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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

 

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State the registrant's net revenue for its most recent fiscal year:    $0.00. The aggregate market value of voting stock held by non-affiliates of the registrant on September 30, 2009, was approximately $16,936,518

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

As of September 30, 2009, there were 38,846,140 outstanding shares of registrant's Common stock, no par value per share.

Documents incorporated by reference: Exhibits

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TABLE OF CONTENTS

PART I
ITEM 1	Description of Business	4
ITEM 1A	Risk Factors	12
ITEM 2	Description of Properties	15
ITEM 3	Legal Proceedings	15
ITEM 4	Submission of Matters to a Vote of Security Holders	16
PART II
ITEM 5	Market for Common Equity and Related Stockholder Matters	16
ITEM 6	Selected Financial Data	18
ITEM 7	Management's Discussion and Analysis or Plan of Operation	18
ITEM 8	Financial Statements	22
ITEM 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	22
ITEM 9A(T)	Controls and Procedures	22
ITEM 9B	Other information	23
PART III
ITEM 10	Directors, Executive Officers and Corporate Governance	23
ITEM 11	Executive Compensation	24
ITEM 12	Security Ownership of Certain Beneficial Owners and Management	26
ITEM 13	Certain Relationships and Related Transactions and Directors Independence	26
ITEM 14	Principal Accountant Fees and Services	27
ITEM 15	Exhibits and Reports on Form 8-K	28
SIGNATURES		29

 

 

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PART I

Forward-Looking Statements

In this report, references to "International Automated Systems," the "Company," "we," "us," and "our" refer to International Automated Systems, Inc.

This annual report on Form 10-K contains certain forward-looking statements and for this purpose any statements contained in this annual report that are not statements of  historical fact are intended to be  “forward-looking  statements” with the meaning of the Private Securities Litigation Reform Act of 1995.  Without limiting  the  foregoing,  words  such as “may,”  “will,”  “expect,” “believe,” “anticipate,”  “estimate” or “continue” or comparable terminology are intended to identify  forward-looking  statements.  These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the markets in which we may participate, competition within our chosen industry, technological advances and failure by us to successfully develop business relationships.

We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, are based on certain assumptions and expectations which may or may not be valid or actually occur and which involve various risks and uncertainties.

 

Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

 

ITEM 1.  DESCRIPTION OF BUSINESS

 

	THE COMPANY
Exact corporate name:	International Automated Systems, Inc.
State and date of incorporation:	Utah- September 26, 1986.
Street address of principal office:	326 North SR 198
	Salem, Utah 84653
Company telephone number:	(801) 423-8132
Fiscal year:	June 30

 

International Automated Systems, Inc. (“the Company”, was organized under the laws of the State of Utah on September 26, 1986.  In April 1988 the Company filed a registration statement for a public offering under the provisions of the Securities Act of 1933 ("1933 Act") to sell a maximum of 1,074,000 units at a price of $.50 per unit. Each unit was comprised of one share of common stock and one common stock purchase warrant.  The Company sold approximately 200,000 units at the offering price of $.50 per unit realizing total proceeds of approximately $100,000. All warrants expired without exercise.

Over time, the Company, for the most part, has acquired its technologies from its president.

OVERVIEW

International Automated Systems, Inc., a Utah corporation (hereinafter "Registrant" or "Company") based in Salem, Utah, seeks to design, produce and market leading edge technology products.  The Company has a production model of a patented turbine which uses the expansion of steam to generate a rotational force. This force can then be used to generate power.  The Company feels the turbine could be used in, but not limited to, the production of electricity, hydrogen or in the transportation industry. Though some testing has been done using pure steam and geothermal steam, more testing will be done. There are risks that a commercial turbine may never be accepted.

The Company has a solar energy thermal system which can be used in conjunction with the Company’s bladeless turbine to generate power. The system tracks the sun as it concentrates the solar energy onto a receiver and this energy is captured and used to propel the bladeless turbine. A typical system will use multiple concentrators to supply a single turbine.

 

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The Company has developed an automated self-service check-out system and management software. This system allows retail customers to ring up their purchases without a cashier or clerk.  The system is primarily designed for grocery stores, but may be applicable in other retail establishments.

The Company has an Automated Fingerprint Identification Machine ("AFIM") which has the capability of verifying the identity of individuals. Potential AFIM applications include products for employee time-keeping and security, access control, and check, debit or credit card verification. Registrant purports that its identity verification system has a variety of uses and applications for both commercial and governmental users. The Company also purports that it has developed technology that transmits information and data using different wave patterns, configurations and timing in the electromagnetic spectrum.  The Company refers to this technology as digital wave modulation ("DWM").  The Company believes that if the technology is implemented and applied commercially, the technology has the capability to significantly increase the amount of information which can be transmitted.  The Company is continuing the development of this technology and the commercial feasibility of the technology has not been demonstrated. The Company believes it has many competitors in the communications, information data transfer and data storage industries which have greater capital resources, more experienced personnel and technology which is more established and accepted in the market place.

The first anticipated product using this technology for commercialization is a high-speed modem. The modem is projected to be faster than modems currently in use.  Generally modems are used for purposes of transmitting data over telephone lines, on telecommunications systems and over wireless mediums such as satellite transmissions and other line- of-sight transmission mediums.  The Company has a modem prototype. Additional development to achieve a commercial product is on going.  In addition, the Company intends to apply the digital wave modulation technology in other areas.  The Company has not established a plan or order of priorities for any future commercial product development. Because this technology is sophisticated and new, the Company may not be successful in its efforts to have commercial exploitable products because of difficulties and problems associated with development. Possible problems could be inability to design, construct and manufacture commercial products; and the Company's lack of funding and financial resources and experienced personnel.  Competitors may develop technologies which are superior and will make the DWM technology obsolete even before the Company has completed its development of any commercial products. Cost will also be a factor in both the development and the commercialization of any new product. It is anticipated that if a commercially viable modem is developed, the Company will have to expend funds to develop a marketing plan and introduce the product into the market. Costs to offer new products and to establish the proper marketing strategy will be significant.  The Company has not made any projections regarding any anticipated costs. There are risks that no commercially viable products will be developed from the technology and any products developed may not be accepted or successful in the marketplace.  In addition, the Company may not have sufficient funds to develop, manufacture and market any products.

 

Propulsion Steam Turbine

 

The Company has a new patented bladeless turbine production model. It uses the expansion of steam, through propulsion, to create a rotational force.

 

The production model has been tested using pure steam created by a gas heat exchanger. The Company feels their propulsion design has many advantages over current bladed turbines. The Company believes their turbine is at least as efficient as traditional turbines, is smaller in size, requires less maintenance, is mass producible and therefore less expensive to manufacture. It also doesn't require cooling towers, thus making it more mobile, more economical and water conserving.

 

The Company believes that the turbine will be marketable in the utility power industry, hydrogen production and transportation. There are also risks that the Company will not be able to manufacture a commercially marketable turbine because of lack of financing, government interference, industry non-acceptance or many other conditions not under the Company's control.

 

The Company has a model of a solar thermal system which can be used to produce steam to drive the Company’s bladeless turbine. The Company believes that the possible advantage over other similar systems is its ability to be mass produced, thus reducing its overall cost as compared to other systems. The Company has developed proprietary structural and lens designs in preparation for mass production of the solar thermal system.
 

Automated Self-Service Check-Out System.

In 1988 a patent was granted for the automated self-service check-out system (hereinafter referred to as the "Self-Check System" or "System").  In retail operations, the System allows customers to check-out the items selected for purchase.

 

Description of the Self-Check System.

The Self-Check System is an automated check-out system for customers of retail establishments and provides for self-service check-out lines, stations or lanes.  The System has a scanner to read the bar codes of items purchased and a scale to weigh the items scanned and placed in the receiving basket.  As each item is scanned by the bar code reader, the scale verifies the accuracy of the item scanned and placed in the basket by comparing the weight of the item scanned with the weight change recorded in the receiving basket. If the weights differ or if other problems arise, a clerk is summoned to assist the customer and resolve any problem.

The Self-Check System is designed to replace clerk operated cashier registers that are used in retail and grocery stores. In addition, the Self-Check System, when fully and completely implemented, is intended to allow a store manager to maintain accurate inventory on a contemporaneous basis.  The contemporaneous inventory assists in reordering and restocking. It is believed that the System may simplify price verification and may provide customers with better and faster service.

Operation of System.

The Self-Check System operates as follows.  Customers make their selections for purchase.  A customer places the grocery cart at the head of the System, removes the products from the grocery basket and scans the bar codes on the products across the reader.  The bar code provides, as a data base index, the product description, weight and price. This information is then relayed on an item by item basis to the computer and the computer transmits the data in its memory to the check-out terminal. The product information, item description and price, are then displayed on the screen.  A running subtotal for all items purchased is also shown.  Each item scanned is placed into a receiving basket or cart on a sensitive scale.  The weight of the item scanned and placed in the receiving basket is compared to the weight for that item as recorded in the computer.  The computer compares the weight of the scanned item with the weight for that item in the database.  If the weight differs, an error code is displayed and an attendant is summoned to assist the customer or to override the System. Once all the items are scanned, a final tally is made.  Payment is then made to the attendant either through a debit or credit card, check or cash. A payment may also be made without an attendant through the use of the "AFIM" which will verify the identity of the person making the transaction and automatically debit their account electronically.

The Self-Check System interfaces with computers and data is transferred back and forth between the check-out terminals and the main computer. The interface may be compatible with various scanners and scales so the Self-Check System may be adaptable to equipment already from other manufacturers.  The System allows one clerk to handle simultaneously multiple check-out stations or lanes.

 

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Possible Advantages.

 

Management believes the Self-Check System may have several possible advantages over conventional retail check-out systems to operators and customers.  For operators the advantages are: reduced labor costs, more accurate inventory, theft reduction, theft deterrence, decreased check fraud, and decreased transaction costs. Also, the retailer can serve more customers during peak traffic. For customers the advantages are: faster service, greater convenience, less time waiting in line and more privacy.  A retail establishment may not need as many cashiers with the Self-Check System. 

 

Management believes that the market for the Self-Check System may include several types of retail establishments, including grocery stores, drug stores, discount stores and fast food restaurants. If operating properly the Self-Check system lessens the impact of having too many attendants or cashiers available.  Customer traffic volume is difficult to predict and retail operators wanting to reduce the time customers wait in line must have sufficient clerks or cashiers available.

The Self-Check System uses proprietary software developed by the Company.  The System also offers a hand-held unit to be used for price verification and taking physical inventory counts.  The hand-held unit reads the bar codes and verifies the price in the database.  This hand-held unit also is used to take physical counts for inventory control.  The System may also include a check-in station at the loading dock. Items delivered are checked and the prices verified against purchase orders allowing greater control. Price verification can be done using the hand-held unit while the products are on the shelf.

For the Self-Check System to operate efficiently at least 95% of the items offered for sale must have bar codes.  In the past few years virtually all packaged goods have bar codes.  Items purchased across the counter, such as bakery, meat and deli products usually have no bar code.  Grocery stores or other retail operations using the System may have to install scales and labelers to place barcodes on items with no bar code.  As an option the Company offers scales and labelers for produce and delicatessen items which interface with the Self-Check System. Management believes that the Self-Check System may help reduce theft.  For instance, one clerk cannot check-out another clerk's or friend's purchases using incorrect and understated prices. A portion of the theft in supermarkets is attributable to employees doing what is called "sweet- hearting" by checking-out the purchases of other employees or friends at reduced prices.

Another market being tested is automatic ordering and payment for use in restaurants and fast-food establishments. Where the customer would use a touch screen, connected to a computer, to place an order, pay for the order with cash, check, credit, or debit card using Company's technologies including AFIM and then have the order automatically sent to the cook for preparation.

Competition

Competitors offer a similar Self-Check System. The success of these other entities and the system used may, individually or collectively, significantly affect the Company's attempt to commercialize its Self-Check System. The Company has no market studies to determine its relative position with its competitors in the market place.  Some competitors have been in business longer, have more experienced personnel, have greater financial resources and better name recognition in the marketplace.

Automatic Fingerprint Identification Machine.

The company has an Automated Fingerprint Identification Machine ("AFIM") which verifies an individual's identity.  The AFIM digitizes the unique characteristics of a person's fingerprint and then stores the information on a magnetic strip similar to the strip on the back of a credit card or on other storage medium.  The identity verification process is simple, quick, easy, and reliable. AFIM connects to and operates with a personal computer.  AFIM has unique software.  Management believes that AFIM is better than other bio-metric and fingerprint based identification systems. The Company is continuing to make modifications to the AFIM technology to increase the speed and to reduce the cost and size of the units.

 

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Operation.

To use the AFIM the person whose identity will be verified has the fingerprint read by the AFIM.  The finger is placed on the lens and AFIM reads the print, digitizes, and stores the digitized fingerprint.  To verify a person's identity AFIM reads the fingerprint and compares it to the digitized fingerprint on the magnetic strip or other storage medium.  A match verifies the person's identity.  The AFIM is connected to a personal computer which processes the information read by the AFIM and makes the comparison to the digitized fingerprint on the magnetic strip or other storage medium. The Company believes that it has the ability to connect AFIMs in series so that multiple stations or readers can be connected and operated by a single personal computer.

 

Possible Commercial Applications.

Different commercial applications of the AFIM are under development.  One application is a time clock.  The digitized fingerprint stored on the magnetic strip on the back of a card like a credit card must match the person's fingerprint that is recording his arrival at or departure from the workplace.  Because the AFIM system validates the identity of the person using the time clock, fellow workers can not make in or out entries for other workers.

Also, AFIM with appropriate software may be used with a database of fingerprints.  The fingerprint is read by the AFIM and then verified against the database for identification and, where appropriate or required, for access control purposes. Searching the database requires additional time to verify the identity of the individual using the fingerprint stored in the database.  To date the full marketing of the AFIM time clock has been delayed as development of the product is continuing and modifications to the AFIM are made.

The Company has no comprehensive study or evaluation to determine the reliability of the AFIM or the frequency of false positives. A false positive is where a verification is sought and the person is identified as correct when it is not the person claimed. Management believes, based on the limited experience available, that AFIM does not yield false positives or false negatives at unsatisfactory levels.

 

Another application of the AFIM technology is door or entry security.  The AFIM would read a card on which the fingerprint of the person seeking entry would be encoded.  The fingerprint of the person seeking entry as read by the AFIM would have to match the fingerprint digitized and encoded on the card.  To be successful the Company believes that the door security adaptation must be compatible with or adaptable to other door entry security systems already in place.  

Another application of the AFIM technology is a vending machine which will allow items to be purchased which now require age and identity verification.

 

Another product based on AFIM technology is identity verification on computer networks or identification when data is transmitted or accessed. The AFIM would read the fingerprint to validate the identity of the user.  Depending on the system protocols the person would then be allowed access to data, files, information or programs.  Also, the identity verification, if development is completed, may validate the identity of the person either receiving or sending information.

Another application of the AFIM technology is fingerprint secured financial transactions.  A card user designates which personal account he/she would like to use. Upon positive AFIM verification, the Company's software sends the transaction information via ACH protocols to the Company's bank and the Company's bank debits the customer's bank account.  The funds are then deposited into the participating retailer's account.

 

For future development and possible commercialization of the AFIM technology and the possible application the Company may attempt to enter into licensing agreements or joint ventures.  Presently the Company is merely considering the possibility of licensing agreements or joint venture agreement. At this time there are no agreements to which the Company is a party for licensing, royalties or joint venture projects.

Competition.

The AFIM based products compete with a broad spectrum of products which verify identity. Competitors offer products based on some form of bio-metrics.  Some competitors offer fingerprint based systems. The success of these other entities and the system used may, individually or collectively, significantly affect the Company's attempt to commercialize AFIM. The Company has no market studies to determine its relative position with its competitors in the market place.  Some competitors have been in business longer, have more experienced personnel, have greater financial resources and better name recognition in the marketplace.

 

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Possible Advantages.

The Company believes that the AFIM products will be quicker, more reliable, and more cost-effective than other identification systems. The Company has no empirical data or statistics to support its belief.

Digital Wave Modulation Technology.

Digital Wave Modulation ("DWM") technology may provide a new way of transmitting data.  Basically different wave patterns are generated on the magnetic spectrum which may increase flows of data and information transmission and communication.  More data will be transmitted in a shorter time period and speed may be increased.

DWM technology is based on the transmission of symmetrical, asymmetrical, and reference waves that are combined and separated. The Company has a modem prototype that has the capability of sending and separating combined multiple waves.  Depending upon frequencies and other factors, the Company believes it can achieve transmission rates in excess of modems currently in use.  Data transmission speed will depend on such factors as the transmission medium, frequencies used and wave combinations.  The rate of data transmission varies significantly depending on the communication medium used.  When using plain old telephone system commonly known as "POTS", transmission rates will be slower.  DWM is not compatible with the technology used in other modems.

 

DWM can be used to transmit over any analog media including wireless.  Because wave frequencies may be higher when sent through the air, wireless data transmission using DWM technology may transmit information at higher rates.

Preliminary evaluations indicate that DWM technology may be used for data storage media which are magnetic based, such as floppy disks, hard drives, video cassettes, tapes etc.  Because various forms of magnetic media store in analog format, DWM may increase the storage capacity of some magnetic based devices.  DWM storage enhancement applications have not been fully developed and tested and may ultimately prove infeasible and impractical.

DWM must be developed from a prototype to a commercially viable product.  Even though the Company has a prototype, the Company makes no assurance that the DWM technology can be developed into a commercially viable product or products.

If the research and development of the modem is successful and the Company then has a commercially viable product, the Company will consider various alternatives.  It may seek a joint venture partner or it may license the technology to another company and attempt to structure a royalty payment to the Company in the licensing agreement.  No plan has been adopted regarding the manufacturing, marketing, or distributing of the modem, when and if commercialization is achieved. No assurance can be given that the commercialization efforts for the modem will be successful or that the Company will be able to effectively penetrate and capture a share of the modem market.  Any possible ventures are predicated on the Company developing a commercially viable product. Presently, the Company's efforts regarding DWM are directed primarily toward the DWM modem.

Management believes that because of the increased amount of information that can be transmitted, other applications in the telecommunications industry may be feasible and beneficial. Again because of the sophisticated and high technology nature of this technology other applications may not ultimately be successful.

 

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The Company is a development stage company and its business is subject to considerable risks.  The Company’s activities have not developed sufficient cash flows from business operations to sustain itself. The Company is small and has an extremely limited capitalization.  Many of its actual and potential competitors have greater financial strength, more experienced personnel and extensive resources available.  Also, the Company is engaged in technological development.  It is expensive to do research and development on new products or applications of new or existing technology.  Resources can be used and depleted without achieving the desired or expected results.  Also, because of the rapid development of technology, the Company's products may become obsolete.  Some of the Company's technology is revolutionary in that it is based on unconventional technological theories. The Company's business activities are subject to a number of risks, some of which are beyond the Company's control.  The Company's future is dependent upon the Company developing technologically complex and innovative products. The Company's future depends on its ability to gain a competitive advantage.  Product development based on new technology is complex and uncertain.  New technology must be applied to products that can be developed and then successfully introduced into and accepted in the market. The Company's results could be adversely affected by delay in the development or manufacture, production cost overruns and delays in the marketing process.

To the extent that this report contains forward-looking statements actual results could vary because of difficulties in developing commercially viable products based on the Company's technologies. The Company undertakes no obligation to release publicly the revisions of any forward-looking statements or circumstances or to report the non-occurrence of any anticipated events.

Management of the Company has had limited experience in the operation of a public company and the management of a commercial enterprise large in scope.

The Company's business, if its technological development is successful, will require the Company to enter new fields of endeavor and even new industries. Entry into new markets will have many risks and require significant capital resources.  If the Company seeks funds from other sources, such funds may not be available to the Company on acceptable terms. Success will be dependent on the judgment and skill of management and the success of the development of any new products.

 

The Company's success depends, and is expected to continue to depend, to a large extent, upon the efforts and abilities of its managerial employees, particularly Neldon Johnson, President of the Company.  The loss of Mr. Johnson would have a substantial, material adverse effect on the Company. The Company has entered into an agreement with Neldon Johnson to act as President and Chief Executive Officer for a period of ten years beginning in July 2000.

The Company is not insured against all risks or potential losses which may arise from the Company's activities because insurance for such risks is unavailable or because insurance premiums, in the judgment of management, would be too high in relation to the risk. If the Company experiences an uninsured loss or suffers liabilities, the Company's operating funds would be reduced and may even be depleted causing financial difficulties for the Company.

Patents and Trade Secrets.

The Company has been assigned or will be assigned the rights to several U.S. patents.  One patent granted in November 1988 deals with the Self-Check System.  The patent pertains to an apparatus attached to a computer which has in its database the weights and prices of all items for sale.  Four patents pertaining to the AFIM technology granted January 1997, February 2001, July 2001, and September 2002, seven patents relate to the DWM technology granted May 1996, June 1997, November 1997, July 2000, September 2000, October 2000, and May 2001, one patent pertaining to shelf tag granted September 2003, and four patents relating to the turbine granted March 2003, January 2004, February 2006 and November 2007.  One patent pertaining to the solar energy technology granted in October 2007.

The Company has not sought or received an opinion from an independent patent attorney regarding the strength of the patents or patents pending and the ability of the Company to withstand any challenge to the patent or any future efforts by the Company to enforce its rights under a patent or patents against others.  One of the AFIM patents was deemed invalid per a court decision in January 2008.  See further discussion in Item 3.

 

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The Company believes that it has trade secrets and it has made efforts to safeguard and secure its trade secrets.  There can be no assurance that these safeguards will enable the Company to prevent competitors from gaining knowledge of these trade secrets and using them to their advantage and to the detriment of the Company.

The Company relies heavily on its proprietary technology in the development of its products. There can be no assurance that others may not develop technology which competes with the Company's products and technology.

Future Funding

 

Because the Company is a development stage company and currently has no revenue, it will continue to need additional operating capital either from borrowing or the sale of additional equities.  The Company has no present plans to borrow money or issue additional shares for money.  In the past, the Company has received funds from its president and his relatives in the form of cash advances. The Company received $557,101 in cash advances from its president during the year ended June 30, 2009. The cash advances are unsecured, payable on demand and non-interest bearing. No assurance can be given that the Company will continue to receive funds from its president.  No agreements or understandings exist regarding any future contributions. In addition, during the year ended June 30, 2009, the Company settled $630,000 of the cash advances by issuing 1,575,000 shares of common stock to the officer upon the exercise of options; and the Company paid $173,744 of the cash advances.  As of June 30, 2009 and 2008, the cash advances, included in the related party payable balance, was $440,382 and $774,001, respectively.

 

General

From its inception the Company's primary activity has been the Development of different technologies. Since its formation, the Company has developed technologies which are in different stages of development. To date the Company has not marketed a commercially acceptable product.

Employees

The Company has thirteen full-time employees. Our employees are not represented by any labor union, and we believe our relations with employees are good.

Company Headquarters

The Company's office is located at 326 North SR 198, Salem, Utah 84653.  The Company's office costs $12,200 per month and is rented from the Company’s president and a third party. The monthly rent includes a 200 square foot office space.

Warranty

The Company warrants that it’s Alternate Solar Energy Systems (“System”) will remain in good operating condition for a thirty-five year period commencing on the installation date and that it will be responsible for all material, equipment and labor costs incurred to complete such maintenance and repair work during that period.

 

Marketing

The Company has not finalized its marketing strategy for all its products at this time.

The Company has received deposits of $1,676,250 from unrelated parties toward the purchase of approximately 200 Systems.   

For the marketing of the Self-Check System, the Company has developed a product named OrderXCEL which had been installed in a restaurant in Orem, Utah and since closed.

For the DWM technology the Company has not determined any definite marketing plan.  

The Company may seek joint venture partners, may license the product to others, or may seek to establish distribution channels.  It is anticipated that any marketing efforts will require time and capital to develop.

 

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Competition

Because the Company's products are distinct, its products will face different competitive forces.  

The Bladeless Turbine and System has competition from larger well-established companies that already have a history and name recognition. Though the turbine has many potential uses, especially in the area of electrical generation, there is no assurance that the marketing strategies will be successful.

AFIM competes with all forms and systems of identity verification.  End users have different needs including cost, sophistication, degree of security, operational requirements, time for individual verification and convenience. The Company believes that no firm dominates the identity verification market.

If the Company successfully completes the development of a commercially viable modem, the Company will face competition from large, well-established firms.  These firms offer products with immediate name recognition and are established in the market place and are compatible with other modems. The Company believes because of the speed at which its modem may operate it may have a competitive advantage.  The Company has no marketing studies or market research reports to determine the acceptance of the modem in the market place or the best marketing strategy to follow. Further, no assurance can be given that the Company will be successful in its further development of the DWM products.

The Company has no market share for any products at this time.

In marketing the Self-Check System the Company faces competition from major companies with established systems in the point of sale terminal market some of which are also developing and testing self checkout systems. Overcoming reluctance to change may be difficult. In addition, the System may not be compatible with or applicable to all types of retail operations.

The Company may rely on prospects known to management or developed by word of mouth.  The Company may develop a franchise program as a means to market and distribute the Self-Check System or OrderXCEL system.

Manufacturing and Raw Materials

The manufacturing of the turbine has been done mostly by the Company up to this point but if needed, the design could be easily outsourced. The solar thermal technology will be mostly manufactured by established companies in their fields, with much of the assembling done on site.

For production of the initial AFIM units the Company did the assembly.  If the Company was successful in its marketing efforts and demand for the AFIM was to increase, the Company intends to use independent contract assemblers.  AFIM is comprised of off the shelf components and proprietary components developed by the Company which are then assembled. The Company's proprietary software controls AFIM's operations.  The Company has no agreement with any independent contract assemblers.  The Company has entered into agreements regarding the AFIM technology, but these agreements have been inactive pending further AFIM development.

Management believes that the supplies and parts are readily available from sources presently used by the Company or from alternative sources which can be used as needed.  The Company has no backlog.

The Self-Check and OrderXCEL Systems are comprised mostly of off-the-shelf parts and components.  These parts are assembled into the systems. The Company's proprietary software ties together the individual components and operates the System. Scanners, video display terminals, and computers are available from several sources.  The software used in the System is proprietary developed by the Company.

Research and Development

The Company's primary activity is the development of its technologies.   The industries may be subject to rapid and significant technological change.  Future growth for the Company may be dependent on its ability to innovate and adapt its technologies to the changing needs of a marketplace. In the past the Company's activities have primarily consisted of its efforts in research and development. During fiscal years ended June 30, 2009 and 2008, research and development expenses were $704,889 and $760,798, respectively. Although no precise dollar amount has been determined, the Company will continue to allocate resources to product development.  The Company expenses development costs as they occur. The Company intends to work closely with prospective customers to determine design, possible enhancements and modifications.

 

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Immediate Plans

Over the next twelve months the Company intends to continue the research and development of its technologies, primarily focusing on its Bladeless Turbine and solar thermal energy technology.  The Company intends to have its solar thermal energy technology, which utilizes the Bladeless Turbine, operational in the next twelve months.  The Company plans to broadly market the technology to companies seeking alternative energy sources.

Renewable Energy Development Corporation (“REDCO”), pursuant to an executed twenty year Power Purchase Agreement (“PPA”) with the Needles Public Utility Authority, will develop and operate a 5-megawatt solar thermal power plant in Needles, CA to provide the city with power and the required Renewable Energy Certificates. REDCO plans to purchase the Company’s solar thermal equipment, including turbines, to build and operate the 5-megawatt solar thermal power plant.  REDCO is in the planning stages of a 49-megawatt solar project in Needles and plans to add an additional 150-200 megawatts over the next 3-5 years; REDCO is currently in discussions with several potential power purchasers for these projects. REDCO plans to utilize the Company’s solar thermal technology on all of its planned solar projects in Needles.

 

Acquisition of Technology

In May 2004, the Company entered into an agreement with its president, in which the Company acquired from the president patents, patents pending, designs and contracts related to the bladeless turbine, solar and chemical thermal technologies and electronic shelf tag technology developed by the president.  As consideration for these patents, patents pending, designs and contracts, the Company issued warrants to purchase 100,000,000 shares of common stock and agreed to pay the president a 10% royalty of total gross sales of products related to the patents.

Government Regulation

The Company's activities may be subject to government regulation. Depending on the nature of its activities in data transmission and power production, the Company may need approval or authorization from Federal, State, or Local authorities.

 

ITEM 1A.  RISK FACTORS

You should carefully consider the risks, uncertainties and other factors described below, in addition to the other information set forth in this Annual Report on Form 10-K, because they could materially and adversely affect our business, operating results, financial condition, cash flows and prospects, as well as adversely affect the value of an investment in our Common Stock. Also, you should be aware that the risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not yet know of, or that we currently think are immaterial, may also impair our business operations. You should also refer to the other information contained in and incorporated by reference into this Annual Report on Form 10-K, including our financial statements and the related notes. The Company's business operations are highly speculative and involve substantial risks.  Only investors who can bear the risk of losing their entire investment should consider buying our shares.  Some of the risk factors that you should consider are the following:

The Company is in the Development Stage

The Company is a development stage company.  The Company has limited assets and has had limited operations since inception.  The Company can provide no assurance that its current and proposed business will produce any material revenues or that it will ever operate on a profitable basis.

We Have a History of Significant Losses, and We May Never Achieve or Sustain Profitability

We are focused on product development and have generated minimal revenues of $111,226. Since inception, we have incurred operating losses each year of our operations and we expect to continue to incur operating losses for the next several years. We may never become profitable. The process of developing our products requires significant development. In addition, commercialization of our targeted products will require the establishment of sales, marketing and manufacturing capabilities, either through internal hiring or through contractual relationships with others. We expect our research and development and general and administrative expenses will increase over the next several years and, as a result, we expect our losses will increase. As of June 30, 2009, our cumulative net loss was $35,334,617. Our net loss was $6,637,337 for the fiscal year ended June 30, 2009. Our continued operational loss may lower the value of our common stock and may jeopardize our ability to continue our operations.

 

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The Company May Experience Fluctuations in Operating Results

The Company's operating results are likely to fluctuate in the future as a result of a variety of factors.  Some of these factors may include economic conditions; the amount and timing of the receipt of sale of the Company's current developments such as the solar lens; the success of the Company's development projects; the success of the Company's marketing strategy; capital expenditures and other costs relating to the development of the Company’s products; and the cost of advertising and related media. Due to all of the foregoing factors, the Company's operating results in any given quarter may fall below expectations.  In such an event, any future trading price of the Company's common stock would likely be materially and adversely affected.

The Company’s Business Model May Change or Evolve

The Company and its prospects must be considered in light of the risks, as identified in the Risk Factors section of this filing, expenses and difficulties frequently encountered by companies in the development stage. Such risks for the Company include, but are not limited to, an evolving business model. To address these risks the Company must, among other things, develop strong business development and management activities, develop the strength and quality of its operations, develop and produce high quality products that can be marketed and distributed.  There can be no assurance that the Company will be successful in meeting these challenges and addressing such risks, and the failure to do so could have a material adverse effect on the Company's business, financial condition and result of operations.

The Company’s Auditors Opinion Expresses Doubt About the Company’s Ability to Continue as a Going Concern

The  independent  auditor's  report issued in connection with the audited financial statements of the Company for the period ended  June  30,  2009, expresses  "substantial doubt about its ability to continue as a going concern," due to the  Company's  status as a  development  stage  company  and its lack of significant  operations.  If the  Company  is unable to get its solar thermal energy technology operational, the Company may  have  to  cease  to  exist,  which  would  be detrimental to the value of the Company's  common stock. The Company can make no assurances that its business operations will develop and provide the Company with significant cash to continue operations.

Customers with Deposits May Request a Return of Their Deposits

 

The Company has received deposits from customers to purchase its alternate solar energy technology system totaling $1,757,250.   The agreements provide that the Company will deliver, install and startup the solar energy technology system on or prior to June 30, 2009.  The Company has delivered, installed and started up the alternate solar energy system, but the energy output has not been verified. Therefore, for these agreements, the customers could request a return of their deposits since the Company has not verified the energy output.  If many of the customers request a return of their deposits, the Company may not have sufficient funds to return the deposits.

 

The Company May Need Future Capital and May Not be Able to Obtain Additional Financing

The  Company  may  need  future  capital  and may  not be  able  to  obtain additional  financing.  If additional funds are needed, funds may be raised as either debt or equity. There can be no assurance that such additional funding will be available on terms acceptable to the Company, or at all.  The Company may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms acceptable to the Company, or at all. If adequate funds are not available on acceptable terms, the Company may be unable to develop or enhance its services and products, take advantage of future opportunities or respond to competitive pressures, any of which could have a material adverse effect on its business, financial condition, results of operations and prospects.

Future Capital Raised Through Equity Financing May be Dilutive to Stockholders

Any additional equity financing may be dilutive to stockholders. If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders of the Company will be reduced, stockholders may experience additional dilution in net book value per share and such equity securities may have rights, preferences or privileges senior to those of the holder of the Company's common stock.

 

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Future Debt Financing May Involve Restrictive Covenants that May Limit the Company’s Operating Flexibility

Furthermore, a debt financing transaction, if available, may involve restrictive covenants, which may limit the Company's operating flexibility with respect to certain business matters. If additional funds are raised through debt financing, the debt holders may require the Company to make certain agreements, covenants, which could limit or prohibit the Company from taking specific actions, such as establishing a limit on further debt, a limit on dividends, limit on sale of assets, or specific collateral requirements.  Furthermore, if the Company raises funds through debt financing, the Company would also become subject to increased interest and principal payment obligations. In either case, if the Company was unable to fulfill either the covenants or the financial obligations, the Company may risk defaulting on the loan, whereby ownership of the firm's assets could be transferred from the shareholders to the debt holders.

Executive Management has Limited Management Experience of an Operating Company

The Company's officers have limited experience in managing an operating company. If the Company develops a marketable product, this lack of experience may make it more difficult to establish the contacts and relationships and implement operating procedures necessary to successfully operate the Company.

The Company’s Success is Dependent on Management

The Company's success is dependent, in large part, on the active participation of its Executive Officers. The loss of their services would materially and adversely affect the Company's development activities and future business success.

The Company’s Success is Dependent on our Patents and Proprietary Rights

The Company’s future success depends in part on our ability to protect our intellectual property and maintain the proprietary nature of our technologies through a combination of patents and other intellectual property arrangements.  The protection provided by our patents and patent applications, if issued, may not be broad enough to prevent competitors from introducing similar products.  In addition, our patents, if challenged, may not be upheld by the courts of any jurisdiction.  Patent infringement litigation, either to enforce our patents or to defend us from infringement suits, would be expensive and, if it occurs, could divert our resources from other planned uses.  Any adverse outcome in such litigation could have a material adverse effect on our ability to market, sell or license the related products.  Patent applications filed in foreign countries and patents in such countries are subject to laws and procedures that differ from those in the U.S.  Patent protection in such countries may be different from patent protection under U.S. laws and may not be as favorable to us.  We also attempt to protect our proprietary information through the use of confidentiality agreements and by limiting access to our facilities.  There can be no assurance that our program of patents, confidentiality agreements and restricted access to our facilities will be sufficient to protect our proprietary technology.

Executive Officers Maintain Significant Control Over the Company and its Assets

Our executive officers maintain control over the Company's board of directors and also control the Company's business operations and policies.  In addition, Neldon Johnson, the Company's President, and two of his sons, Randale Johnson and LaGrand Johnson, control approximately 82% of the voting rights of the Company. As a result, these three individuals will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.

The Company is Unlikely to Pay Dividends in the Foreseeable Future

It is unlikely that the Company will pay dividends on its common stock in the foreseeable future, resulting in an investor's only return on an investment in the Company's common stock being the appreciation of the per share price. The Company can make no assurances that the Company's common stock will ever appreciate.

Risks of “Penny Stock”

Our common stock may be deemed to be "penny stock" as that term is defined in Rule 3a51-1 of the SEC. Penny stocks are stocks (i) with a price of less than five  dollars  per share;  (ii) that are not traded on a  "recognized"  national exchange;  (iii) whose prices are not quoted on the NASDAQ  automated  quotation system (NASDAQ- listed stocks must still meet requirement (i) above); or (iv) in issuers with net tangible assets less than $2,000,000 (if the issuer has been in continuous  operation for at least three years); or $5,000,000 (if in continuous operation  for less than three  years);  or with  average  revenues of less than $6,000,000 for the last three years.

 

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Section 15(g) of the Exchange Act and Rule 15g-2 of the SEC require broker dealers dealing in penny stocks to provide  potential  investors with a document disclosing  the risks of penny stocks and to obtain a manually  signed and dated written  receipt of the document  before  effecting any  transaction  in a penny stock for the investor's  account.  Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock."

Moreover,  Rule 15g-9 of the SEC requires broker dealers in penny stocks to approve the  account of any  investor  for  transactions  in such stocks  before selling  any  "penny  stock"  to that  investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his, her or its financial situation,  investment experience and investment objectives;  (ii) reasonably  determine,  based on that  information,  that  transactions in penny stocks are suitable  for the  investor,  and that the  investor  has  sufficient knowledge and experience as to be reasonably  capable of evaluating the risks of penny stock  transactions;  (iii) provide the investor with a written  statement setting forth the basis on which the  broker-dealer  made the  determination  in (ii) above;  and (iv) receive a signed and dated copy of such statement from the investor,  confirming  that it  accurately  reflects  the  investor's financial situation,  investment  experience and investment  objectives.  Compliance with these requirements may make it more difficult for investors in our common stock to resell their shares to third parties or to otherwise dispose of them.

No Assurance of a Liquid Public Market for our Common Stock.

There can be no assurance as to the depth or liquidity of any market for our common stock or the prices at which holders may be able to sell their shares.  As a result, an investment in our common stock may not be totally liquid, and investors may not be able to liquidate their investment readily or at all when they need or desire to sell.

 

 

ITEM 2.  DESCRIPTION OF PROPERTIES

The Company’s principal executive offices are located at 326 North SR 198, Salem, Utah 84653.  The Company rents the office space from its president at a cost of $6,000 per month and from a third party at a cost of $6,200 per month.  The monthly rent includes a 200 square foot office space, plus additional store front and warehouse space.  Our primary use of this the space is for offices.

The Company owns approximately 600 acres of land in Delta, Utah which was purchased in August 2006.  The Company is currently building a solar energy plant on the land utilizing its solar energy technology system.  The Company also entered into a lease agreement in November 2006 for research and development space in Delta, Utah, to be close to where it is building its solar energy technology system.  The lease expires in November 2016 and requires annual lease payments of $7,500.

The Company also owns approximately 6 acres of land in California.  This land is currently not being used, but the Company plans to build a small energy plant utilizing the alternate solar energy technology system.  Permits will need to be obtained prior to utilizing this land for this purpose.

The Company believes that its current office and research and development space will be adequate to meet current needs. The Company may, however, require additional facilities in the future depending upon being able to produce and market its solar energy technology system.

 

ITEM 3.  LEGAL PROCEEDINGS

The Company filed a patent infringement lawsuit against Digital Persona, Inc and Microsoft Corporation in January 2006. This lawsuit was based upon an alleged infringement, by the above mentioned parties, of United States Patent No. 5,598,474 (“the 474 patent”) for certain fingerprint technology invented by Neldon P. Johnson and assigned to Company. Each defendant responded to the complaint denying all counts, raising affirmative defenses and asserting counterclaims of non-infringement and invalidity. In January 2008, the court entered an order declaring the 474 patent invalid. Subsequent to the order, all claims and counter claims were settled between the Company and Digital Persona, Inc and Microsoft Corporation.

The Company filed a patent infringement lawsuit against IBM; IBM Corporation; IBM Personal Computing Division; Lenovo (United States) Inc.; Lenovo Group Ltd; and John Does 1-20 in February 2006. UPEK, Inc. was subsequently added as a defendant.  This lawsuit was also based upon an alleged infringement, by the above mentioned parties, of the 474 patent.  In January 2008, this case was consolidated with the above mentioned Digital Persona and Microsoft Corporation case.  In June 2008 UPEK filed a motion for further declaration of patent invalidity.  UPEK also filed a separate motion for attorneys’ fees and costs based upon assertions that the case is an “exceptional case” under 35 U.S.C. §285.

 

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The Company filed a motion to dismiss in August 2008.  The Court issued a Memorandum Decision and Order denying the defendant’s motion for summary judgment and denying the motion for an award of attorney fees.  The Court made a limited award of $45,000 for reasonable attorney fees incurred by the defendant, which was paid by the Company in April 2009.

Additional litigation to enforce patents, to protect proprietary information, or to defend the Company against alleged infringement of the rights of others may occur. Such litigation would be costly, could divert our resources from other planned activities, and could have a material adverse effect on our results of operations and financial condition.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Presently Registrant's common stock is traded on the NASD Electronic Bulletin Board under the symbol "IAUS".  The table below sets forth the closing high and low bid prices at which the Company's shares of common stock were quoted during the quarters indicated. The trades are in U. S. dollars but may be inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions in the common stock.

Fiscal 2009		High		Low
June 30, 2009		$0.69		$0.38
March 31, 2009		$0.67		$0.22
December 31, 2008		$0.40		$0.18
September 30, 2008		$0.50		$0.34
Fiscal 2008		High		Low
June 30, 2008		$0.65		$0.40
March 31, 2008		$0.63		$0.34
December 31, 2007		$1.06		$0.35
September 30, 2007		$1.08		$0.62

The Company's shares are significantly volatile and subject to broad price movements and fluctuations. The Company's shares should be considered speculative and volatile securities. The stock price may also be affected by broader market trends unrelated to the Company's activities.

At June 30, 2009, the Company had approximately 995 shareholders of record.

As of June 30, 2009, Registrant had 34,501,322 issued and outstanding, net of 4,344,818 held in an escrow account. Of these shares, approximately 29,003,000 shares were free trading shares.  There were approximately 5,497,000 shares of restricted common stock but most of these shares may be available for resale pursuant to the provisions of Rule 144 promulgated under the 1933 Act.  As of June 30, 2009, at least 100 shareholders hold not less than 1,000 restricted shares of common stock and have held the shares for not less than two years.  At least twenty-five shareholders own not less than 10,000 or more restricted shares of common stock and have held the shares for not less than one year. These shareholders satisfy the one year holding period under Rule 144 promulgated under the 1933 Act. Rule 144(k) allows a restricted legend to be removed after two years have elapsed from the date of purchase and provides that certain provisions of Rule 144 are not applicable.

Sales pursuant to the provisions of Rule 144 sold into the trading market could adversely affect the market price.  The Company's shares trade on the NASD Electronic Bulletin Board. The per share price in an auction market is based in part on supply and demand.  If more shares are available for sale into the market by holders of restricted shares who satisfy the conditions of Rule 144 and in particular subsection 144(k), the market price of the shares of common stock of the Company will be adversely affected.

 

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Dividend Policy

To date, registrant has not declared or paid any dividends to holders of its common stock.  In the future it is unlikely that the Company will pay any dividends.

Recent Sales of Unregistered Securities

During the period covered by this report the Company issued 1,575,000 shares of common stock to the Company’s president upon the exercise of options in exchange for settlement of $630,000 in related party payables.

We issued all of these securities to persons who were “accredited investors” as those terms are defined in Rule 501 of Regulation D of the Securities and Exchange Commission; and each such person had prior access to all material information about us. We believe that the offer and sale of these securities were exempt from the registration requirements of the Securities Act, pursuant to Sections 4(2) and 4(6) thereof, and Rule 506 of Regulation D of the Securities and Exchange Commission.  Registration of sales to “accredited investors” are preempted from state regulation, though states may require the filing of  notices, a fee and other administrative documentation like consents to service of process and the like.

Resales of the shares noted above must be made through an available exemption such as Rule 144 or Section 4(1) of the Securities Act in "routine trading transactions." Any person who acquires any of these securities in a private transaction may be subject to the same resale requirements.  (See below for a general discussion on Rule 144).

Rule 144

The following is a summary of the current requirements of Rule 144:

	Affiliate or Person Selling on Behalf of an Affiliate	Non-Affiliate (and has not been an Affiliate During the Prior Three Months)
Restricted Securities of Reporting Issuers	During six-month holding period – no resales under Rule 144 Permitted.     After Six-month holding period – may resell in accordance with all Rule 144 requirements including: ·Current public information, ·Volume limitations, ·Manner of sale requirements for equity securities, and ·Filing of Form 144.	During six- month holding period – no resales under Rule 144 permitted.   After six-month holding period but before one year – unlimited public resales under Rule 144 except that the current public information requirement still applies.   After one-year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.
Restricted Securities of Non-Reporting Issuers	During one-year holding period – no resales under Rule 144 permitted.   After one-year holding period – may resell in accordance with all Rule 144 requirements including: ·Current public information, ·Volume limitations, ·Manner of sale requirements for equity securities, and ·Filing of Form 144.	During one-year holding period – no resales under Rule 144 permitted.   After one-year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

 

 

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 - Financial Statements and Supplementary Data.”

 

		June 30, 2009				June 30, 2008
Results of Operations:
Revenue		$	-			$	-
Loss from operations			(6,627,114	)			(7,804,599	)
Other income (expenses)			(10,223	)			(11,104	)
Net loss			(6,637,337	)			(7,815,703	)
Basic and diluted net loss per share			(0.20	)			(0.27	)
Cash Flow and Balance Sheet Data:
Net cash used in operating activities		$	(843,908	)		$	(1,525,399	)
Cash			47,537				144,429
Total Assets			1,029,603				935,729
Total Current Liabilities			2,913,638				2,104,145
Accumulated deficit			(35,334,617	)			(28,697,280	)
Total Stockholders' deficit			(1,980,717	)			(1,277,071	)

 

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

General

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition.  The discussion should be read in conjunction with the financial statements and notes thereto.  This discussion contains forward looking statements regarding the Company's plans, objectives, expectations and intentions.  All forward looking statements are subject to risks and uncertainties that could cause the Company's actual results and experience to differ materially from such projections.

Historically, the Company's activities have been dominated by its research and development activities.  As a result, there have not been revenues associated with operations. The Company has limited experience regarding profit margins or costs associated with operating a business.

Plan of Operation

 

The Company’s plan of operation for the next 12 months is to: (i) continue to build its alternate solar energy system and get the system operational to begin producing saleable energy; (ii) market and sell the alternate solar energy system to entities who desire to produce solar energy; and (iii) continue to develop marketable products for its technologies.

During the next 12 months, additional financing will be required to fund the building of the alternate solar energy system and the development of marketable products.  To date, the Company has primarily financed operations by the receipt of advances from the Company’s president, deposits from customers for the alternate solar energy system and through the private placement of equity securities. The president and the Company have no formal agreement as to any future advances. However, it is anticipated that the Company will continue to receive additional financing from receipt of advances from its president to help fund continuing operations.  The Company also anticipates receiving additional financing through the private placement of equity securities.

 

The Company does not expect a significant change in the number of employees during the next 12 months.  However, if the Company is successful in getting the alternate solar energy system operational, additional employees may be necessary depending on the demand for the system and how the Company determines to produce the system.  The Company plans to evaluate the possibility of contracting with suppliers to produce and install the systems.

 

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Results of Operations

Fiscal year ended June 30, 2009 compared to fiscal year ended June 30, 2008

 

The Company has not generated a profit since inception.  Operations during the years ended June 30, 2009 and 2008, primarily pertained to research and development and other activities.  Research and development expenses decreased by $55,909 or 7% from $760,798 in fiscal year 2008 to $704,889 primarily due to purchasing less research and development materials for the solar thermal and bladeless turbine during the fiscal year 2009 as compared to fiscal year 2008.

General and administrative expenses decreased by $1,099,062 or 16% from $7,021,287 in fiscal year 2008 to $5,922,225 in fiscal year 2009. The decrease in general and administrative expenses is primarily due to many options fully vesting in fiscal year 2008 resulting in a decrease in stock-based compensation for fiscal year 2009.

Total revenue and cost of sales were $0 for fiscal years 2009 and 2008. Other expenses remained relatively constant in fiscal years 2009 and 2008.  Net loss decreased by $1,178,366 from $7,815,703 in fiscal year 2008 to $6,637,337 in fiscal year 2009 primarily related to the decrease in stock-based compensation.

Liquidity and Capital Resources

Historically, our principal use of cash has been to fund ongoing research and development activities.  To date, we have primarily financed our operations by the receipt of loan advances from the Company’s president and through the private placement of equity securities. The president and the Company have no formal agreement as to any future loans or advances. The Company has no line of credit with any financial institution. The Company believes that until it has consistent operations and revenues, it will be unable to establish a line of credit from conventional sources.

The Company's liquidity is substantially limited given the current rate of expenditures.  More funds will be required to support ongoing product development, finance any marketing programs and establish any distribution networks.  The Company had $47,537 in cash as of June 30, 2009, representing a decrease of $96,892 from June 30, 2008.  The decrease relates to net cash used in operations and investing of $843,908 and $23,358, respectively, offset by net cash provided by financing activities of $770,374.

As of June 30, 2009, the Company has current assets of $59,370 and total assets of $1,029,603.  Current liabilities were $2,913,638 and total liabilities of $3,010,320. The ratio of current assets to current liabilities is approximately 0.02. If the Company continues to have a negative cash flow or if the Company is unable to generate sufficient revenues to meet its operating expenses, the Company will continue to experience liquidity difficulties.

Stock issuance

The Company has shares of common stock in escrow accounts. Proceeds from the sale of stock from these escrow accounts are placed in separate escrow accounts to be used at the Company’s and the trustee’s discretion. During the year ended June 30, 2009, 1,245,000 shares were sold for proceeds of $432,502 at prices ranging from $0.16 to $0.67 per share.  During the year ended June 30, 2008, 1,116,100 shares were sold for proceeds of $529,676 at prices ranging from $0.34 to $0.92 per share.   The proceeds were used to pay professional fees, rent, operating expenses and accrued liabilities.   At June 30, 2009 and 2008, there was a balance of 4,344,818 and 5,589,818 shares, respectively, in the escrow accounts.

During the year ended June 30, 2009, the Company issued 50,000 shares of common stock to a company in exchange for services valued at $29,500 and issued 505,000 shares of common stock, valued at $126,250, to employees for compensation.  During the year ended June 30, 2008, the Company issued 150,000 shares of common stock to an individual in exchange for $45,000 in cash at $0.30 per share.

Critical Accounting Policies

The Company’s significant accounting policies are discussed in Note 1 to the Financial Statements. The application of certain policies requires significant judgments or an estimation process that can affect our results of operations, financial position and cash flows, as well as the related footnote disclosures. We base our estimates on historical experience and other assumptions, as discussed below, that we believe is reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. The accounting policies and estimates with the greatest potential to have a significant impact on our operating results, financial position, cash flows and footnote disclosures are as follows.

 

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Long-Lived Assets

The Company regularly evaluates whether events or circumstances have occurred that indicate the carrying value of its long-lived assets may not be recoverable.  When factors indicate the asset may not be recoverable, we compare the related undiscounted future net cash flows to the carrying value of the asset to determine if impairment exists.  If the expected future net cash flows are less than the carrying value, an impairment charge is recognized based on the fair value of the asset.  The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions. Furthermore, the Company makes periodic assessments about each patent and related technology to determine if it plans to continue to pursue the technology and if the patent has value. As a result of these assessments, the Company wrote off $0 and $22,972 of patents during the years ended June 30, 2009 and 2008, respectively.

Stock-Based Compensation

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”, on July 1, 2007, which requires us to measure compensation expense for all outstanding unvested share-based awards at fair value and recognize compensation expense over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from estimates, such amounts will be recorded as an adjustment in the period estimates are revised.  The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results may differ from these estimates.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of June 30, 2009 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods:

 

		Payments due by Fiscal Year
Contractual Obligations		2010				2011				2012				2013				2014				Thereafter				Total
Long-term debt arrangements (1)		$	52,543			$	12,704			$	13,594			$	14,545			$	15,564			$	40,275			$	149,225
Operating leases (2)			7,500				7,500				7,500				7,500				7,500				17,500				55,000
Total contractual obligations		$	60,043			$	20,204			$	21,094			$	22,045			$	23,064			$	57,775			$	204,225

(1) The Company has two notes payable to financing companies due in annual statements that are collateralized by land and both mature in fiscal year 2017. The Company also has a note payable maturing in fiscal 2010 for equipment.

(2)  The Company entered into a lease agreement for research and development space in October 2006. The term of this lease is from November 1, 2006 to November 1, 2016.

The Company has also entered into several solar lease bonus fee contracts with many of the customers who made deposits on the alternate solar energy system discussed further in Note 1 and Note 9 to the financial statements.  As additional consideration for making the deposit and making the alternate solar energy system available to the Company as a reference for marketing and sales purposes to show and demonstrate, the Company has agreed to pay many of the customers a referral fee of .009% on the first one billion dollars of total gross sales revenue received by the Company for the sale of power generation equipment.  The Company will be obligated to pay this bonus fee if it is able to produce and then sell its alternate solar energy system.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations or cash flows.

 

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Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51" (“SFAS 160”). SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for the Company beginning July 1, 2009. Early adoption is not permitted.  These statements will affect the Company for combinations after July 1, 2009.

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for the Company beginning July 1, 2009, and is not expected to have a significant impact on the Company’s financial statements.

In April 2009, the FASB released FASB Staff Position (“FSP”) SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“SFAS 107-1 and APB 28-1”).  This FSP amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements.  The FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements.  This proposal is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt SFAS 107-1 and APB 28-1 and provide the additional disclosure requirements for the first quarter for fiscal year end 2010.

In April 2009, the FASB released FSP SFAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (“SFAS 157-4”).  This FSP provides additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in SFAS 157, “Fair Value Measurements.”  SFAS 157-4 is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt the provisions of SFAS 157-4 during first quarter 2010, but does not believe this guidance will have a significant impact on the Company’s financial statements.

In April 2009, the FASB released FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  This proposal provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments.  This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt the provisions of this Staff Position during the first quarter 2010, but does not believe this guidance will have a significant impact on the Company’s financial statements.

In May 2009, the FASB issued statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 modifies the definition of what qualifies as a subsequent event—those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued—and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date.  SFAS 165 is effective for fiscal years and interim periods ending after June 15, 2009. The Company adopted the provisions of SFAS 165 for the year ended June 30, 2009 and have evaluated any subsequent events through October 13, 2009. The Company does not believe there are any material subsequent events which would require further disclosure as discussed in Note 14.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”).  SFAS 166 amends SFAS 140 by including: the elimination of the qualifying special-purpose entity (QSPE) concept; a new participating interest definition that must be met for transfers of portions of financial assets to be eligible for sale accounting; clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale; and a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor.  Additionally, the standard requires extensive new disclosures regarding an entity’s involvement in a transfer of financial assets.  Finally, existing QSPEs (prior to the effective date of SFAS 166) must be evaluated for consolidation by reporting entities in accordance with the applicable consolidation guidance upon the elimination of this concept.  SFAS 166 is effective for the Company beginning on July 1, 2010.  The Company has not yet determined the impact that adoption of SFAS 166 will have on its financial statements.

 

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In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”).  Among other items, SFAS 167 responds to concerns about the application of certain key provisions of FIN 46(R), including those regarding the transparency of the involvement with variable interest entities.  SFAS 167 is effective for the Company beginning on July 1, 2010.  The Company has not yet determined the impact that adoption of SFAS 167 will have on its financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”).   SFAS 168 establishes the FASB Accounting Standards Codification™ (Codification) as the source of authoritative U.S. GAAP to be applied by nongovernmental entities.  While not intended to change U.S. GAAP, the Codification significantly changes the way in which the accounting literature is organized.  The Company will adopt this new accounting standard for its financial statements for the quarterly period ending September 30, 2009.  The Company does not expect the adoption of SFAS 168 to have a material impact on its financial statements.

The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position or cash flows.  Based on that review, the Company believes that none of these pronouncements will have a significant effect on its financial statements.

 

 

ITEM 8. FINANCIAL STATEMENTS

The financial statements required by this item are after the signature pages.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

 

ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of June 30, 2009.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.  Based on this evaluation, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of June 30, 2009, our internal control over financial reporting was effective.

 

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This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

During the most recent quarter ended June 30, 2009, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

ITEM 9B. OTHER INFORMATION

None

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Officers

The executive officers and directors of the Company are as follows:

Name		Age		Position with the Company
Neldon Johnson		63		Chairman of the Board of Directors, President and CEO
Randale Johnson		40		Secretary, Vice President
LaGrand Johnson		43		CFO
Bruce Barrett		79		Director
Blain Phillips		47		Director

All Directors hold office until a successor has been elected. All officers are appointed by the Board of Directors and serve at the discretion of the Board until a new officer is appointed.

Directors will be reimbursed by the Company for any expenses incurred in attending Directors' meetings. The Company also intends to obtain Officers and Directors liability insurance, although no assurance can be given that it will be able to do so.

Background of Executive Officers and Directors

 

Neldon Johnson is the founder of the Company and the primary inventor of the Self-Check system, AFIM, DWM, and turbine technologies. Mr. Johnson directs the Company's research and development program. Mr. Johnson studied physics and mathematics at Brigham Young University in Provo, Utah, and graduated from Utah Technical College's Electronics Technology Program in 1964.  He has taken training courses and has taught courses in electronics programming, microwave and wave switch programs. From 1965 to 1968 he worked for American Telephone and Telegraph, Inc., as an engineer.

 

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From 1983 to the present, Mr. Johnson has been developing the Self-Check System, AFIM, DWM, and turbine technologies. Also, from 1975 to 1990 he worked at a Ream's Grocery Store and had management responsibilities for operations. Mr. Johnson has real estate holdings, one of which is a building of approximately 25,000 square feet in Salem, Utah.

Randale P. Johnson is the son of Neldon Johnson. He has been an officer since June 1996.  His responsibilities include marketing and administration.  Mr. Johnson holds an associate degree in Computer Science and has four years of experience in the computer industry.  He joined the Company in 1996.

LaGrand T. Johnson is the son of Neldon Johnson. He has worked with the Company since 1987 but started full time in 1996. He graduated with a Bachelor's Degree in chemistry in 1991. He received his Doctor of Osteopathy degree in 1995 from Western University of Health Sciences. He works as CFO and General Manager of the Company and in research and development.

Bruce Barrett graduated from Brigham Young University with a degree in Marketing and Business Management in 1958. After graduating he continued to work for BYU. He was Manager of Married Student Housing, Manager of Material Handling, Director of Textile Cleaning Services, and Director of Auxiliary Services before retiring in 1995.

Blain Phillips has been employed at Union Pacific Railroad since 1991.

None of the officers or directors of the Company has during the past five years, been involved in any events such as criminal proceedings or convicted of proceedings relating to securities violations.

Corporate Governance

Nominating Committee

We  have  not  established  a  Nominating  Committee  because,  due  to our development  of  operations  and the fact that we only have three directors and executive officers, we believe that we are able to effectively manage the issues normally considered  by a Nominating Committee.  Following the entry into any business or the completion of any acquisition, merger or reorganization, a further review of this issue will no doubt be necessitated and undertaken by new management.

If we do establish a Nominating Committee, we will disclose this change to our procedures in recommending nominees to our board of directors.

Audit Committee

We have not established an Audit Committee because,  due to our development of  operations  and the fact that we only have  three  directors  and  executive officers,  we believe that we are able to effectively manage the issues normally considered by an audit  committee.  Following the entry into any business or the completion of any acquisition, merger or reorganization, a further review of this issue will no doubt be necessitated and undertaken by new management

 

 

ITEM 11. EXECUTIVE COMPENSATION

The table below summarizes the total compensation paid to or earned by each of the named executive officers for the fiscal years ended June 30, 2009 and 2008.

 

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Name and Principal Position		Fiscal Year			Salary ($)				Bonus ($)				Stock Awards ($) (1)				Option Awards  ($) (2)				Non-Equity Incentive Plan Compensation ($)				Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
Neldon Johnson		2009				125,000				-				-				4,687,007				-				-				-				4,812,007
President, CEO and Director		2008				-				-				122,478				5,613,494				-				-				-				5,735,972
Randale Johnson		2009				54,600				-				-				14,216				-				-				-				68,816
Secretary and Vice President		2008				54,667				-				-				28,269				-				-				-				82,936
LaGrand Johnson		2009				44,100				-				-				14,216				-				-				-				58,316
CFO		2008				31,925				-				-				28,269				-				-				-				60,194

 

(1)

The amount in the stock awards columns represents the value of the 1,000,000 Series 1 Class A Preferred Stock granted as compensation for services performed in 2008 lieu of cash compensation.

 

(2)

The amounts in the option awards column reflect the dollar amount recognized for financial statement reporting purposes for the indicated fiscal years ended June 30, in accordance with SFAS 123(R) and thus include amounts from options granted in prior years.  No options were granted in the current year.

 

Employment Agreements

The Company has entered into an agreement with Neldon Johnson to act as President and CEO of the Company for a period of ten years starting in July 2000. Per the agreement, Neldon is to be paid $100,000 per anum and shall increase each calendar year by the percentage increase in the Consumer Price Index.  Neldon may terminate the agreement, but must give the Company 6 months advance notice.  The Company can not voluntarily terminate Neldon’s employment for any reason.  No additional payments are outlined in the agreement for a change in control.

Outstanding Equity Awards at Fiscal Year-End

 

	Option Awards					Stock Awards
(a)	(b)	(c)	(d)	(e)	(f)	(g)	(h)	(i)	(j)
Name	Number of Securities Underlying Unexercised Options (#)Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested	Market Value of Shares or Units of Stock That Have Not Vested	Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
Neldon Johnson	29,300,000	65,000,000 (1)	—	$0.40	12/31/2034	—	—	—	—
Randale Johnson	450,000	50,000 (2)	—	$3.00	8/22/2010	—	—	—	—
LaGrand Johnson	450,000	50,000 (2)	—	$3.00	8/22/2010	—	—	—	—

 

(1)	These options were granted on May 14, 2004 and vest on January 1, 2010.

 

(2)	These options were granted on August 24, 2000 and vest on August 24, 2009.

 

 

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Compensation of Directors

The Company’s Directors currently are not compensated for their time and there are no payment arrangements.  The Company anticipates that it will need to compensate Directors at some point in the future.

 

ITEM. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information known to the Company regarding beneficial ownership of the Company's Common Stock as of June 30, 2009, by (i) each person known by the Company to own, directly or beneficially, more than 5% of the Company's Common Stock, (ii) each of the Company's directors, and (iii) all officers and directors of the Company as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws, where applicable.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our common stock issuable currently or within 60 days of June 30, 2009, upon exercise of options or warrants held by that person or group is deemed outstanding. These shares, however, are not deemed outstanding for computing the percentage ownership of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the stockholders named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Percentage ownership is based on 64,801,322 shares of common stock outstanding as of June 30, 2009, together with applicable options and warrants for each stockholder.  Unless otherwise indicated, the address of each person listed below is in the care of International Automated Systems, Inc., 326 North SR 198, Salem, Utah 84653.

 

		Shares Beneficially Owned
Name and Title		Number (4)		Percent
Neldon Johnson, President, CEO and Director		30,869,920	(1)	47.6%
Randale Johnson, Secretary and Vice President		750,000	(2)	1.2%
LaGrand Johnson, CFO		650,000	(3)	1.0%
Bruce Barrett, Director		100,000		0.2%
Blain Phillips, Director		-		0.0%
All officers and directors as a group (5 persons)		32,369,920		50.0%

 

(1)	Includes warrants to purchase 29,300,000 shares of common stock exercisable within 60 days of June 30, 2009.

(2)	Includes options to purchase 500,000 shares of common stock exercisable within 60 days of June 30, 2009.

(3)	Includes options to purchase 500,000 shares of common stock exercisable within 60 days of June 30, 2009.

(4)

Does not include 2,000,000 shares of Series 1 Class A Preferred Stock held by Neldon Johnson, 1,150,000 shares of Series 1 Class A Preferred Stock held by LaGrand Johnson, or 1,150,000 shares of Series 1 Class A Preferred Stock held by Randale Johnson. Each share of the Series 1 Class A Preferred Stock has ten votes per share and votes with the shares of common stock on all matters with the exception of 1,000,000 of the Series 1 Class A Preferred Stock held by Neldon Johnson which has 100 votes per share and votes with the shares of common stock on all matters. Mr. Neldon Johnson has approximately 70%, LaGrand Johnson 6%, and Randale Johnson 6% of the voting control of the Company when the voting power of the shares of preferred stock, common stock and vested options are considered together.

 

Changes in Control

There are no additional present arrangements or pledges of the Company’s securities which may result in a change in control of the Company.  However, there are no provisions in our Articles of Incorporation or Bylaws that would delay, defer or prevent a change in control.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

On May 14, 2004, the Company entered into an agreement with Neldon Johnson, the Company’s president, in which the Company acquired from Mr. Johnson patents, patents pending, designs and contracts related to the bladeless turbine, solar and chemical thermal technologies, and electronic shelf tag technology developed by Mr. Johnson.  As consideration for these patents, patents pending, designs and contracts, the Company issued warrants to purchase 100,000,000 shares of common stock and 10% of total gross sales in royalties of the Company.  

 

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During the year ended June 30, 2003, the Company commenced leasing office and research and development space on a month- to-month basis from its president, for $6,000 per month.  The amount payable to the president for rent at June 30, 2009 was $65,000.

The Company received cash advances of $557,101 from its president during the year ended June 30, 2009. The Company settled $630,000 of the cash advances by issuing 1,575,000 shares of common stock to the officer upon the exercise of warrants; paid $173,744 of the cash advances; and settled $86,977 of the cash advances through the transfer of in-process patent rights at cost during the year ended June 30, 2009. The balance was $440,382 at June 30, 2009 and is unsecured, payable on demand and non-interest bearing.

During December 2005, the Company entered into a purchase and installation contract with Solar Renewable Energy-1, LLC for a solar thermal power plant. The contract is contingent on several factors and provides for certain progress payments. As of June 30, 2009, the Company has not provided any services or equipment required under this agreement and has received no money and recognized no revenues.

Resolving Conflicts of Interest

The Company’s directors must disclose all conflicts of interest and all corporate opportunities to the entire board of directors.  Any transaction involving a conflict of interest will be conducted on terms not less favorable than that which could be obtained from an unrelated third party.

Director Independence

The Company has two independent directors serving on its board of directors.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Our financial statements for the years ended June 30, 2009 and 2008 have been audited by our principal accountant, Mantyla McReynolds, LLC. Each year the Chief Executive Officer pre-approves all audit and tax related services prior to the performance of services by Mantyla McReynolds, LLC. The percentage of hours expended on the audit by persons other than full time, permanent employees of Mantyla McReynolds, LLC was zero.

Audit Fees

Aggregate fees for the year ended June 30, 2009 for professional services by Mantyla McReynolds, LLC, our principal accountant, for the audit of our annual financial statements and review of our interim financial statements were approximately $48,325.

Aggregate fees for the year ended June 30, 2008 for professional services by Mantyla McReynolds, LLC, our principal accountant, for the audit of our annual financial statements and review of our interim financial statements were approximately $37,329.

Audit-Related Fees

Audit-related fees, not included in the previous paragraphs, for the years ended June 30, 2009 and 2008 for assurance and related services by Mantyla McReynolds, LLC were $655 and $130, respectively.

Tax Fees

$0 and $728 of fees were billed to us for years ended June 30, 2009 and 2008, respectively, for professional services by Mantyla McReynolds, LLC for tax compliance, tax advice, and tax planning.  A firm, other than our principal accountant, prepares all income tax returns.  

 

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ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

31.1	Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

b. Reports on Form 8-K.

During the period ended June 30, 2006, Registrant filed two reports on Form 8-K and one report on 8-K/A.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	INTERNATIONAL AUTOMATED SYSTEMS, INC.
	/s/ Neldon Johnson
	NELDON JOHNSON
	Title:  President,
	Chief Executive Officer
	Date:  October 13, 2009
	DIRECTORS
	/s/ Neldon Johnson
	NELDON JOHNSON
	Title:  Director
	Date: October 13, 2009
	/s/ Blain Phillips
	BLAIN PHILLIPS
	Title:  Director
	Date:  October 13, 2009
	/s/ Bruce Barrett
	BRUCE BARRETT
	Title:  Director
	Date:  October 13, 2009

 

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INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Table of Contents

		Page
Report of Independent Registered Public Accounting Firm		F1
Balance Sheets - June 30, 2009 and 2008		F2
Statements of Operations for the Years Ended June 30, 2009 and 2008 and for the period from Inception [September 26, 1986] through June 30, 2009		F3
Statements of Stockholders' Equity/ (Deficit) for the Period from Inception through June 30, 2009		F4
Statements of Cash Flows for the Years Ended June 30, 2009 and 2008 and for the period from Inception [September 26, 1986] through June 30, 2009		F8
Notes to the Financial Statements		F10

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

International Automated Systems, Inc.

We have audited the accompanying balance sheets of International Automated Systems, Inc. (the Company) as of June 30, 2009 and 2008, and the related statements of operations and cash flows for the years ended June 30, 2009 and 2008 and for the period from July 1, 2006 through June 30, 2009, and the statement of stockholders’ deficit for the period from July 1, 2006 through June 30, 2009.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.  The financial statements of International Automated Systems, Inc. for the period from inception [September 26, 1986] through June 30, 2005, were audited by other auditors whose report dated September 28, 2005, except for the Note 1 restatement which was dated February 20, 2006, expressed an unqualified opinion on those statements.  Others audited the financial statements of the Company from inception (September 26, 1986) through June 30, 1990, whose reports dated October 21, 1988 and April 30, 1991, were qualified subject to the effects of such adjustments, if any, as might have been required had the outcome of certain uncertainties referred to in the related notes been known. Our opinion, in so far as it relates to the period from September 26, 1986 through June 30, 2005, is based solely on the reports of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2009 and 2008 and the results of operations and cash flows for the years ended June 30, 2009 and 2008, and for the period from inception (September 26, 1986) through June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has accumulated losses from inception and has negative working capital as of June 30, 2009. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Mantyla McReynolds, LLC

Salt Lake City, Utah

October 13, 2009

 

F-1

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INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Balance Sheets

			June 30,				June 30,
			2009				2008
ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	47,537			$	144,429
	Prepaid expenses			11,833				-
	Total Current Assets			59,370				144,429
Alternate solar energy systems				413,520				151,859
Property and equipment, net of accumulated depreciation of $291,390 and $202,965, respectively - Note 1				481,512				471,614
Patents, net of accumulated amortization of $20,825 and $15,176, respectively				75,201				167,827
	TOTAL ASSETS		$	1,029,603			$	935,729
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
	Accounts payable		$	417,136			$	335,413
	Accrued liabilities			181,327				72,391
	Related party payable - Note 3			505,382				882,001
	Customer deposits - Note 1 and Note 9			1,757,250				803,250
	Notes payable-current portion - Note 5			52,543				11,090
	Total Current Liabilities			2,913,638				2,104,145
Long-term notes payable - Note 5				96,682				108,655
TOTAL LIABILITIES				3,010,320				2,212,800
Commitments and contingencies - Note 11
STOCKHOLDERS' EQUITY (DEFICIT)
	Preferred stock, Class A, no par value; 22,000,000 shares authorized, 4,400,000 shares issued and outstanding			417,264				417,264
	Preferred stock, Class B, no par value, 3,000,000 shares authorized, 300,000 shares issued and outstanding			-				-
	Common stock, no par value, 225,000,000 shares authorized, 34,501,322 and 31,146,722 issued and outstanding,net of 4,344,818 and 5,589,818 shares held in escrow account, respectively - Note 7			32,936,636				27,002,945
	Deficit accumulated during the development stage			(35,334,617	)			(28,697,280	)
	Total Stockholders' Deficit			(1,980,717	)			(1,277,071	)
	TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	1,029,603			$	935,729

The accompanying notes are an integral part of these financial statements

 

F-2

---

 

INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Statements of Operations

										For the Period
										From Inception
		For the Years Ended								(September 26,
		June 30,								1986) Through
		2009				2008				June 30, 2009
REVENUES
Sales		$	-			$	-			$	111,226
Income from related party			-				-				32,348
Total Revenues			-				-				143,574
COST OF SALES
Cost of sales			-				-				81,927
Write down of carrying value of inventory			-				-				233,131
Total Costs of Sales			-				-				315,058
GROSS LOSS			-				-				(171,484	)
OPERATING EXPENSES
General and administrative			5,922,225				7,021,287				28,228,935
Research and development			704,889				760,798				7,622,839
Impairment of patents			-				22,972				140,577
License fees			-				-				270,634
Loss (gain) on disposal of property and equipment			-				(458	)			16,901
Total Operating Expenses			6,627,114				7,804,599				36,279,886
LOSS FROM OPERATIONS			(6,627,114	)			(7,804,599	)			(36,451,370	)
OTHER INCOME (EXPENSES)
Loss on impairment of assets			-				-				(583	)
Forfeiture of deposits			-				-				(236,803	)
Interest income			127				1,570				26,489
Interest expense			(8,371	)			(12,769	)			(23,097	)
Other income (expenses)			(1,979	)			95				(31,276	)
Total Other Income (Expenses)			(10,223	)			(11,104	)			(265,270	)
LOSS BEFORE EXTRAORDINARY GAIN			(6,637,337	)			(7,815,703	)			(36,716,640	)
Extraordinary gain on sale of patents			-				-				1,382,023
NET LOSS		$	(6,637,337	)		$	(7,815,703	)		$	(35,334,617	)
Net loss per common share
Basic and diluted		$	(0.20	)		$	(0.27	)
Weighted average common shares outstanding
Basic and diluted			32,733,279				29,251,202

The accompanying notes are an integral part of these financial statements

 

F-3

---

 

INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Statement of Stockholders Equity / (Deficit)

		Preferred Stock								Common Stock								Stock Purchase				Deficit Accumulated During Development				Total Stockholder's
		Shares				Amount				Shares				Amount				Rights				Stage				Deficit
Balance - September 26, 1986
(Date of Inception)			-			$	-				-			$	-			$	-			$	-			$	-
Common stock issued for cash
September 1986 - $0.002 per share			-				-				5,100,000				11,546				-				-				11,546
September 1988 (net of $38,702 offering costs) - $0.32 per share			-				-				213,065				67,964				-				-				67,964
December 1988 (net of $6,059 offering costs) - $0.32 per share			-				-				33,358				10,641				-				-				10,641
March 1989 (net of $4,944 offering costs) - $0.32 per share			-				-				27,216				8,681				-				-				8,681
June 1989 (net of $6,804 offering costs) - $0.32 per share			-				-				37,461				11,950				-				-				11,950
Common stock issued for services
September 1986 - $0.002 per share			-				-				300,000				679				-				-				679
June 1989 - $0.32 per share			-				-				5,000				1,595				-				-				1,595
Net loss for the period from September 26,1986 through June 30, 1990			-				-				-				-				-				(192,978	)			(192,978	)
Balance - June 30, 1990			-				-				5,716,100				113,056				-				(192,978	)			(79,922	)
Class A Preferred and Common Stock issued for technology 1990-1996-    $0.02 per share			1,000,000				292,786				6,000,000				175,672				-				-				468,458
Class A Preferred Stock issued for services
July 2000 - $0.001 per share			2,000,000				2,000				-				-				-				-				2,000
August 2000 - $0.00 per share			400,000				-				-				-				-				-				-
Class B Preferred stock issued for services
August 2000 - $0.00 per share			300,000				-				-				-				-				-				-
Common Stock issued for cash
January 1994 - $0.40 per share			-				-				59,856				23,942				-				-				23,942
May 1994 - $0.20 per share			-				-				137,500				27,500				-				-				27,500
January 1996 (net of $24,387 offering costs) - $3.86 per share			-				-				179,500				693,613				-				-				693,613
November 1997 - $1.43 per share			-				-				35,000				50,000				-				-				50,000
May 1998 - $1.20 per share			-				-				250,000				300,000				-				-				300,000
October 1999 - $2.00 per share			-				-				50,000				100,000				-				-				100,000
September 2000 - $1.67 per share			-				-				11,500				19,236				-				-				19,236
October through Dec 2000 - $1.03 per share			-				-				140,100				144,546				-				-				144,546
January through March 2001 - $1.30 per share			-				-				39,900				51,920				-				-				51,920
April through June 2001 - $0.98 per share			-				-				120,100				117,684				-				-				117,684
July through December 2001 - $0.86 per share			-				-				138,400				119,287				-				-				119,287
December 2001 - $0.71 per share			-				-				28,000				20,000				-				-				20,000
January 2002 - $1.39 per share			-				-				50,000				35,910				-				-				35,910
May through June 2002 - $0.25 per share			-				-				500,000				125,000				-				-				125,000
Common Stock issued for services
April 1991 - $0.10 per share			-				-				300,000				30,000				-				-				30,000
January 1995 - $1.00 per share			-				-				100,000				100,000				-				-				100,000
May 1997 - $4.13 per share			-				-				14,000				57,750				-				-				57,750
June 1997 - $2.94 per share			-				-				5,000				14,690				-				-				14,690
December 1997 - $1.13 per share			-				-				6,000				6,750				-				-				6,750

The accompanying notes are an integral part of these financial statements

 

F-4

---

 

INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Statement of Stockholders Equity / (Deficit), continued

		Preferred Stock								Common Stock								Stock Purchase				Deficit Accumulated During Development				Total Stockholder's
		Shares				Amount				Shares				Amount				Rights				Stage				Deficit
October 1999 - $1.26 per share			-				-				50,000				63,147				-				-				63,147
August 2000 - $2.25 per share			-				-				268,000				603,000				-				-				603,000
May 2001 - $1.12 per share			-				-				3,000				3,360				-				-				3,360
February and March 2001 - $1.55 per share			-				-				350,000				542,500				-				-				542,500
October 2001 - $1.44 per share			-				-				150,000				216,000				-				-				216,000
February 2002 - $1.14 per share			-				-				25,000				28,500				-				-				28,500
Common stock issued for financing transactions
November 2000 - $0.90 per share			-				-				50,000				45,000				-				-				45,000
December 2000 - $0.90 per share			-				-				10,000				9,000				-				-				9,000
January 2001 - $0.84 per share			-				-				30,000				25,320				-				-				25,320
June 2001 - $1.16 per share			-				-				120,000				139,200				-				-				139,200
Common stock issued to satisfy liabilities
June 1991 - $0.03 per share			-				-				2,700,000				78,101				-				-				78,101
Grant of stock purchase rights
May 1994 - $0.50 per share			-				-				-				6,750				13,500				-				6,750
June 1995 - $3.00 per share			-				-				-				95,283				31,761				-				95,283
August 1995 - $5.00 per share			-				-				-				25,000				5,000				-				25,000
Stock purchase rights exercised
May 1997			-				-				36,761				-				(36,761	)			-				-
June 1997			-				-				13,500				-				(13,500	)			-				-
Redemption and retirement of treasury stock
December 1991 - $0.49 per share			-				-				(5,000	)			(2,425	)			-				-				(2,425	)
December 1992 - $0.49 per share			-				-				(1,856	)			(900	)			-				-				(900	)
Adjustment for additional shares issued 1990-2002			-				-				68,973				-				-				-				-
Contributed capital - cash and settlement of liability, no shares issued, 1990-2002			-				-				-				5,762,419				-				-				5,762,419
Capital distribution of related party receivable, 1990-2002			-				-				-				(1,577,674	)			-				-				(1,577,674	)
Net loss for the period from July 1, 1990 through June 30, 2002			-				-				-				-				-				(8,705,191	)			(8,705,191	)
Balance – June 30, 2002			3,700,000				294,786				17,749,334				8,388,137				-				(8,898,169	)			(215,246	)
Common stock issued for cash
July 2002 - $0.20 per share			-				-				150,000				30,000				-				-				30,000
August 2002 - $0.26 per share			-				-				316,000				82,000				-				-				82,000
January 2003 - $0.32 per share			-				-				80,000				25,600				-				-				25,600
July through September 2002 - $0.39 per share			-				-				217,000				84,204				-				-				84,204
October through December 2002 - $0.33 per share			-				-				200,000				66,407				-				-				66,407
January through March 2003 - $0.26 per share			-				-				150,000				38,617				-				-				38,617
April through June 2003 - $0.24 per share			-				-				240,000				57,234				-				-				57,234
Common stock issued for services
July 2002 - $0.50 per share			-				-				3,806				1,903				-				-				1,903
October 2002 - $0.45 per share			-				-				885,000				398,250				-				-				398,250
November 2002 - $0.35 per share			-				-				65,000				22,750				-				-				22,750
May 2003 - $0.15 per share			-				-				10,000				1,500				-				-				1,500

The accompanying notes are an integral part of these financial statements

 

F-5

---

 

INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Statement of Stockholders Equity / (Deficit), continued

		Preferred Stock								Common Stock								Stock Purchase				Deficit Accumulated During Development			Total Stockholder's
		Shares				Amount				Shares				Amount				Rights				Stage			Deficit
Common stock issued as part of share value guarantee
August through May 2003			-				-				260,000				-				-				-			-
Contributed capital - no shares issued
July through June 2003			-				-				-				39,682				-				-			39,682
Capital distribution of related party receivable- July through June 2003			-				-				-				(52,606	)			-				-			(52,606	)
Net loss			-				-				-				-				-				(1,017,055	)		(1,017,055	)
Balance – June 30, 2003			3,700,000				294,786				20,326,140				9,183,678				-				(9,915,224	)		(436,760	)
Common stock issued for cash
August 2003- $0.50 per share			-				-				132,400				66,200				-				-			66,200
September 2003- $0.50 per share			-				-				148,000				73,000				-				-			73,000
December 2003- $0.25 per share			-				-				34,000				8,500				-				-			8,500
July through September 2003 - $0.72 per share			-				-				84,000				60,880				-				-			60,880
October through December 2003 - $0.34 per share			-				-				111,200				37,731				-				-			37,731
January through March 2004 - $0.36 per share			-				-				91,500				32,560				-				-			32,560
April through June 2004 - $0.38 per share			-				-				104,800				40,337				-				-			40,337
Contributed capital - no shares issued
July through June 2004			-				-				-				98,204				-				-			98,204
Net income			-				-				-				-				-				443,183			443,183
Balance – June 30, 2004			3,700,000				294,786				21,032,040				9,601,090				-				(9,472,041	)		423,835
Common stock issued for cash
August 2004 - $0.25 per share			-				-				132,000				32,546				-				-			32,546
July through September 2004 - $0.37 per share			-				-				103,050				38,165				-				-			38,165
October through December 2004 - $0.34 per share			-				-				233,200				79,201				-				-			79,201
January through March 2005 - $0.47 per share			-				-				225,000				106,701				-				-			106,701
April through June 2005 - $0.40 per share			-				-				170,500				66,279				-				-			66,279
Contributed capital - no shares issued			-				-				-				93,877				-				-			93,877
Common stock issued for services			-				-				1,100,000				429,000				-							429,000
Net loss			-				-				-				-				-				(1,442,880	)		(1,442,880	)
Balance - June 30, 2005			3,700,000				294,786				22,995,790				10,446,859				-				(10,914,921	)		(173,276	)
Common stock issued for cash
July through September 2005 - $0.56 per share			-				-				722,500				407,817				-				-			407,817
October through December 2005 - $0.43 per share			-				-				124,000				52,761				-				-			52,761
January through March 2006 - $0.88 per share			-				-				411,900				361,140				-				-			361,140
April through June 2006 - $0.69 per share			-				-				968,432				641,730				-				-			641,730
Common stock issued for services - $0.30 per share			-				-				50,000				15,000				-				-			15,000
Common stock issued for services - $0.34 per share			-				-				60,000				20,400				-				-			20,400
Common stock issued for settlement of debt - $0.69 per share			-				-				200,000				138,000				-				-			138,000
Net loss			-				-				-				-				-				(1,473,256	)		(1,473,256	)
Balance - June 30, 2006			3,700,000				294,786				25,532,622				12,083,707				-				(12,388,177	)		(9,684	)

The accompanying notes are an integral part of these financial statements

 

F-6

---

 

INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Statement of Stockholders Equity / (Deficit), continued

		Preferred Stock								Common Stock								Stock Purchase				Treasury Stock								Deficit Accumulated During Development				Total Stockholder's
		Shares				Amount				Shares				Amount				Rights				Shares				Amount				Stage				Deficit
Balance - June 30, 2006			3,700,000			$	294,786				25,532,622			$	12,083,707			$	-				-			$	-			$	(12,388,177	)		$	(9,684	)
Common stock issued for cash
July through September 2006 - $0.63 per share			-				-				143,000				89,900				-				-				-				-				89,900
October through December 2006 - $0.52 per share			-				-				402,580				208,252				-				-				-				-				208,252
January through March 2007 - $0.68 per share			-				-				136,920				93,309				-				-				-				-				93,309
April through June 2007 - $0.74 per share			-				-				4,500				3,322				-				-				-				-				3,322
Amortization of stock-based compensation			-				-				-				6,548,839				-				-				-				-				6,548,839
Common stock issued for cash - $0.40 per share			-				-				400,000				160,000				-				-				-				-				160,000
Options exercised  for settlement of  related party borrowings - $0.40 per share			-				-				1,725,000				690,000				-				-				-				-				690,000
Treasury stock issued for settlement of debt - $0.51 per share			-				-				-				-				-				(625,000	)			(318,750	)			-				(318,750	)
Treasury stock issued for settlement of debt - $0.65 per share			-				-				-				-				-				(500,000	)			(325,000	)			-				(325,000	)
Reissuance of treasury stock for cash - $0.86 per share			-				-				-				200,055				-				575,000				293,250				-				493,305
Net loss			-				-				-				-				-				-				-				(8,493,400	)			(8,493,400	)
Balance - June 30, 2007			3,700,000				294,786				28,344,622				20,077,384				-				(550,000	)			(350,500	)			(20,881,577	)			(859,907	)
Class A Preferred Stock issued for compensation- $0.12 per share			1,000,000				122,478				-				-				-				-				-				-				122,478
Common stock issued for cash
July through September 2007 - $0.76 per share			-				-				24,600				18,665				-				-				-				-				18,665
October through December 2007 - $0.59 per share			-				-				22,700				31,894				-				-				-				-				31,894
January through March 2008 - $0.59 per share			-				-				146,600				57,667				-				-				-				-				57,667
April through June 2008 - $0.44  per share			-				-				372,200				163,182				-				-				-				-				163,182
Amortization of stock-based compensation			-				-				-				5,864,405				-				-				-				-				5,864,405
Common stock issued for cash - $0.30 per share			-				-				150,000				45,000				-				-				-				-				45,000
Options exercised  for settlement of  related party borrowings - $0.40 per share			-				-				2,000,000				800,000				-				-				-				-				800,000
Common stock issued for services - $0.43 per share			-				-				86,000				36,980				-				-				-				-				36,980
Reissuance of treasury stock for cash - $0.46 per share			-				-				-				(92,232	)			-				550,000				350,500				-				258,268
Net loss			-				-				-				-				-				-				-				(7,815,703	)			(7,815,703	)
Balance - June 30, 2008			4,700,000				417,264				31,146,722				27,002,945				-				-				-				(28,697,280	)			(1,277,071	)
Common stock issued for cash
July through September 2008 - $0.38 per share			-				-				227,000				86,173				-				-				-				-				86,173
October through December 2008 - $0.27 per share			-				-				398,900				109,385				-				-				-				-				109,385
January through March 2009 - $0.27 per share			-				-				316,000				86,019				-				-				-				-				86,019
April through June 2009 - $0.50  per share			-				-				303,100				150,925				-				-				-				-				150,926
Common stock issued for compensation - $0.25 per share			-				-				505,000				126,250				-				-				-				-				126,250
Amortization of stock-based compensation			-				-				-				4,715,439				-				-				-				-				4,715,439
Common stock issued for services - $0.59 per share			-				-				50,000				29,500				-				-				-				-				29,500
Options exercised  for settlement of  related party borrowings - $0.40 per share			-				-				1,575,000				630,000				-				-				-				-				630,000
Common stock retired			-				-				(20,400	)			-				-				-				-				-				-
Net loss			-				-				-				-				-				-				-				(6,637,337	)			(6,637,337	)
Balance - June 30, 2009			4,700,000			$	417,264				34,501,322			$	32,936,636			$	-				-			$	-			$	(35,334,617	)		$	(1,980,717	)

The accompanying notes are an integral part of these financial statements

 

F-7

---

 

INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Statements of Cash Flows

										For the Period
										From Inception
		For the Years Ended								(September 26,
		June 30,								1986) Through
		2009				2008				June 30, 2009
Cash flows used in operating activities
Net loss		$	(6,637,337	)		$	(7,815,703	)		$	(35,334,617	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			94,074				85,110				575,648
Stock based compensation			4,841,689				5,986,883				20,063,218
Forfeiture of deposits			-				-				236,803
Write down of carrying value of inventory			-				-				16,945
Write off of equipment to research and development			-				-				23,900
(Gain) / loss on disposal of equipment			-				(458	)			17,484
Impairment of patents and abandonment of in-process rights to technology			-				22,972				387,128
Extraordinary gain on sale of patents			-				-				(1,382,023	)
Gain on settlement of debt			-				-				(6,123	)
Stock issued for services			19,667				36,981				120,247
Changes in current assets and liabilities:
(Increase) / decrease in prepaid expenses			(2,000	)			320				(2,000	)
(Increase) / decrease in alternate solar energy systems			(261,661	)			(65,272	)			(413,520	)
Increase / (decrease) in customer deposits			954,000				90,000				1,757,250
Increase / (decrease) in accounts payable			81,723				48,987				417,136
Increase / (decrease) in related party payable			(42,999	)			70,652				65,001
Increase / (decrease) in accrued liabilities			108,936				14,129				281,326
Net cash used in operating activities			(843,908	)			(1,525,399	)			(13,176,197	)
Cash flows used in investing activities
Purchase of property and equipment			(23,358	)			(116,898	)			(754,536	)
Purchase of rights to technology			-				(11,882	)			(706,643	)
Organization costs			-				-				(1,880	)
Net cash advanced to related party			-				-				(1,644,988	)
Commitments and contingencies - Note 6			-				-				44,220
Proceeds from sale of equipment			-				2,500				2,500
Repayment of cash loaned to related party			-				-				53,254
Net proceeds from sale of patents			-				-				1,382,023
Net cash used in investing activities			(23,358	)			(126,280	)			(1,626,050	)
Cash flows provided by financing activities
Proceeds from issuance of common stock			432,502				316,408				5,789,231
Proceeds from reissuance of treasury stock			-				258,268				751,573
Contributed capital			-				-				6,270,559
Payments for treasury stock			-				-				(3,325	)
Payments for stock offering costs			-				-				(56,509	)
Proceeds from net borrowings from related party			557,101				730,805				2,399,121
Payments on borrowings from related party			(173,744	)			(99,537	)			(273,281	)
Proceeds from notes payable			-				-				29,857
Payments on notes payable and capital lease obligations			(45,485	)			(5,217	)			(213,101	)
Proceeds from related party deposits			-				-				224,400
Purchases of equipment held for distribution			-				-				(68,741	)
Net cash provided by financing activities			770,374				1,200,727				14,849,784
Net change in cash			(96,892	)			(450,952	)			47,537
Cash at beginning of period			144,429				595,381				-
Cash at end of period		$	47,537			$	144,429			$	47,537

The accompanying notes are an integral part of these financial statements

 

F-8

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INTERNATIONAL AUTOMATED SYSTEMS, INC.

(A Development Stage Company)

Statements of Cash Flows

(Continued)

		For the Years Ended
		June 30,
		2009				2008
Supplemental non-cash flow information
Acquisition of property and equipment with note payable		$	74,965			$	-
Settlement of borrowings from related party in exchange for exercise of options		$	630,000			$	800,000
Settlement of related party borrowings in exchange for patent rights		$	86,977			$	-
Stock issued for services and included in prepaids		$	9,833			$	-
Supplemental cash flow information
Cash payments for interest		$	9,105			$	4,920
Cash payments for income taxes		$	100			$	100

The accompanying notes are an integral part of these financial statements

 

F-9

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International Automated Systems, Inc.

(A Development Stage Company)

Notes to the Financial Statements

June 30, 2009 and 2008

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - International Automated Systems, Inc. (the “Company” or “IAS”) was incorporated in the State of Utah on September 26, 1986. The Company’s activities to date have consisted of developing a business plan, raising capital through the issuance of debt and equity instruments, obtaining the rights to certain technology related to an automated self check-out system for retail stores, developing other electronic security and communication equipment and developing power generation equipment.

The Company is considered to be in the development stage as defined in Financial Accounting Standards Board Statement No. 7. It has yet to commence full-scale operations and continues to develop its planned principle operations.

 

Use of Estimates - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires 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 balance sheet and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Basis of Presentation / Going Concern - The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.   As of June 30, 2009, the Company had $47,537 of available cash and a working capital deficit of $2,854,268.  For the years ended June 30, 2009 and 2008, the Company had no revenue, no operating income, used net cash for operating activities of $843,908 and $1,525,399, respectively. As of June 30, 2009 the Company’s losses accumulated from inception totaled $35,334,617.  These factors, among others, indicate that the Company may be unable to continue as a going concern for the next twelve months. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional financing as may be required, and ultimately to attain sufficient cash flow from operations to meet its obligations on a timely basis. Management is in the process of negotiating various sales agreements and believes these sales will generate sufficient cash flow for the Company to continue as a going concern. If the Company is unsuccessful in these efforts and does not attain sufficient sales to permit profitable operations or if it cannot obtain sufficient additional financing, it may be required to substantially curtail or terminate its operations.

Concentration Risks - The Federal Deposit Insurance Corporation (FDIC) insures cash deposits in most general bank accounts for up to $250,000 per institution.  The Company had no cash deposits that exceeded insured amounts for the years ended June 30, 2009 and 2008, respectively.

Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Fair Value of Financial Instruments - The Company’s financial instruments consist of cash and cash equivalents, payables, and notes payable.  The carrying amount of cash and cash equivalents and payables approximates fair value because of the short-term nature of these items.  The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at rates that approximate market interest rates for similar debt instruments.

Impairment - The Company records impairment losses on property and equipment and patents when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.  Furthermore, the Company makes periodic assessments about each patent and the related technology to determine if it plans to continue to pursue the technology and if the patent has value.

Property and Equipment - Property and equipment are recorded at cost and are depreciated using the straight-line method based on the expected useful lives of the assets which range from five to ten years. Depreciation expense for the years ended June 30, 2009 and 2008 was $88,425 and $78,865, respectively. The major classes of assets are as follows:

 

F-10

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		June 30, 2009				June 30, 2008
Land		$	216,025			$	216,025
Computer equipment			59,956				49,089
Machinery and equipment			388,113				300,657
Trucks and autos			97,044				97,044
Mobile office			11,764				11,764
Total property and equipment			772,902				674,579
Less accumulated depreciation and amortization			(291,390	)			(202,965	)
Total property and equipment, net		$	481,512			$	471,614

Patents - Legal fees incurred in obtaining patents and franchises in the United States of America and other countries are capitalized. Costs to develop the technology are recognized as research and development and expensed when incurred. The patents are being amortized, once issued, on a straight-line basis over a 17-year life.

At June 30, 2009 and 2008, the Company had capitalized patents subject to amortization of $75,201 and $80,850, net of $20,825 and $15,176 in accumulated amortization, respectively. Also at June 30, 2008, the Company had capitalized $86,977 of in-process patents that were not subject to amortization.  During the year ended June 30, 2009, the Company determined that the in-process patent’s rights should be transferred to the Company’s president and offset the $86,977 previously paid with the related party payable.

All patent costs were assessed for impairment and $0 and $22,972 was determined to be impaired during the years ended June 30, 2009 and 2008, respectively.  Amortization expense was $5,649 and $6,245 for the years ended June 30, 2009 and 2008, respectively.  Amortization expense is expected to be $5,649 per year for the next five years.

 

Alternate Solar Energy Systems - The Company’s principal product is its Alternative Solar Energy System (“System”).  Each individual system is designed to generate 250,000,000 British Thermal Units (“BTU’s”) per year.  The principal component of the system is the solar lenses in the collection platform.  The solar lenses are purchased from a third party.  The System also includes towers and pipelines, which are constructed by the Company.

 

Capitalized Costs - Similar to a multi-unit condominium project with both unit-specific and common area costs, the Company capitalizes all costs associated with constructing the System.  Costs are allocated equally to each unit (based on their common size) and will be recognized as cost of sales at the same rate revenue is recognized, as discussed below.  Capitalized System costs at June 30, 2009 include labor costs and materials for the Systems sold through June 30, 2009 and materials that will be used to produce additional Systems that will be sold in the future.

Customer Deposits and Revenue Recognition - The terms of sale of a System provides for an initial cash deposit of $9,000 at the date the agreement is signed and thirty annual payments of $700 (with no stated interest), totaling $21,000, commencing five years following the installation date.  As of June 30, 2009, the Company had entered into contracts and received deposits to build, install and maintain approximately 200 Systems.

Under the terms of sale, the Company warrants that the Systems will remain in good operating condition for a thirty-five year period commencing on the installation date and that it will be responsible for all material, equipment and labor costs incurred to complete such maintenance and repair work.  In addition, the Company warrants a production rate of 95% of the target production rate of 250,000,000 BTU’s per year for the first five years.  If the energy produced during the first five years is less than five times the warranted production rate, the purchaser may elect to terminate the agreement and will have no further obligation other than to return the System to the Company.  The initial cash deposit will not be returned.

The deposits received have been recorded as customer deposits and included as current liabilities in the financial statements since the Company has not verified the energy output and has not yet delivered electricity from the Systems to a third party as of June 30, 2009.  Therefore, for all of these agreements, the customers may request a return of their deposits since the Company has not verified output of the energy.  The Company will begin to recognize revenue once the Systems energy output has been verified (saleable energy is produced) and once it is able to estimate its costs associated with the warranty.

Stock Based Compensation – As of July 1, 2006, the Company adopted SFAS No. 123(R), “Share-based Payment” (“SFAS No. 123(R)”), which requires the Company to measure compensation expense for all outstanding unvested share-based awards at fair value and recognize compensation expense over the service period for awards expected to vest. The fair value of stock options was determined at the grant dates using the Black-Scholes option-pricing model. The Company uses historical data to estimate the expected volatility and expected life. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from estimates, such amounts will be recorded as an adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results may differ substantially from these estimates (see Note 4).

 

F-11

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Advertising Costs - Advertising costs are expensed when incurred. Advertising expense was $12,884 and $8,700 for the years ended June 30, 2009 and 2008, respectively.

Research and Development - Research and development has been the principal function of the Company. Research and development costs are expensed as incurred.  Expenses in the accompanying financial statements include certain costs which are directly associated with the Company’s research and development of the Solar Power Plant technology, Steam Turbine technology, Automated Fingerprint Identification Machine technology, Digital Wave Modulation Technology and other various projects. These costs, which consist primarily of monies paid for consulting expenses, materials and supplies and compensation costs amounted to $704,889 and $760,798 for the fiscal years ended June 30, 2009 and 2008, respectively.

Income Taxes - The Company recognizes the amount of income taxes payable or refundable for the current year and recognizes deferred tax assets and liabilities for operating loss carryforwards and for the future tax consequences attributable to differences between the financial statement amounts of certain assets and liabilities and their respective tax basis. Deferred tax assets and deferred liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance to the extent that uncertainty exists as to whether the deferred tax assets will ultimately be realized.

Recent Accounting Pronouncements – In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51" (“SFAS 160”). SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for the Company beginning July 1, 2009. Early adoption is not permitted.  These statements will affect the Company for combinations after July 1, 2009.

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for the Company beginning July 1, 2009, and is not expected to have a significant impact on the Company’s financial statements.

In April 2009, the FASB released FASB Staff Position (“FSP”) SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“SFAS 107-1 and APB 28-1”).  This FSP amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements.  The FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements.  This proposal is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt SFAS 107-1 and APB 28-1 and provide the additional disclosure requirements for the first quarter for fiscal year end 2010.

In April 2009, the FASB released FSP SFAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (“SFAS 157-4”).  This FSP provides additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in SFAS 157, “Fair Value Measurements.”  SFAS 157-4 is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt the provisions of SFAS 157-4 during first quarter 2010, but does not believe this guidance will have a significant impact on the Company’s financial statements.

In April 2009, the FASB released FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  This proposal provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments.  This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt the provisions of this Staff Position during the first quarter 2010, but does not believe this guidance will have a significant impact on the Company’s financial statements.

In May 2009, the FASB issued statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 modifies the definition of what qualifies as a subsequent event—those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued—and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date.  SFAS 165 is effective for fiscal years and interim periods ending after June 15, 2009. The Company adopted the provisions of SFAS 165 for the year ended June 30, 2009 and have evaluated any subsequent events through October 13, 2009. The Company does not believe there are any material subsequent events which would require further disclosure as discussed in Note 14.

 

F-12

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In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”).  SFAS 166 amends SFAS 140 by including: the elimination of the qualifying special-purpose entity (QSPE) concept; a new participating interest definition that must be met for transfers of portions of financial assets to be eligible for sale accounting; clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale; and a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor.  Additionally, the standard requires extensive new disclosures regarding an entity’s involvement in a transfer of financial assets.  Finally, existing QSPEs (prior to the effective date of SFAS 166) must be evaluated for consolidation by reporting entities in accordance with the applicable consolidation guidance upon the elimination of this concept.  SFAS 166 is effective for the Company beginning on July 1, 2010.  The Company has not yet determined the impact that adoption of SFAS 166 will have on its financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”).  Among other items, SFAS 167 responds to concerns about the application of certain key provisions of FIN 46(R), including those regarding the transparency of the involvement with variable interest entities.  SFAS 167 is effective for the Company beginning on July 1, 2010.  The Company has not yet determined the impact that adoption of SFAS 167 will have on its financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”).   SFAS 168 establishes the FASB Accounting Standards Codification™ (Codification) as the source of authoritative U.S. GAAP to be applied by nongovernmental entities.  While not intended to change U.S. GAAP, the Codification significantly changes the way in which the accounting literature is organized.  The Company will adopt this new accounting standard for its financial statements for the quarterly period ending September 30, 2009.  The Company does not expect the adoption of SFAS 168 to have a material impact on its financial statements.

The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position or cash flows.  Based on that review, the Company believes that none of these pronouncements will have a significant effect on its financial statements.

NOTE 2 – BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic earnings per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing the net income or loss by the sum of the weighted average number of common shares plus the weighted average common stock equivalents which would arise from the exercise of outstanding stock options, issuance of stock held in trust and conversion of Series B Preferred Shares into options to purchase shares of common stock, using the treasury stock method and the average market price per share during the period.

As a result of incurring a net loss for the years ended June 30, 2009 and 2008, no outstanding common stock equivalents are included in the calculation of diluted earnings per share because such effect would be anti-dilutive. The Company had outstanding stock options and warrants to purchase a total of 95,900,000 and 97,475,000 shares of common stock at June 30, 2009 and 2008, respectively, which are not included in the basic earnings per share calculation.  The Company had 4,344,818 and 5,589,818 shares of common stock held in trust at June 30, 2009 and 2008, respectively, which are not included in the basic earnings per share calculation.  The Company had 300,000 Series B Preferred Shares that are convertible into options to purchase 600,000 shares of common stock at June 30, 2009 and 2008, which are not included in the basic earnings per share calculation.

  

NOTE 3 – RELATED PARTY TRANSACTIONS

During 2003, the Company commenced leasing office and research and development space on a month-to-month basis from the president and a third party.  The lease is an operating lease and rent expense is $6,000 per month payable to the president and $6,200 per month payable to the third party.  The amount payable to the president for rent at June 30, 2009 and 2008 was $65,000 and $108,000, respectively, and is included in related party payables.

The Company received cash advances of $557,101 and $730,805 from its president during the years ended June 30, 2009 and 2008.  The advances are non-interest bearing, payable upon demand and included in related party payables.  During the year ended June 30, 2009, the Company settled $630,000 of the cash advances by issuing 1,575,000 shares of common stock to the president upon the exercise of warrants; paid $173,744 of the cash advances; and settled $86,977 of the cash advances through the transfer of in-process patent rights at cost. During the year ended June 30, 2008, the Company settled $800,000 of the cash advances by issuing 2,000,000 shares of common stock to the president upon the exercise of warrants; and paid $99,537 of the cash advances.  As of June 30, 2009 and 2008, the balance was $440,382 and $774,001, respectively.

 

F-13

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During the year ended June 30, 2008, the Company issued 1,000,000 Series A Preferred Stock valued at $122,478 to the president as compensation for services rendered during the year.

During the year ended June 30, 2009 and 2008, the Company received deposits from officers totaling $0 and $81,000, respectively, for alternate solar energy systems. The deposits are included in customer deposits.

The Company's president and two of his sons, who are also officers of the Company, control approximately 82% of the voting rights of the Company. As a result, these three individuals control the Company’s business operations and policies and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.

NOTE 4 – STOCK BASED COMPENSATION

Options and Warrants - The Company’s board of directors authorized the Company to enter into an agreement dated May 14, 2004 and amended October 13, 2004, with the Company’s president, in which the Company acquired patents, patents pending, designs and contracts related to certain technology developed by the president from the president.  The direct costs of developing and obtaining the acquired patents, patents pending, designs and contracts were paid and capitalized by the Company.  No additional value has been assigned to these patents as a result of them being acquired from the president.  

 

As consideration, the Company authorized and issued warrants to purchase 100,000,000 shares of common stock to the president and agreed to pay the president royalties in the future equal to 10% of future sales proceeds from the technology.  The warrants, which were considered stock-based compensation for services to be rendered, had no intrinsic value on the grant date.  The fair value of the warrants was $37,136,781, calculated on the grant date using the Black-Scholes model. The following assumptions were used for this grant: Average risk-free interest rate of 4.79%; expected lives of 10 years; expected dividend yield of zero percent; and expected volatility of 138.76%. In accordance with SFAS 123(R), starting on July 1, 2006, the Company began recognizing stock-based compensation expense over the graded exercisability period of the options using the straight-line basis over the requisite service period for each separately exercisability portion of the award  as if the award was, in-substance, multiple awards.

 

The agreement contains an anti-dilution clause that gives the president the right to purchase the same number of shares of common stock, given reclassification, reorganization or change by a stockholder, as were purchasable prior to any such changes, at a total price equal to that payable upon the exercise of the options.  Appropriate adjustments shall be made to the exercise price so the aggregate purchase price of the shares will remain the same.  

The warrants have an exercise price of $0.40 per share and are exercisable beginning on the following dates:

January 1, 2005 -   5,000,000 shares

January 1, 2006 -   5,000,000 shares

January 1, 2007 -   5,000,000 shares

 January 1, 2008 - 10,000,000 shares

 January 1, 2009 - 10,000,000 shares

 January 1, 2010 - 65,000,000 shares

During the year ended June 30, 2008, the president exercised 2,000,000 of the warrants in exchange for satisfaction of a related party payable of $800,000.

During the year ended June 30, 2009, the president exercised 1,575,000 of the warrants in exchange for satisfaction of related party payable of $630,000.

In August 2000, the Company issued options to purchase 1,000,000 shares of restricted common stock over a ten year period at $3.00 per share as part of employment agreements. These options vest 100,000 shares per year over a ten year period and expire ten years from the date of issuance.

 

In August 2000, the Company issued options to purchase 600,000 shares of restricted common stock over a ten year period at $3.00 per share as part of employment agreements. These options vested on August 24, 2000 and expire ten years from the date of issuance.

  
The following table summarizes the stock option/warrant activity as of and for the years ended June 30, 2009 and 2008:

 

F-14

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										Wtd. Avg.
						Wtd. Avg.				Remaining				Aggregate
						Exercise				Life in				Intrinsic
		Options/Warrants				Prices				Years				Value
Outstanding at July 1, 2007			99,475,000			$	0.44				27.2			$	33,277,500
Exercised			(2,000,000	)			0.40								70,000
Outstanding at June 30, 2008			97,475,000				0.44				26.1				33,277,500
Exercised			(1,575,000	)			0.40								(236,250	)
Outstanding at June 30, 2009			95,900,000			$	0.44				25.1			$	17,917,000
Exercisable at June 30, 2009			30,800,000			$	0.53				24.3			$	5,567,000

The following table summarizes information about the stock options/warrants as of June 30, 2009:

				Options/Warrants Outstanding																Options/Warrants Exercisable
								Wtd. Avg.																Wtd. Avg.
Range of								Remaining				Wtd. Avg.				Aggregate								Remaining				Wtd. Avg.				Aggregate
Exercise								Contractual				Exercise				Intrinsic								Contractual				Exercise				Intrinsic
Prices				Shares				Life (years)				Price				Value				Shares				Life (years)				Price				Value
$	3.00				1,600,000				1.15			$	3.00			$	-				1,500,000				1.15			$	3.00			$	-
$	0.40				94,300,000				25.52				0.40				17,917,000				29,300,000				25.52				0.40				5,567,000
					95,900,000				25.11			$	0.44			$	17,917,000				30,800,000				24.33			$	0.53			$	5,567,000

The following table summarizes information about non-vested options/warrants as of and for the year ended June 30, 2009:

						Wtd. Avg.
						Grant Date
		Warrants/Options				Fair Value
Non-vested at June 30, 2008			75,200,000			$	0.37
Vested during the year ended June 30, 2009			(10,100,000	)			0.39
Non-vested at June 30, 2009			65,100,000			$	0.37

The total fair values of options/warrants vested during each of the years ended June 30, 2009 and 2008 was $3,919,000.

Restricted Stock - During the year ended June 30, 2009, the Company granted 505,000 shares of restricted stock to employees, which vested immediately.   The grant date fair value of the restricted stock awards, which totaled $126,250, was based on the effective date of the restricted stock awards using the $0.25 closing market price of the Company’s common stock on the grant date, with the compensation expense being recognized immediately.

For the years ended June 30, 2009 and 2008, total stock-based compensation expense recognized was $4,841,689 and $5,986,883, respectively.  Stock-based compensation for the year ended June 30, 2009 includes the issuance of 505,000 shares of restricted common stock valued at $126,250.  Stock-based compensation for the year ended June 30, 2008 includes the issuance of Series A Preferred Shares to the president valued at $122,478.  As of June 30, 2009, there was approximately $2,173,590 of unrecognized compensation cost related to non-vested stock-based compensation awards granted. The compensation cost is expected to be recognized over a weighted average period of 0.38 years.

At March 31, 2008, the Company determined that approximately 6.5 million common shares reserved for issuance under the options/warrants were in excess of authorized shares on a fully diluted basis (the “Excess Options”).  In accordance with SFAS 123(R), the Company classified the fair value of $2,591,649, calculated using the Black-Scholes model, of these Excess Options as a liability at March 31, 2008.  The Company also recorded stock-based compensation expense of $194,227 because the new calculated fair value of the Excess Options exceeded the grant date fair value by $194,227. In June 2008, the Company’s Board of Directors amended the Company’s articles of incorporation authorizing 225,000,000 shares of common stock.  As a result of the additional shares being authorized, the classification of the Excess Options was changed from a liability to equity in accordance with SFAS 123(R).  The fair value of the Excess Options was recalculated on the date of the amendment of the articles of incorporation.  Since the recalculated fair value approximated the fair value calculated at March 31, 2008, the Company reclassified the liability to common stock at June 30, 2008 and recorded no additional stock-based compensation expense.

Reduction in related party payables received from the exercise of stock options/warrants during the years ended June 30, 2009 and 2008 was $630,000 and $800,000, respectively. No tax benefit was realized from the exercise of these options due to the Company’s current loss position.

 

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NOTE 5 – NOTES PAYABLE

Notes payable consist of the following:

		June 30, 2009				June 30, 2008
Note payable to a financing company; 7% per annum; secured by land; due in annual installments of $10,000; maturing on August 1, 2016; collateralized by a deed of trust covering the underlying real property		$	57,387			$	63,107
Note payable to a financing company; 7% per annum; secured by land; due in annual installments of $9,397; maturing on July 15, 2016; collateralized by a deed of trust covering the underlying real property			51,168				56,638
Note payable to a company; 4.65% per annum; due in monthly installments of $4,000; maturing in May 2010			40,670				-
			149,225				119,745
Less current portion			(52,543	)			(11,090	)
Long-term debt		$	96,682			$	108,655

The scheduled maturities of the notes payable are as follows:

2010		$	52,543
2011			12,704
2012			13,594
2013			14,545
2014			15,564
Thereafter			40,275
		$	149,225

NOTE 6 – PREFERRED STOCK

Series A Preferred Stock – The Series A Preferred Stock has equal dividend rights to the common shares, is not convertible into common shares, has no cumulative dividend requirements and has liquidation preferences equivalent to the common shares. 3,400,000 of the Series A Preferred Stock are entitled to the voting rights of ten common shares, and 1,000,000 of the Series A Preferred Stock are entitled to the voting rights of 100 common shares.

During the year ended June 30, 2008, the Company issued 1,000,000 Series A Preferred Stock entitled to the voting rights of 100 common shares, valued at $122,478, to the president as compensation during the year ended June 30, 2008. At June 30, 2009 and 2008, there were 4,400,000 Series A Preferred Stock issued and outstanding.

 Series B Preferred Stock – The Series B Preferred Stock has equal dividend rights to the common shares, has no cumulative dividend requirements, has liquidation preferences equivalent to the common shares and each preferred share is entitled to the voting rights of ten common shares.  Each share is convertible into options to purchase two shares of common stock at $3.00 per share, exercisable immediately and the options expire ten years from the date the preferred stock is exchanged.  At June 30, 2009 and 2008, there were 300,000, series B Preferred shares issued and outstanding.

 

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NOTE 7 – COMMON STOCK

 

Common Stock Held in Escrow - The Company has shares of common stock held in escrow accounts. Proceeds from the sale of stock from these escrow accounts are placed in separate escrow accounts to be used at the Company’s and the trustee’s discretion. During the year ended June 30, 2009, 1,245,000 shares were sold for proceeds of $432,502 at prices ranging from $0.16 to $0.67 per share. During the year ended June 30, 2008, 1,116,100 shares were sold for proceeds of $529,676, including shares sold from treasury, at prices ranging from $0.34 to $.92 per share. The proceeds were used to pay professional fees, rent, operating expenses and accrued liabilities.   At June 30, 2009 and 2008, there was a balance of 4,344,818 and 5,589,818 shares, respectively, in the escrow accounts.  These shares are not accounted for as issued or outstanding common shares.

 

During the year ended June 30, 2008, the Company also issued 150,000 shares of common stock to an accredited investor in exchange for $45,000 in cash at $0.30 per share.    

Common Stock Issued for Services – During the year ended June 30, 2009, the Company issued 50,000 shares of common stock valued at $29,500 or $0.59 per share in exchange for services performed.  At June 30, 2009, $9,833 was included in prepaid expenses and $19,667 was expensed since only a portion of the shares had been earned. During the year ended June 30, 2008, the Company issued 86,000 shares of common stock in exchange for services performed. The shares were valued at $36,980 or $0.43 per share.

Retirement of Common Stock – The Company retired 20,400 shares of common stock during the year ended June 30, 2009.

NOTE 8 – TREASURY STOCK

 

During the year ended June 30, 2008, 550,000 treasury shares were reissued for proceeds of $258,268.  The Company recorded the difference between the cost and proceeds of $92,232 as a reduction of common stock.

 

NOTE 9 – CUSTOMER DEPOSITS

During the years ended June 30, 2009 and 2008, the Company received customer deposits totaling $954,000 and $99,000, respectively, and refunded deposits totaling $0 and $9,000, respectively, relating to contract agreements to build, install and maintain alternate solar energy systems.

The total amount of customer deposits at June 30, 2009 and 2008 was $1,757,250 and $803,250, respectively.  The agreements provide that the Company will deliver, install and startup the alternate solar energy system prior to June 30, 2009.  The Company has and continues to work toward delivering, installing and starting up the alternate solar energy system, but the energy output has not been verified.  Therefore, for all of these agreements, the customers may request a return of their deposits since the Company has not verified output of the energy.

 

NOTE 10 – INCOME TAXES

Because of its net losses, the Company did not have a current or deferred provision for income taxes for the years ended June 30, 2009 and 2008. Significant components of the Company’s net deferred income tax assets using a combined federal and state tax rate of 37.3% as of June 30, 2009 and 2008 are as follows.

		June 30, 2009				June 30, 2008
Net operating loss carryforwards		$	4,116,481			$	3,425,078
Accrued wages			47,332				-
Depreciation and amortization			(21,990	)			2,283
Total gross deferred income tax asset			4,141,823				3,427,361
Less valuation allowance			(4,141,823	)			(3,427,361	)
Net deferred income taxes		$	-			$	-

The net change in the valuation allowance for the years ended June 30, 2009 and 2008 was an increase of $714,462 and a decrease of $1,807,350, respectively.

SFAS No. 109 (“SFAS 109”) requires that a valuation allowance be provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized.  Because the Company has a history of operating losses, the Company’s ability to realize the benefit of its deferred tax asset will depend on the generation of future taxable income.  The Company has recorded a full valuation allowance as of June 30, 2009 and 2008.

 

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At June 30, 2009, the Company had total tax net operating loss carryforwards of $11,036,142 that will expire in the years 2012 through 2029.

The following is a reconciliation of the income tax benefit from the loss before extraordinary gain computed at the federal statutory tax rate with the provision for income taxes for the years ended June 30, 2009 and 2008:

		June 30, 2009				June 30, 2008
US Federal income tax benefit at statutory rate of 34%		$	(2,256,695	)		$	(2,657,339	)
Nondeductible expenses			1,761,265				2,316,909
State income tax benefit, net of federal expense			(219,032	)			(257,918	)
Change in valuation allowance			714,462				598,348
Total income tax provision		$	-			$	-

In accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48“), the Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns.  The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any material adjustments. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48.  The Company is subject to audit by the IRS and various states for the prior 3 years.

 

The Company’s policy for recording interest and penalties associated with taxes is to recognize it as a component of income tax expense.  The Company recorded no interest and penalties for the years ended June 30, 2009 and 2008.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Sales Commitments - During December 2005, the Company entered into a purchase and installation contract with Solar Renewable Energy-1, LLC for a solar thermal power plant. The contract is contingent on several factors and provides for certain progress payments to the Company. As of June 30, 2009, the Company has not provided any services or equipment required under this agreement and has recognized no revenues.

The Company has entered into several solar lease bonus fee contracts with many of the customers who made deposits on the alternate solar energy system discussed in Note 9.  As additional consideration for making the deposit and making the solar alternate energy system available to the Company as a reference for marketing and sales purposes to show and demonstrate, the Company has agreed to pay many of the customers a referral fee of .009%, for each System purchased, on the first one billion dollars of total gross sales revenue received by the Company for the sale of power generation equipment.

Legal - During the years ended June 30, 2009 and 2008, the Company was involved in various lawsuits to protect its patents.  One counterclaim was filed by a defendant against the Company in June 2008, requesting an award for attorney fees and court costs, which could have exceeded $1,000,000. The Company filed a motion to dismiss in August 2008.  The Court issued a Memorandum Decision and Order denying the defendant’s motion for summary judgment and denying the motion for an award of attorney fees.  The Court made a limited award of $45,000 for reasonable attorney fees incurred by the defendant, which was paid by the Company in April 2009.

Employment Agreement - The Company has entered into an agreement with its president and CEO for a period of ten years starting in July 2000. Per the agreement, the president is to be paid $100,000 per anum and shall increase each calendar year by the percentage increase in the Consumer Price Index.  The president may terminate the agreement, but must give the Company six months advance notice.  The Company can not voluntarily terminate its president’s employment for any reason.  No additional payments are outlined in the agreement for a change in control. The president agreed to waive his salary from July 2000 to June 30, 2006.  The Company issued 1,000,000 Series A Preferred Stock, entitled to the voting rights of 100 common shares, valued at $122,478, to its president in lieu of cash compensation for services rendered during fiscal year 2008.  The Company accrued $125,000 for services rendered by its president during fiscal year 2009, which are included accrued liabilities at June 30, 2009.

 

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NOTE 12 – LEASE OBLIGATIONS

In October 2006, the Company entered into a lease agreement for research and development space. The term of this lease is from November 1, 2006 to November 1, 2016.  The following summarizes future minimum lease payments under this lease at June 30, 2009:

2010		$	7,500
2011			7,500
2012			7,500
2013			7,500
2014			7,500
Thereafter			17,500
		$	55,000

Total rent expense for this lease and the leases described in Note 3 for the years ended June 30, 2009 and 2008 was $169,870 and $152,551, respectively.

NOTE 13 – RECLASSIFICATION

Certain prior year amounts have been reclassified to conform to the current year presentation.  Alternate solar energy system was moved from current assets to non-current assets.

 

NOTE 14 – SUBSEQUENT EVENTS

In preparing the accompanying audited financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after June 30, 2009, up until the issuance of the financial statements, which occurred on October 13, 2009.

 

 

 

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