing smart grid energy related products. As of June 29, 2010, the Company acquired the assets and management of Trimax
Wireless Systems, Inc. (“Trimax”), in exchange for equity and a note payable. In April 2011, the Company acquired controlling
interest in Lockwood Technology Corporation (“Lockwood”), a provider of advanced asset management solutions. The Trimax
and Lockwood product lines are expected to provide an operating platform and enhanced operating effectiveness to the Secure Intelligent
Energy Platform.
While we continue to support the OptiCon Network
Management platform, the Company has shifted its focus and energies towards the “Smart Grid” energy sector. The Company
believes our secure integrated platform will hasten the deployment of all Smart Grid technology for resource constrained small
and mid-sized utilities. Infrax’s advantage comes from our products ability to enable the creation of a secure
platform scalable to deliver a broad set of intelligent Smart Grid initiatives across millions of endpoints for Utilities.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated balance sheet as of March
31, 2014, the consolidated statements of operations and statements of cash flows for the three and nine months then ended, have
been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures, normally included in the financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, have been condensed or omitted as allowed by such rules and regulations, and
the Company believes that the disclosures are adequate to make the information presented not misleading.
In the opinion of management, all adjustments
necessary to present fairly the financial position at March 31, 2014, and the results of operations and changes in cash flows for
the three and nine months then ended, have been made. These financial statements should be read in conjunction with our audited
financial statements and notes thereto included in our annual report for the year ended June 30, 2013 on Form 10-K filed with the
SEC on October 15, 2013.
Certain reclassifications have been made to
the Statement of Operations for disclosure purposes and comparability.
Use of Estimates
The Company prepares its financial statements
in conformity with generally accepted accounting principles in the United States of America. These principals require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual
results could differ from those estimates.
Principles
of Consolidation
The consolidated financial statements include
the accounts and operations of Infrax Systems, Inc., and its wholly owned subsidiary, Infrax Systems SA (Pty) Ltd, an inactive
foreign subsidiary and Lockwood Technology Corporation (70% owned by Infrax Systems, Inc. (collectively referred to as the “Company”). Accordingly,
the assets and liabilities, and expenses of this company have been included in the accompanying consolidated financial statements,
and material intercompany transactions have been eliminated.
The Trimax Wireless, Inc. acquisition was effective
June 29, 2010. The Company, per the agreement, acquired all the assets and liabilities of Trimax Wireless, Inc. As an asset purchase
the acquired assets and liabilities are included in the accounts of Infrax Systems, Inc.
Variable Interest Entities
The Company considers the consolidation of
entities to which the usual condition (ownership of a majority voting interest) of consolidation does not apply, focusing on controlling
financial interests that may be achieved through arrangements that do not involve voting interest. If an enterprise
holds a majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary
is generally required to consolidate assets, liabilities and non-controlling interests at fair value (or at historical cost if
the entity is a related party) and subsequently account for the variable interest as if it were consolidated based on a majority
voting interest. The Company has evaluated all related parties, contracts, agreements and arrangements in which it may
hold a variable interest. The Company has determined it is not the primary beneficiary in any of these entities, arrangements or
participates in any of the activities.
Financial Instruments
The Company’s balance sheets include
the following financial instruments: cash, accounts receivable, inventory, accounts payable, accrued expenses, deferred revenue,
and notes payable and notes payable to stockholder. The carrying amounts of current assets and current liabilities approximate
their fair value because of the relatively short period of time between the origination of these instruments and their expected
realization. The carrying values of the note payable to stockholder approximates fair value based on borrowing rates
currently available to the Company for instruments with similar terms and remaining maturities.
In September 2006, the Financial Accounting
Standards Board (FASB) introduced a framework for measuring fair value and expanded required disclosure about fair value measurements
of assets and liabilities. The Company adopted the standard for those financial assets and liabilities as of the beginning of the
2008 fiscal year and the impact of adoption was not significant. FASB Accounting Standards Codification (ASC) 820 “
Fair
Value Measurements and Disclosures
” (ASC 820) defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date.. ASC 820 also establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources
(observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the
best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of Nine broad levels,
which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). The Nine levels of the fair value hierarchy are described below:
·
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities
·
Level
2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or
other means.
·
Level
3 - Inputs that are both significant to the fair value measurement and unobservable.
Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of March 31, 2014. The respective carrying
value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.
These financial instruments include accounts receivable, other current assets, accounts payable, accrued compensation and accrued
expenses. The fair value of the Company’s notes payable is estimated based on current rates that would be available for debt
of similar terms which is not significantly different from its stated value.
The Company applied ASC 820 for all non-financial
assets and liabilities measured at fair value on a non-recurring basis. The adoption of ASC 820 for non-financial assets and liabilities
did not have a significant impact on the Company’s financial statements.
As of March 31, 2014 and June 30, 2013, the
fair values of the Company’s financial instruments approximate their historical carrying amount.
Cash and Cash Equivalents
The majority of cash is maintained with major
financial institutions in the United States. Deposits with these banks may exceed the amount of insurance provided on
such deposits. Generally, these deposits may be redeemed on demand and, therefore, bear minimal risk. The
Company considers all highly liquid investments purchased with an original maturity of Nine months or less to be cash equivalents.
Accounts Receivable and Credit
Accounts receivable consist of amounts due
for the delivery of sales to customers. Prepayments on account are recorded as customer deferred revenue. Additionally,
the Company invoices projects when signed agreement or statements of work are received. Amounts are recorded at the anticipated
collectible amount and recorded as deferred revenue until such time that the work is performed. Contract revenue is recognized
as the contract is completed, based on defined milestones (see policy on revenue recognition). An allowance for doubtful accounts
is considered to be established for any amounts that may not be recoverable, which is based on an analysis of the Company’s
customer credit worthiness, and current economic trends. Based on management’s review of accounts receivable,
no allowance for doubtful accounts was considered necessary. Receivables are determined to be past due, based
on payment terms of original invoices. The Company does not typically charge interest on past due receivables.
Inventories
Inventories are stated at the lower of cost
or market, which approximates actual cost. Cost is determined using the first-in, first-out method. Inventory is comprised
of component parts and accessories available for sale. Parts are generally purchased for projects, as minimal inventory is held
to supply customers.
Property &
Equipment
Property and equipment are recorded at historical
cost or acquisition value. Depreciation is computed on the straight-line method over estimated useful lives of the respective assets,
ranging from five to nine years. The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment
to the depreciation and amortization period or the unamortized balance is warranted. Based upon the Company's most recent analysis,
management believes that no impairment of property and equipment exists at March 31, 2014.
Intangible Property
On June 29, 2010 the Company acquired the assets
of Trimax Wireless Systems, Inc., including licenses and trademarks. The purchase price was allocated first to the identifiable
assets received, allocating the remaining costs to the intellectual property. The valuation considered future cash flows of the
operating intangible assets acquired. The valuation of the intellectual property was limited to the acquisition price (valuation
of stock consideration and note payable), less the fair market value of identifiable assets. The shares issued in exchange for
the acquired property were valued at the fair market value of the equivalent common stock as of the date of closing. The fair market
value of consideration issued (stock and note payable) to the sellers was an aggregate amount of $6,511,364. The value assigned
to the carrying value of the acquired intellectual property was $6,329,342. Intellectual property has an estimated useful life
of 59 months (remaining life of patents).
On May, 2011 the Company completed the acquisition
of controlling interest (70%) in Lockwood Technology Corporation, in exchange for stock and certain considerations (cash and warrants).
The shares were issued at the fair market value at the date of the transaction ($1,650,000) and warrants were valued using an option
price model ($477,900). The total purchase price, net of cash, notes receivable, and net assets acquired was $1,956,158. The Company
recognized an immediate impairment in the amount of $641,008 in consideration of its analysis of future discounted cash flows and
industry multiples of the acquired Company, resulting in a net intangible assets of $1,315,150. Management’s allocation of
the purchase price was based on our assessment of the fair market value of the assets acquired, in accordance with Accounting Standard
Codification, Topic 805. Fixed assets and other tangible assets were evaluated for market value. There were no identifiable assets
that had any significant appreciation or impairment; therefore those assets have been brought over at the historical basis, net
of depreciation. The analysis of the intangible values purchased were allocated to the Lockwood customer list (30% or $394,550)
and the developed software and licensing technology (70% or $920,600).
Capitalized Software Development Costs
The Company capitalizes software development
costs, under which certain software development costs incurred subsequent to the establishment of technological feasibility have
been capitalized and are being amortized over the estimated lives of the related products. Capitalization of computer software
costs is discontinued when the computer software product is available to be sold, leased, or otherwise marketed.
Amortization begins when the product is available for release and sold to customers. Software development costs will be amortized
based on the estimated economic life of the product, anticipated to be 10 years.
Impairment of Long-Lived Assets
Periodically, the Company assesses the recoverability
of the Company’s intangible assets, consisting of the Trimax acquired intellectual property, OptiCon Network Manager software
and its trademark, and record an impairment loss to the extent that the carrying amounts of the assets exceed its fair value. Based
upon management's most recent analysis, the Company believes that no impairment of the Company’s tangible or intangible assets
exist at March 31, 2014 and June 30, 2013.
Revenue Recognition
The Company is principally in the business
of providing solutions for a secure intelligent energy platform that incorporates our secure wireless technology. Contracts include
multiple revenue components, comprised of our software licensing, hardware platforms, installation, training and maintenance. In
accordance with ASC 605-25 Multiple-Element Arrangements, revenue from licensing the software will be recognized upon installation
and acceptance of the software by customers. When a software sales arrangement includes rights to customer support,
the portion of the license fee allocated to such support is recognized ratably over the term of the arrangement, normally one year. Revenue
from professional services arrangements will be recognized in the month in which services are rendered over the term of the arrangement.
Revenue associated with software sales to distributors is recognized, net of discounts, when the Company has performed substantially
all its obligations under the arrangement. Until such time as substantially all obligations under the arrangement are
met, software sales are recognized as deferred revenue. Costs and expenses associated with deferred revenue are also
deferred. When a software sales arrangements include a commitment to provide training and/or other services or materials,
the Company estimates and records the expected costs of these training and/or other services and/or materials.
Stock Based Compensation
The Company issues restricted stock to consultants
for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured
at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is
reached or (ii) the date at which the counterparty's performance is complete. The Company recognized consulting expenses
and a corresponding increase to additional paid-in-capital related to stock issued for services. Stock compensation for the
periods presented were issued to consultants for past services provided, accordingly, all shares issued are fully vested, and there
is no unrecognized compensation associated with these transactions.
Shipping Costs
The Company includes shipping costs and freight-in
costs in cost of goods sold.
Advertising Costs
The costs of advertising are expensed as incurred.
Advertising expenses are included in the Company’s operating expenses. Advertising expense was $0, $512, $0 and $4,556 for
the three and nine month periods ending March 31, 2014 and 2013, respectively
Research and Development
The Company expenses research and development
costs when incurred. Indirect costs related to research and developments are allocated based on percentage usage to
the research and development.
Income Taxes
The Company accounts for income taxes under
the liability method. Deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purpose, referred to as
temporary differences. Deferred tax assets
and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the
periods in which the deferred tax assets and liabilities are expected to be settled or realized.
Earnings (Loss) Per Share
Basic EPS is calculated by dividing the loss
available to common shareholders by the weighted average number of common shares outstanding during each period. Diluted
EPS is similarly calculated, except that the denominator includes common shares that may be issued subject to existing rights with
dilutive potential, except when their inclusion would be anti-dilutive.
Based on an estimated current value of the
Company’s stock being equal to or less than the exercise price of the warrants, none of the shares assumed issued upon conversion
of the warrants, nor any of the stock assumed issued under the Company's 2004 Non statutory Stock Option Plan, are included in
the computation of fully diluted loss per share, since their inclusion would be anti-dilutive. Convertible preferred shares have
been included in the dilutive computation, as if they would have been converted at the end of the period.
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March 31,
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2014
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2013
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Earnings (Loss) per share:
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|
|
|
Net Loss
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|
$ (1,588,452)
|
|
$ (1,696,228)
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|
|
|
|
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Common shares
|
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106,661,587
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|
98,580,428
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Earnings (loss) per share, basic
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$ (0.015)
|
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$ (0.017)
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|
|
*Potentially issuable preferred shares, if converted to common,
were considered but not included in the calculation of diluted earnings per share for the period ended March 31, 2014 and 2013,
respectively, because their inclusion would be anti-dilutive.
Recently Issued Accounting Pronouncements
We have reviewed accounting pronouncements
and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has considered
the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified
principles will have a material impact on the corporation’s reported financial position or operations in the near term. The
applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration. Those
standards have been addressed in the notes to the unaudited financial statement and in our Annual Report, filed on Form 10-K for
the period ended June 30, 2013.
3. Going Concern
As of March 31, 2014, the Company has a working
capital deficit and has incurred a loss from operations and recurring losses since its inception resulting in a significant accumulated
deficit. As of March 31, 2014, the Company had negative working capital of approximately $2.3 million and $373 in
cash with which to satisfy any future cash requirements. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The Company’s is attaining revenues and management expects profitability in the future; however
operations have not yet attained a profit or break-even. Accordingly, the Company depends upon capital to be derived from future
financing activities such as loans from its officers and directors, subsequent offerings of its common stock or debt financing
in order to operate and grow the business. There can be no assurance that the Company will be successful in raising such capital.
The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but
are not limited to, acceptance of the Company’s business plan, the ability to raise capital in the future, to continue receiving
funding from its officers, directors and shareholders, the ability to expand its customer base, and the ability to hire key employees
to grow the business. There may be other risks and circumstances that management may be unable to predict.
4. Accounts Receivable
Accounts receivable reflect the amounts that
have billed at their anticipated collectible amount. The Company receives contract acceptances on submitted quotes. Due to the
advanced planning required, contract modifications occur, therefore, management invoices contracts upon signing, however, may reserve
against invoicing until final scope of project negotiations or good faith deposits are made.
5. Property and Equipment
Property and equipment consists of the following:
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March 31,
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June 30,
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2014
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2013
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(unaudited)
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(audited)
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Office and computer equipment
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$ 120,636
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$ 120,636
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Furniture and fixtures & improvements
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54,703
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54,703
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Computer software
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5,468
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|
5,468
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180,807
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180,807
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Accumulated depreciation
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(131,147)
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(106,345)
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$ 49,660
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$ 74,462
|
For the nine months ended March 31, 2014 and 2013, the total depreciation
expense charged to operations totaled $24,802, and $25,610 respectively.
6. Intangible Assets
Intangible assets consists of the following:
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March 31, 2014
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June 30, 2013
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(unaudited)
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(audited)
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Opticon fiber optic management software
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$ 189,862
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$ 189,862
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Trademarks
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1,000
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|
1,000
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TriMax intellectual property
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6,329,342
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6,329,342
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TriMax software
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180,020
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180,020
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Lockwood customer list
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394,550
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394,550
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Lockwood licensing technology
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920,600
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920,600
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8,015,374
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8,015,374
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Accumulated amortization
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(5,794,190)
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(4,572,532)
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$ 2,221,184
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$ 3,442,842
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For the nine months ended March 31, 2014 and 2013, the total amortization
expense charged to operations totaled $1,221,658 and $1,221,658, respectively.
Opticon fiber optic management software
The Company purchased all rights, titles and
interest in the Opticon fiber optic management software on July 26, 2005, from FutureTech, LLC. in exchange for common stock. The
agreement became effective upon FutureTech purchasing the acquired assets from Corning Cable Systems, LLC in exchange for $100,000
in cash. The Company recorded the common stock at the transferor’s historical cost basis determined under generally accepted
accounting principles.
On July 26, 2005, the Company purchased the
OptiCon Network Manager software system which consisted of version R3 and R4. At the time of the purchase, the software
system was out of date and had to be updated and integrated with other current business software systems, before it could be distributed
to customers. The development of R3 software system was completed during the quarter ended December 31, 2006, and is
available for distribution to customers. In June 2010 a transfer of 50% of the R3 license was returned to FutureTech, LLC at a
carrying cost value of $22,250.
During the nine months ended March 31, 2014 and 2013, the Company did not allocate any direct labor costs, and indirect costs and
expenses to this effort. The capitalized software costs are amortized when the software is actually sold to customers.
Amortization is provided based on the number of software units sold relative to the number of expected to be sold during the software’s
economic life.
TriMax intellectual property
On June 29, 2010 the Company acquired the assets
of Trimax Wireless Systems, Inc., including licenses and trademarks. The purchase price was allocated first to the identifiable
assets received, allocating the remaining costs to the intellectual property. The valuation
considered future cash flows of the operating
intangible assets acquired. The valuation of the intellectual property was limited to the acquisition price (valuation of stock
consideration and note payable), less the fair market value of identifiable assets. The shares issued in exchange for the acquired
property were valued at the fair market value of the equivalent common stock as of the date of closing. The acquisition carrying
value assigned to the intellectual property was $6,329,342.
TriMax software
Software development costs, in the amount of
$180,020, were acquired in the Trimax acquisition. The proprietary software was an identified asset of the acquisition and valued
at the historical carrying value, cost. The capitalized software is available for sale and is to be amortized over a 5 year period.
Lockwood Technology Corporation
On May, 2011 the Company completed the acquisition
of controlling interest in Lockwood Technology Corporation, leading RFID software and hardware solutions provider, from Daedalus
Capital, LLC. Infrax Systems acquired 70% interest in exchange for stock and certain considerations, including a $50,000 note receivable
(due in 180 days) from the sellers to Infrax and $112,000 in cash received by Infrax at closing. Additionally, warrants were issued
for the purpose of possible future investment capital, to be received by Infrax. Shares were issued at the fair market value at
the date of the transaction ($1,650,000). The agreement included warrants for the purchase of 660,000 (post reverse split) common
shares at an exercise price of $5.00 (split adjusted, for a term of 3 years. The warrants are callable by Infrax at certain fair
market values of the common stock. Warrants were valued at $477,900 using an option price model (assumptions used in calculation:
volatility 400%; risk free rate 1.02%; dividend rate 0%). The total purchase price, net of cash, notes receivable, and net assets
acquired was $1,956,158 and was allocated to intangible assets.
The Company recognized an immediate impairment
in the amount of $641,008 in consideration of its analysis of future discounted cash flows and industry multiples of the acquired
Company, resulting in a net intangible assets of $1,315,150. Infrax also plans to utilize their expertise in future smart grid
deployment projects. Management’s allocation of the purchase price was based on our assessment of the fair market value of
the assets acquired, in accordance with Accounting Standard Codification, Topic 805. Fixed assets and other tangible assets were
evaluated for market value. There were no identifiable assets that had any significant appreciation or impairment; therefore those
assets have been brought over at the historical basis, net of depreciation. The analysis of the intangible values purchased were
allocated to the Lockwood customer list (30% or $394,550) and the developed software and licensing technology (70% or $920,600).
7. Notes payable
On June 29, 2010 the Company entered into an
agreement with the shareholders of Trimax Wireless, Inc. (“Trimax”) for the purchase of their business assets and technology
for preferred shares of the Company, the assumption of liabilities and a note payable, in the amount of $712,500. The note is interest
bearing at 6% per annum until fully paid with a start period of 90 (September 29, 2010) days for the first payment. The Company
shall make interest-only payments on the first day of each month from the date of this Note until the earlier of (a) receipt of
Investment Funding as defined; or (b) 180 days from the date hereof ("Maturity Date") (December 29, 2010). Principal
plus all accrued and unpaid interest on such principal shall be due and payable on the Maturity Date. As of the balance sheet date
the Company is in default, as it has not made payments on this loan and is currently in negotiations to extend terms. There is
no default interest rate.
The Company issued a demand note to an unrelated
party, with an unpaid balance in the amount of $6,000 with an annual interest rate of 18%. There are no repayment terms.
In April of 2011 the Company issued a demand
note to an unrelated party in the net amount of $6,000 for cash infused into the Company at the time of the acquisition of its
interest in Lockwood Technology Corporation. The note is non-interest bearing as has no repayment terms.
8. Related Parties Disclosures
Employment Agreements
The following agreements are with Shareholders,
Directors and Members of the Board:
Sam Talari
Effective
August 1, 2009, the Company entered into a three-year employment agreement with Sam Talari, one of the Company’s directors.
The agreement was automatically renewed for an additional one-year period, and subsequently renewed by the Board for an additional
one-year period through July 31, 2013. The Agreement provides for (a) a base salary of $15,000 per month, (b)
a signing bonus
equal to one month salary, (c) four weeks’ vacation within one year of the starting date, and (d) all group insurance plans
and other benefit plans and programs made available to the Company’s management employees.
John Verghese
On October 19, 2010,
as amended January 1, 2010, the Company entered into a three-year employment agreement with John Verghese as Director of Product
Development, one of the Company’s directors. The Agreement provides for (a) a base salary of $6,500 per month, (b) a signing
bonus of $10,000, (c) three weeks’ vacation within one year of the starting date, and (d) all group insurance plans and other
benefit plans and programs made available to the Company’s management employees. Additionally Mr. Verghese has the option
to purchase 360,000 shares of common stock at $.025 per share, ratably vesting at the employment anniversary date.
Terry Gardner
On April 2nd, 2012,
the Company entered into a three-year employment agreement with Terry Gardner as VP of Professional Services. The Agreement provides
for (a) a base salary of $10,000 per month, (b) a signing bonus of $30,000, (c) three weeks’ vacation within one year of
the starting date, and (d) all group insurance plans and other benefit plans and programs made available to the Company’s
management employees. Additionally Mr. Gardner has the option to purchase 300,000 shares of common stock at $.04 per share, ratably
vesting at the employment anniversary date.
Malcolm F. Welch
On October 6, 2009, the Company
entered into a one-year employment agreement with Malcolm F. Welch, one of the Company’s directors and Co-Chairman of the
Board. The agreement is automatically extended for successive one one-year periods, unless previously terminated. The Agreement,
as amended effective January 1, 2010 provides for (a) a base salary of $2,000 per month; (b) eligibility to receive 375,000 shares
of the Company’s common stock based on the employee’s achievement of goals and objectives approved by the Board; (c)
an option to purchase 375,000 shares of the Company common stock at $0.025 per share to be granted over a 3 years based on the
achievement of goals and objectives established by the Board; (d) a bonus based on the level of funding the Company achieves through
December 31, 2010 ; (e) two week vacation during first year of employment; and (f) all group insurance plans and other benefit
plans and programs made available to the Company’s management employees.
Other employment agreements exist with employees.
Line of Credit, Master Agreement
On September 1, 2005, Mr. Sam Talari, one of
the Company’s directors, agreed to make advances to the Company as an interim unsecured loan for operational capital up to
a maximum of $350,000, evidenced by a master promissory note, with interest at the rate of 5% per annum, based on amounts advanced
from time to time, payable annually. Mr. Talari has pledged additional funding for operating capital, up to $500,000, under the
same terms as the original Master Note. Mr. Talari, from time to time, has converted advances and accrued interest in exchange
for equity shares. Mr. Talari continued making advances to the Company on the loan, of which $782,507 and $762,588 remains outstanding
at March 31, 2014 and June 30, 2013, respectively. Mr. Talari has pledged additional funding for operating capital, up to $1 million,
under the same terms as the original Master Note.
9. Income Taxes
There is no current or deferred income tax
expense or benefit allocated to continuing operations for the period ended March 31, 2014 and 2013. The Company has not recognized
an income tax benefit for its operating losses generated through March 31, 2014 based on uncertainties concerning the Company’s
ability to generate taxable income in future periods. The tax benefit is offset by a valuation allowance established
against deferred tax assets arising from operating losses and other temporary differences, the realization of which could not be
considered more likely than not. In future periods, tax benefits and related deferred tax assets will be recognized
when management considers realization of such amounts to be more likely than not.
For income tax purposes the Company has available
a net operating loss carry-forward of approximately $7,500,000 from inception to March 31, 2014, which will expire, unless used
to offset future federal taxable income beginning in 2024. The tax years ending June 30, 2010 through June 30, 2013 are open for
inspection by both Federal and State Agencies.
10. Capital Equity
The Company has issued convertible preferred shares. Shares are
convertible into the Company’s common stock, at the option of the holder, at the prescribed conversion rate. Conversions
are as follows:
|
|
Shares
|
|
|
Conversion
|
|
|
|
Outstanding
|
|
|
Rate to Common
|
|
Preferred Series A
|
|
|
2,400,000
|
|
|
|
375
|
|
Preferred Series A1
|
|
|
8,889
|
|
|
|
89
|
|
Preferred Series A2
|
|
|
88,889
|
|
|
|
20
|
|
Preferred Series A3
|
|
|
25,846
|
|
|
|
16
|
|
Preferred Series B1
|
|
|
12,330
|
|
|
|
300
|
|
Preferred Series B2
|
|
|
1,210
|
|
|
|
300
|
|
|
|
|
2,537,164
|
|
|
|
|
|
On September 24, 2013, the Company issued 5,000,000 shares of its
common stock for services.
11. Commitments and Contingencies
Lease/Rental Agreements
Our executive office is now located in an office complex under annual five year lease, beginning June 1, 2012 at a rent of $3,575
per month. We entered into this 5-year commercial lease agreement in St. Petersburg, Florida with Kalyvas Group II, LLC. Our lease
provides us with approximately 4,100 square feet of: reception area, nine offices, a lab/production area, inventory room, server
room, kitchenette and one conference rooms. We believe the facilities are adequate for our operational needs. We may require additional
offices in the event we obtain funding and acquire additional customers.
Rent expense for the nine months ended March
31, 2014 and 2013 amounted to $33,837 and $18,357, respectively.
Foreign Currency Translation
The balance sheets of the Company's foreign
subsidiaries are translated at period-end rates of exchange, and the statements of earnings are translated at the weighted-average
exchange rate for the period. Gains or losses resulting from translating foreign currency financial statements are included in
accumulated other comprehensive income (loss) in the consolidated statements of stockholders' equity and comprehensive income.
At March 31, 2014 and 2013 no foreign currency translation was conducted due to the immaterial nature of its subsidiary’s
balance sheet.
Legal Matters
From time to time the
Company may be a party to litigation matters involving claims against the Company. Management believes that there are no current
matters that would have a material effect on the Company’s consolidated financial position or results of operations as of
March 31, 2014.
During the quarter ended
June 30, 2011, Trimax Wireless filed a complaint relating to the unpaid balance of the Promissory Note executed with the acquisition
of Trimax Wireless. The Company has filed a motion to dismiss such action which is set for hearing. The note is unsecured, however,
if holders prevail, they may be entitled to legal cost, in addition to payments per the term of the agreement. The Company believes
that it has sufficient affirmative defenses to this complaint and does not believe that it will have a material effect on the Company.
Currently the company is in the process of requesting dismissal of the suit.
During quarter ended
June 30, 2012, The Company filed a Federal lawsuit against Lockwood Worldwide and its owners, current and previous management
in the UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF FLORIDA. We are requesting an award of compensatory damages, an award
of treble damages pursuant to the provisions of RICO and other applicable federal and state statutes and an award of punitive
damages in the full amount by the jury against each of the Defendants. As Plaintiff, we have suffered damages as a result thereof,
an amount in excess of $4,350,000. We are asking for a total damages up to 4 times the amount of loss or close to $16M. As of
the filing of this 10/Q, we have had success in freezing their operational account and all funds associated with that account. We
are also in settlement talks with Sovereign bank.
12. Subsequent Events
None