Notes to Condensed Consolidated Financial
Statements
As of December 31, 2012
(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 December 31, 2012, the consolidated
statements of operations and statements of cash flows for the respective periods presented, 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 December 31, 2012, and the results of operations and changes in cash flows for all periods presented,
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, 2012 on Form 10-K filed with the SEC on October 19, 2012.
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, 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 December 31, 2012. 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 December 31 and June 30, 2012, 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 December 31, 2012.
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 December 31, 2012 and June 30, 2012.
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, $6,865, $3,230 and $11,657 for the three and
six month periods ending December 31, 2012 and 2011, 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.
|
|
December 31,
|
|
|
2012
|
|
2011
|
Earnings (Loss) per share:
|
|
|
|
|
Net Loss
|
|
$ (
1,117,616
)
|
|
$ (2,001,977)
|
|
|
|
|
|
Common shares
|
|
98,580,428
|
|
16,864,447
|
|
|
|
|
|
Earnings (loss) per share, basic
|
|
$ (0.01)
|
|
$ (0.12)
|
|
|
|
|
|
*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 December 31, 2012 and 2011,
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, 2012.
3. Going Concern
As of December 31, 2012, 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 December 31, 2012, the Company had negative working capital of approximately $2.0 million and approximately $0 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:
|
|
|
|
|
December 31,
|
|
June 30,
|
|
|
2012
|
|
2012
|
|
|
(unaudited)
|
|
(audited)
|
Office and computer equipment
|
|
$ 120,636
|
|
$ 122,348
|
Furniture and fixtures & improvements
|
|
54,703
|
|
52,991
|
Computer software
|
|
5,468
|
|
5,468
|
|
|
180,807
|
|
180,807
|
Accumulated depreciation
|
|
(89,272)
|
|
72,199
|
|
|
$ 91,535
|
|
$ 108,608
|
For the six months ended December 31, 2012 and 2011, the total depreciation
expense charged to operations totaled $8,451, and $8,451 respectively.
6. Intangible Assets
Intangible assets consists of the following:
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|
|
|
|
|
December 31, 2012
|
|
June 30, 2012
|
|
|
(unaudited)
|
|
(audited)
|
Opticon fiber optic management software
|
|
$ 189,862
|
|
$ 189,862
|
Trademarks
|
|
1,000
|
|
1,000
|
TriMax intellectual property
|
|
6,329,342
|
|
6,329,342
|
TriMax software
|
|
180,020
|
|
180,020
|
Lockwood customer list
|
|
394,550
|
|
394,550
|
Lockwood licensing technology
|
|
920,600
|
|
920,600
|
|
|
8,015,374
|
|
8,015,374
|
Accumulated amortization
|
|
3,758,094
|
|
2,943,655
|
|
|
$ 4,257,281
|
|
$ 5,071,719
|
For the six months ended December 31, 2012 and 2011, the total amortization
expense charged to operations totaled $831,512 and $814,440, 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 years ended June 30, 2012 and 2011, 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. Debt Agreements
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 has a Master Note Agreement, as an unsecured line of
credit, from Mr. Sam Talari. The Master Note is for operational capital, in the amount of $350,000 and bears interest at 5% per
annum. Mr. Talari has pledged additional funding for operating capital, up to $1 million dollars, under the same terms as the original
Master Note.
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 $777,779 and $574,957 remains outstanding at December
31, 2012 and June 2012, respectively. In addition, the Company has accrued interest on this loan in the amount of $
30,235
and $30,235 at December 31, 2012 and June 2012, respectively. Mr. Talari has pledged additional funding for operating capital,
up to $1 million, under the same terms as the original Master Note.
9. Stock Options and Warrants
On December 2, 2005, the Company granted two unrelated individuals
Series A Warrants to purchase 660,004 shares, at an adjusted average exercise price of $ .75. All of the Warrants expire
on November 11, 2011. All of the Warrants granted were non-qualified fixed price warrants.
The following table summarizes the activity related to the stock
purchase warrants and options and weighted average assumptions for the period ended December 31, 2012:
|
|
|
|
|
|
Weighted Average
|
|
Remaining
|
|
|
Options
|
|
Options
|
|
Intrinsic
|
|
Exercise
|
|
Contractual
|
|
|
Outstanding
|
|
Vested
|
|
Value
|
|
Price
|
|
Term
|
Options, June 30, 2011
|
|
600,000
|
|
600,000
|
|
$
|
|
$5.50
|
|
1.37 years
|
Granted
|
|
-
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
-
|
|
-
|
|
|
|
|
|
|
Options, June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
(600,000)
|
|
(600,000)
|
|
|
|
0
|
|
0
|
Options, December 31, 2012
|
|
660,004
|
|
660,004
|
|
|
|
|
|
|
The following are the weighted average assumptions for the options
granted:
Weighted Average:
|
|
|
Dividend rate
|
|
0.0%
|
Risk-free interest rate
|
|
1.02%
|
Expected lives (years)
|
|
5.0
|
Expected price volatility
|
|
400.0%
|
Forfeiture Rate
|
|
0.0%
|
10. Income Taxes
There is no current or deferred income tax expense or benefit allocated
to continuing operations for the period ended December 31, 2012 and 2011. The Company has not recognized an income tax benefit
for its operating losses generated through December 31, 2012 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 $6,283,226 from inception to December 31, 2012, which will expire, unless used to offset future
federal taxable income beginning in 2024.
11. 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
|
|
|
|
88.89
|
|
Preferred Series A2
|
|
|
88,889
|
|
|
|
20
|
|
Preferred Series A3
|
|
|
25,846
|
|
|
|
20
|
|
Preferred Series B
|
|
|
1,210
|
|
|
|
0.30
|
|
|
|
|
2,524,834
|
|
|
|
|
|
Effective August, 2011 the Company's Board of Directors affected
a 1:500 reverse stock split on common shares. In September 2011 the Preferred B shares were subject to a reverse split of 1 for
1,000. Due to the event of the reverse stock split, the preferred shares conversion rate to common were adjusted All shares presented
have been retroactively stated to reflect the reverse-split shares.
12. 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 six months ended December 31, 2012 and 2011
amounted to $10,641 and $43,867, 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 December 31, 2012 and 2011 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 December 31, 2012.
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.
13. Subsequent Events
The Company has been
approached by a large electric contractor for a possible investment and or an alliance. The Company has also been approached by
an Investment Fund in a possible investment in the Company. Currently we are in discussion with three separate parties on possible
investment in the Company. As we are getting closer to the completion of our products and validation of our technologies, we will
be approached by partners and investors. Management and the Board of Directors are aware of our position and potential of our technology
and will consider any offer that increases shareholder value.
We have started preparing the S1 for the spin-off of the Lockwood
Technology. We have consulted with our auditors, our accountants and our SEC counsel for process support. Although we expected
to file the S1 before the end of the year, due to financial process delays and valuation, we intend to file the S1 as soon as all
the necessary steps are completed. We believe with Lockwood’s current pipeline, the Company should flourish as a separate
public company. Depending on the market condition, we expect to price the IPO from $0.20 to $1 per share. We are in the process
of utilizing a possible underwrites for this offering.
On January 17th 2013, Mr Don Ballou, Lockwoods VP of
Operations & Engineering, exchanged $50k of sign-on bonus into
2.5M shares of restricted common stock of Infrax Systems.
Company also issued 1,153,754 restricted common for services.