Attached files
| file | filename |
|---|---|
| EX-32.1 - INFERX CORP | v193063_ex32-1.htm |
| EX-31.1 - INFERX CORP | v193063_ex31-1.htm |
| EX-10.1 - INFERX CORP | v193063_ex10-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended March 31, 2010
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¨
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934
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For the
transition period from _______ to _______
Commission
file number 000-51720
(Exact
name of registrant as specified in its charter)
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Delaware
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54-1614664
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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46950
Jennings Farm Drive
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|
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Suite
290
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|
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Sterling,
Virginia
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20164
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(Address
of principal executive offices)
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(Zip
Code)
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(703)
444-6030
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ¨ No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
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Accelerated
filer o
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||
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Non-accelerated
filer o
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Smaller
reporting company x
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|
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
As of
August 6, 2010 there were 16,042,996 outstanding shares of the registrant’s
common stock, $.0001 par value.
INFERX
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
MARCH
31, 2010 (UNAUDITED) AND DECEMBER 31, 2009
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MARCH 31,
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DECEMBER 31,
|
|||||||
|
2010
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2009
|
|||||||
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ASSETS
|
||||||||
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CURRENT
ASSETS
|
||||||||
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Cash
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$ | 9,003 | $ | 49,989 | ||||
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Accounts
receivable
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1,027,990 | 916,641 | ||||||
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Prepaid
expenses
|
750 | - | ||||||
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Total
current assets
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1,037,743 | 966,630 | ||||||
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Fixed
assets, net of depreciation
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41,307 | 49,722 | ||||||
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Other
Assets
|
||||||||
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Other
assets
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6,000 | 6,000 | ||||||
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Computer
software development costs, net of amortization
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48,666 | 64,888 | ||||||
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Total
other asset
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54,666 | 70,888 | ||||||
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TOTAL
ASSETS
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$ | 1,133,716 | $ | 1,087,240 | ||||
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
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CURRENT
LIABILITIES
|
||||||||
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Accounts
payable and accrued expenses
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$ | 2,654,363 | $ | 2,102,644 | ||||
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Line
of credit
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350,587 | 358,087 | ||||||
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Related
party payable
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725,000 | 725,000 | ||||||
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Convertible
debenture, net of debt discount of $56,633 and $98,130
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93,367 | 51,870 | ||||||
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Derivative
liability
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332,552 | 220,052 | ||||||
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Liability
for stock to be issued - preferred stock
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200 | 200 | ||||||
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Liability
for stock to be issued - common stock
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61,909 | 61,909 | ||||||
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Current
portion of notes payable, net of debt discount of $0 and
$9,658
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40,545 | 545 | ||||||
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Total
current liabilities
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4,258,523 | 3,520,307 | ||||||
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Long-term
Liabilities
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||||||||
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Notes
payable, net of current portion, net of debt discount of $0 and
$1,059
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354,391 | 354,391 | ||||||
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TOTAL
LIABILITIES
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4,612,914 | 3,874,698 | ||||||
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STOCKHOLDERS'
EQUITY (DEFICIT)
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||||||||
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Preferred
stock, par value $0.0001 per share, 10,000,000 shares authorized and no
shares issued and outstanding
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- | - | ||||||
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Common
stock, par value $0.0001 per share, 400,000,000 shares authorized and
3,920,645 shares issued and outstanding, respectively
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392 | 392 | ||||||
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Additional
paid-in capital
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- | - | ||||||
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Retained
earnings (defict)
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(3,479,590 | ) | (2,787,850 | ) | ||||
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Total
stockholders' equity (deficit)
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(3,479,198 | ) | (2,787,458 | ) | ||||
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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$ | 1,133,716 | $ | 1,087,240 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
INFERX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
|
2010
|
2009
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|||||||
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REVENUE
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$ | 1,392,058 | $ | 1,443,108 | ||||
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COST
OF REVENUES
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||||||||
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Direct
labor and other finges
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296,564 | 256,554 | ||||||
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Subcontractor
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994,602 | 914,901 | ||||||
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Other
direct costs
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21,977 | 14,288 | ||||||
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Amortization
of computer software development costs
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16,222 | - | ||||||
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Total
costs of revenues
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1,329,365 | 1,185,743 | ||||||
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GROSS
PROFIT
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62,693 | 257,365 | ||||||
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OPERATING
EXPENSES
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||||||||
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Indirect
and overhead labor and fringes
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374,527 | 188,324 | ||||||
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Professional
fees
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108,790 | 7,011 | ||||||
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Business
development costs
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11,357 | 3,824 | ||||||
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Rent
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25,350 | 19,285 | ||||||
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Advertising
and promotion
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25,165 | 1,631 | ||||||
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General
and administrative
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37,343 | 19,361 | ||||||
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Stock
based compensation
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- | - | ||||||
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Depreciation
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8,415 | 10,386 | ||||||
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Total
operating expenses
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590,947 | 249,822 | ||||||
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NET
INCOME (LOSS) FROM OPERATIONS BEFORE OTHER EXPENSE AND PROVISION FOR
INCOME TAXES
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(528,254 | ) | 7,543 | |||||
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OTHER
INCOME (EXPENSE)
|
||||||||
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Amortization
of debt discount
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(41,497 | ) | - | |||||
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Fair
value adjustment on derivative liability
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(112,500 | ) | - | |||||
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Interest
expense, net of interest income
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(9,489 | ) | (5,594 | ) | ||||
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Total
other income (expense)
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(163,486 | ) | (5,594 | ) | ||||
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NET
INCOME (LOSS) FROM OPERATIONS BEFORE PROVISION FOR INCOME
TAXES
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(691,740 | ) | 1,949 | |||||
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Provision
for income taxes
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- | - | ||||||
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NET
INCOME (LOSS) APPLICABLE TO SHARES
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$ | (691,740 | ) | $ | 1,949 | |||
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NET
INCOME (LOSS) PER BASIC AND DILUTED SHARES
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$ | (0.18 | ) | $ | 0.00 | |||
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WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
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3,920,645 | 635,170 | ||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
INFERX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
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2010
|
2009
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|||||||
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CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
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Net
income (loss)
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$ | (691,740 | ) | $ | 1,949 | |||
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Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
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Amortization
of debt discount
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41,497 | - | ||||||
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Services
rendered for promissory note
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40,000 | - | ||||||
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Fair
value adjustment for derivative liability
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112,500 | - | ||||||
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Amortization
of computer software development costs
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16,222 | - | ||||||
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Depreciation
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8,415 | 10,386 | ||||||
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Change
in assets and liabilities
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||||||||
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(Increase)
decrease in accounts receivable
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(111,349 | ) | (269,958 | ) | ||||
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(Increase)
decrease in other current assets
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(750 | ) | (1,200 | ) | ||||
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Increase
in accounts payable and accrued expenses
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551,719 | 207,237 | ||||||
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Total
adjustments
|
658,254 | (53,535 | ) | |||||
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Net
cash provided by (used in) operating activities
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(33,486 | ) | (51,586 | ) | ||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
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Acquisition
of fixed assets
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- | (3,675 | ) | |||||
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Net
cash (used in) financing activities
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- | (3,675 | ) | |||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
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(Repayment)
of line of credit, net
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(7,500 | ) | (10,000 | ) | ||||
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Net
cash (used in) financing activities
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(7,500 | ) | (10,000 | ) | ||||
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NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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(40,986 | ) | (65,261 | ) | ||||
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CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
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49,989 | 71,450 | ||||||
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CASH
AND CASH EQUIVALENTS - END OF PERIOD
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$ | 9,003 | $ | 6,189 | ||||
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SUPPLEMENTAL
INFORMATION OF CASH FLOW ACTIVITY
|
||||||||
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Cash
paid during the year for interest
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$ | - | $ | 6,916 | ||||
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Cash
paid during the year for income taxes
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$ | - | $ | - | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
ORGANIZATION AND BASIS
OF PRESENTATION
|
These
unaudited condensed consolidated financial statements reflect all adjustments,
including normal recurring adjustments which, in the opinion of management, are
necessary to present fairly the consolidated operations and cash flows for the
periods presented.
Black
Nickel Acquisition Corporation I was incorporated in Delaware on May 26, 2005,
and was formed as a vehicle to pursue a business combination. From inception
through October 24, 2006, Black Nickel Acquisition Corporation I, was engaged in
organizational efforts and obtaining initial financing.
On May
17, 2006, Black Nickel Acquisition Corporation I entered into a letter of intent
with InferX Corporation, a privately-held Virginia corporation (“InferX
Virginia”), with respect to entering into a merger transaction relating to
bridge financing for InferX Virginia and the acquisition of and merger with
InferX Virginia. The transaction closed on October 24, 2006. Following the
merger, Black Nickel Acquisition Corporation I effected a short-form merger of
InferX Virginia with and into Black Nickel Acquisition Corp. I, pursuant to
which the separate existence of InferX Virginia terminated and Black Nickel
Acquisition Corp. I changed its name to InferX Corporation (“InferX” or the
“Company”).
The
transaction was recorded as a recapitalization under the purchase method of
accounting, as InferX became the accounting acquirer. The reported amounts and
disclosures contained in the consolidated financial statements are those of
InferX Corporation, the operating company.
InferX
was incorporated under the laws of Delaware in 1999. On December 31, 2005,
InferX and Datamat Systems Research, Inc. (“Datamat”), a company incorporated in
1992 under the corporate laws of the Commonwealth of Virginia executed an
Agreement and Plan of Merger (the “Merger”). InferX and Datamat had common
majority directors. The financial statements herein reflect the combined entity,
and all intercompany transactions and accounts have been eliminated. As a result
of the Merger, InferX merged with and into Datamat, the surviving entity. Upon
completion, Datamat changed its name to InferX Corporation.
InferX
was formed to develop and commercially market computer applications software
systems that were initially developed by Datamat with grants from the Missile
Defense Agency.Datamat was formed as a professional services research and
development firm, specializing in the Department of Defense. The Company
currently provides services and software to the United States government, and is
in process of formalizing business plans that will enable them to provide
software and services to commercial entities as well.
On March
16, 2009, the Company entered into an agreement and plan of reorganization (the
“Merger Agreement”) with the Irus Group, Inc. (“Irus”) under which it intends to
effect a reverse triangular merger between Irus and the Company’s wholly-owned
subsidiary, Irus Acquisition Corp. (formed for the purse of completing this
transaction). The Merger Agreement was then amended on June 15, 2009
(the “First Amended and Restated Agreement”) to reflect the change in the amount
of the shares issued to Irus in the transaction.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
1-
|
ORGANIZATION AND BASIS
OF PRESENTATION(CONTINUED)
|
Under the
terms of the First Amended and Restated Agreement, the issued and outstanding
shares of Irus common stock will be automatically converted into the right to
receive 56% of the issued and outstanding shares of the Company’s common
stock.
The
Merger Agreement also provides that, at the effective time of the Merger, the
Company’s Board of Directors agrees to appoint Vijay Suri, President and CEO of
the Company and have Vijay Suri fill a vacancy on its Board of Directors. In
addition, effectiveness of the Merger Agreement is conditional upon (i) the
Company restructuring existing debt by converting the existing debt and warrants
to common stock with the intention of having no more than 57-60 million shares
of its common stock outstanding prior to a reverse split of not less than 1:10;
(ii) the Company using its best efforts to reduce its accounts payable by 70%,
(iii) Vijay Suri, President and CEO of The Irus executing an employment
agreement with the Company, and (iv) additional customary closing conditions
relating to delivery of financial statements, closing certificates as to
representations and warranties, and the delivery of any required consents or
government approvals.
In
accordance with the merger, the Company on July 27, 2009 filed a Schedule 14C
with the Securities and Exchange Commission. The Schedule 14C, contained 2
proposals; to increase the authorized common shares from 75,000,000 to
400,000,000 and to reverse split the common stock on a 1:20 basis. All share and
per share amounts have been presented on a post-split basis.
On
October 27, 2009, the Company and Irus completed the Merger. As consideration
for the Merger, the Company is to issue 9,089,768 shares of common stock and
1,000,000 shares of preferred stock to Vijay Suri, the sole stockholder of Irus.
On June 2, 2010, the Board rescinded the 1,000,000 shares of preferred stock and
issued Vijay Suri 1,000,000 shares of common stock in recognition of his
personal guarantee of certain corporate debt of the Company.
Irus is a
consulting firm advising on the planning, implementation and development of
complex business intelligence and corporate performance management systems. Irus
has successfully implemented projects across a broad cross-section of clients in
the government, financial services, retail, manufacturing, and
telecommunications markets. Irus has provided business solutions for many large
clients, including MasterCard, JP Morgan Chase, ConAgra, and the US Navy, and
collaborates with a wide range of technology partners including Oracle,
IBM/Cognos and Microsoft.
The
Merger with Irus was accounted for as a recapitalization under the purchase
method of accounting, as Irus became the accounting acquirer. The reported
amounts and disclosures contained in the consolidated financial statements are
those of Irus, the operating company. In the transaction, Irus did assume the
technology of the Company as well as the liabilities.
Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted
Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB
Accounting Standards Codification (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. The Codification superseded all existing non-SEC accounting
and reporting standards. All other non-grandfathered, non-SEC accounting
literature not included in the Codification is non-authoritative. The FASB will
not issue new standards in the form of Statements, FASB Positions or Emerging
Issue Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”).
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
1-
|
ORGANIZATION AND BASIS
OF PRESENTATION(CONTINUED)
|
The FASB
will not consider ASUs as authoritative in their own right. ASUs will serve only
to update the Codification, provide background information about the guidance
and provide the bases for conclusions on the change(s) in the Codification.
References made to FASB guidance throughout this document have been updated for
the Codification.
Going
Concern
As shown
in the accompanying condensed consolidated financial statements the Company has
incurred a loss of $691,740 and income of $1,949 for the three months ended
March 31, 2010 and 2009, respectively, and has a working capital deficiency of
$3,220,780 as of March 31, 2010.The principal reasons for the recurring losses
and working capital deficiency relates to the Company’s continued focus on
consolidating operations directly related to the merger, as well as refining its
products and search for profitable government contracts. The Company expects the
negative cash flow from operations to continue its trend through the next six
months, however continues to expand their pipeline of contracts. These factors
raise significant doubt about the ability of the Company to continue as a going
concern.
Management’s
plans to address these conditions include continued efforts to obtain government
contracts as well as commercial contracts through expanding sources and new
technology, and the raising of additional capital through the sale of the
Company’s stock. Additionally, the Company has commenced plans to reduce their
liabilities by conversion of the notes payable and underlying warrants into
shares of common stock.
The
Company’s long-term success is dependent upon the obtaining of sufficient
capital to fund its operations; development of its products; and launching its
products to the worldwide market. These factors will contribute to the Company’s
obtaining sufficient sales volume to be profitable. To achieve these objectives,
the Company may be required to raise additional capital through public or
private financings or other arrangements.
It cannot
be assured that such financings will be available on terms attractive to the
Company, if at all. Such financings may be dilutive to existing stockholders and
may contain restrictive covenants.
The
Company is subject to certain risks common to technology-based companies in
similar stages of development. Principal risks to the Company include
uncertainty of growth in market acceptance for its products; history of losses
in recent years; ability to remain competitive in response to new technologies;
costs to defend, as well as risks of losing patent and intellectual property
rights; reliance on limited number of suppliers; reliance on outsourced
manufacture of its products for quality control and product availability;
uncertainty of demand for its products in certain markets; ability to manage
growth effectively; dependence on key members of its management; and its ability
to obtain adequate capital to fund future operations.
The
condensed consolidated financial statements do not include any adjustments
relating to the carrying amounts of recorded assets or the carrying amounts and
classification of recorded liabilities that may be required should the Company
be unable to continue as a going concern.
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Principles of
Consolidation
The
condensed consolidated financial statements include those of the Company and its
wholly-owned subsidiary. All intercompany accounts and transactions have been
eliminated in consolidation.
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Use of
Estimates
The
preparation of condensed consolidated 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 disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash
Equivalents
The
Company considers all highly liquid debt instruments and other short-term
investments with a maturity of three months or less, when purchased, to be cash
equivalents.
The
Company maintains cash and cash equivalent balances at one financial institution
that is insured by the Federal Deposit Insurance Corporation up to
$250,000.
Allowance for Doubtful
Accounts
The
Company provides an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection
information. Credit is granted to substantially all customers on an
unsecured basis. In determining the amount of the allowance,
management is required to make certain estimates and
assumptions. Management has determined that as of March 31, 2010, no
allowance for doubtful accounts is required.
Fixed
Assets
Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets (primarily three to five years). Costs of maintenance and repairs
are charged to expense as incurred.
Computer Software
Development Costs
During
2009, the Company capitalized certain software development costs. The
Company capitalizes the cost of software in accordance with ASC 985-20 once
technological feasibility has been demonstrated, as the Company has in the past
sold, leased or otherwise marketed their software, and plans on doing so in the
future. The Company capitalizes costs incurred to develop and market
their privacy preserving software during the development process, including
payroll costs for employees who are directly associated with the development
process and services performed by consultants. Amortization of such
costs is based on the greater of (1) the ratio of current gross revenues to the
sum of current and anticipated gross revenues, or (2) the straight-line method
over the remaining economic life of the software, typically five years. It is
possible that those anticipated gross revenues, the remaining economic life of
the products, or both, may be reduced as a result of future
events. The Company has not developed any software for internal
use.
For the
three months ended March 31, 2010 and 2009, the Company recognized $16,222 and
$0 of amortization expense on its capitalized software costs,
respectively.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Recoverability of Long-Lived
Assets
The
Company reviews the recoverability of our long-lived assets on a periodic basis
whenever events and changes in circumstances have occurred which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on our ability to recover the carrying value of long-lived assets from expected
future cash flows from operations on an undiscounted basis. If such assets are
determined to be impaired, the impairment recognized is the amount by which the
carrying value of the assets exceeds the fair value of the assets. Fixed assets
to be disposed of by sale are carried at the lower of the then current carrying
value or fair value less estimated costs to sell.
Revenue
Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is
probable. We enter into certain arrangements where we are obligated
to deliver multiple products and/or services (multiple elements). In
these transactions, we allocate the total revenue among the elements based on
the sales price of each element when sold separately (vendor-specific objective
evidence). The Company generates revenue from application license
sales, application maintenance and support, professional services rendered to
customers as well as from application management support contracts with
governmental units. The Company’s revenue is generated under
time-and-material contracts and fixed-price contracts.
The
Company’s business is not seasonal in nature. The timing of contract
awards, the availability of funding from the customer, the incurrence of
contract costs and unit deliveries are the primary drivers of our revenue
recognition. These factors are influenced by the federal government’s
October-to-September fiscal year. This process has historically
resulted in higher revenues in the latter half of the year. Many of
our government customers schedule deliveries toward the end of the calendar
year, resulting in increasing revenues and earnings over the course of the
year.
The
Company does not derive revenue from projects involving multiple
revenue-generating activities. If a contract would involve the
provision of multiple service elements, total estimated contract revenue would
be allocated to each element based on the fair value of each
element. The amount of revenue allocated to each element would then
be limited to the amount that is not contingent upon the delivery of another
element in the future. Revenue for each element would then be
recognized depending upon whether the contract is a time-and-materials contract
or a fixed-price, fixed-time contract.
Stock-Based
Compensation
In 2006,
the Company adopted the provisions of ASC 718-10 “Share-Based Payments” (“ASC
718-10”) which requires recognition of stock-based compensation expense for all
share-based payments based on fair value. Share-based payment
transactions within the scope of ASC 718-10 include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. This adoption had no effect on the Company’s
operations. Prior to January 1, 2006, the Company measured
compensation expense for all of the share-based compensation using the intrinsic
value method.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Stock-Based Compensation
(continued)
The
Company has elected to use the modified–prospective approach
method. Under that transition method, the calculated expense in 2006
is equivalent to compensation expense for all awards granted prior to, but not
yet vested as of January 1, 2006, based on the grant-date fair
values. Stock-based compensation expense for all awards granted after
January 1, 2006 is based on the grant-date fair values. The Company
recognizes these compensation costs, net of an estimated forfeiture rate, on a
pro rata basis over the requisite service period of each vesting tranche of each
award. The Company considers voluntary termination behavior as well
as trends of actual option forfeitures when estimating the forfeiture
rate.
The
Company measures compensation expense for non-employee stock-based compensation
under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". The fair value of the option issued is used to measure the
transaction, as this is more reliable than the fair value of the services
received. The fair value is measured at the value of the Company’s
common stock on the date that the commitment for performance by the counterparty
has been reached or the counterparty’s performance is complete. The
fair value of the equity instrument is charged directly to compensation expense
and additional paid-in capital. For common stock issuances to
non-employees that are fully vested and are for future periods, we classify
these issuances as prepaid expenses and expense the prepaid expenses over the
service period. At no time have we issued common stock for a period
that exceeds one year.
Concentrations
The
Company has derived 93% of their revenue for the three months ended March 31,
2010 from two customers.
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. To date, accounts
receivable have been derived from contracts with agencies of the federal
government. Accounts receivable are generally due within 30 days and no
collateral is required.
Segment
Reporting
The
Company follows the provisions of ASC 280-10, "Disclosures about Segments of an
Enterprise and Related Information”.This standard requires that companies
disclose operating segments based on the manner in which management
disaggregates the Company in making internal operating decisions. The Company
only operates in one reporting segment as of March 31, 2010 and for the three
months ended March 31, 2010 and 2009.
Fair Value of Financial
Instruments (other than Derivative Financial Instruments)
The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments. For
the notes payable, the carrying amount reported is based upon the incremental
borrowing rates otherwise available to us for similar borrowings. For
the warrants that are classified as derivatives, fair values were calculated at
net present value using our weighted average borrowing rate for debt instruments
without conversion features applied to total future cash flows of the
instruments.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Convertible
Instruments
The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features, where the ability
to physical or net-share settle the conversion option is not within the control
of the Company, are bifurcated and accounted for as a derivative financial
instrument. Bifurcation of the embedded derivative instrument requires
allocation of the proceeds first to the fair value of the embedded derivative
instrument with the residual allocated to the debt instrument. The resulting
discount to the face value of the debt instrument is amortized through periodic
charges to interest expense using the Effective Interest Method.
Income
Taxes
Under ASC
740 the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to
reverse.
Uncertainty in Income
Taxes
Under ASC
740-10-25 recognition and measurement of uncertain income tax positions is
required using a “more-likely-than-not” approach. The Company evaluates their
tax positions on an annual and quarterly basis, and has determined that as of
March 31, 2010 no additional accrual for income taxes is necessary.
(Loss) Per Share of Common
Stock
Basic net
(loss) per common share (“EPS”) is computed using the weighted average number of
common shares outstanding for the period. Diluted earnings per share include
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
are not included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be anti-dilutive for the periods
presented.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
(Loss) Per Share of Common
Stock (continued)
The
following is a reconciliation of the computation for basic and diluted
EPS:
|
|
|
Three Months Ended
|
|
|||||
|
|
|
March 31,
|
|
|
March 31,
|
|
||
|
2010
|
2009
|
|||||||
|
Net
income (loss)
|
$
|
(691,740
|
) | $ |
1,949
|
|||
|
Weighted-average
common shares outstanding :
|
||||||||
|
Basic
|
3,920,645
|
635,170
|
||||||
|
Warrants
|
435,000
|
-
|
|
|||||
|
Options
|
3,270,000
|
-
|
||||||
|
Diluted
|
7,625,645
|
635,170
|
||||||
|
Basic
net income (loss) per share
|
$
|
(0.18
|
) | $ |
0.00
|
|||
|
Diluted
net income (loss) per share
|
$
|
(0.18
|
) | $ |
0.00
|
|||
Research and
Development
Research
and development expenses include payroll, employee benefits, equity
compensation, and other headcount-related costs associated with product
development. The Company has determined that technological
feasibility for the software products is reached shortly before the products are
released to manufacturing. Costs incurred after technological feasibility is
established are not material, and accordingly, the Company expenses all research
and development costs when incurred. In addition, research and
development costs have been included in the consolidated statements of
operations for the three months ended March 31, 2010 and 2009,
respectively.
Recent Issued Accounting
Standards
In
September 2006, ASC issued 820, Fair Value Measurements. ASC
820 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of ASC 820 is not expected to have a material impact on
the financial statements.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Recent Issued Accounting
Standards (continued)
In
February 2007, ASC issued 825-10, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of ASC 320-10 ,
(“ASC 825-10”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates. A
business entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. ASC 825-10 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.
In
December 2007, ASC 810-10-65, “Noncontrolling Interests in Consolidated
Financial Statements,” (“ASC 810-10-65”), was issued. ASC 810-10-65 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, changes in a parent’s ownership of a
noncontrolling interest, calculation and disclosure of the consolidated net
income attributable to the parent and the noncontrolling interest, changes in a
parent’s ownership interest while the parent retains its controlling financial
interest and fair value measurement of any retained noncontrolling equity
investment.
ASC
810-10-65 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. Management is determining the impact that
the adoption of ASC 810-10-65 will have on the Company’s financial position,
results of operations or cash flows.
In
December 2007, the Company adopted ASC 805, Business Combinations (“ASC
805”). ASC 805 retains the fundamental requirements that the acquisition method
of accounting be used for all business combinations and for an acquirer to be
identified for each business combination. ASC 805 defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. ASC 805 will require an entity to record separately
from the business combination the direct costs, where previously these costs
were included in the total allocated cost of the acquisition. ASC 805
will require an entity to recognize the assets acquired, liabilities assumed,
and any non-controlling interest in the acquired at the acquisition date, at
their fair values as of that date.
ASC 805
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met. Finally, ASC 805 will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date. This will be effective for business combinations
completed on or after the first annual reporting period beginning on or after
December 15, 2008. Early adoption is not permitted and the ASC is to
be applied prospectively only. Upon adoption of this ASC, there would be no
impact to the Company’s results of operations and financial condition for
acquisitions previously completed. The adoption of ASC 805 is not expected to
have a material effect on the Company’s financial position, results of
operations or cash flows.
In March
2008, ASC issued ASC 815, Disclosures about Derivative
Instruments and Hedging Activities ”, (“ASC 815”). ASC 815 requires
enhanced disclosures about an entity’s derivative and hedging activities. These
enhanced disclosures will discuss: how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for and its related interpretations; and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. ASC 815 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The Company does
not believe that ASC 815 will have an impact on their results of operations or
financial position.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Recent Issued Accounting
Standards (continued)
In April
2008, ASC issued ASC 350, “Determination of the Useful Life of Intangible
Assets”. This amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset under ASC 350. The guidance is used for determining the useful
life of a recognized intangible asset shall be applied prospectively to
intangible assets acquired after adoption, and the disclosure requirements shall
be applied prospectively to all intangible assets recognized as of, and
subsequent to, adoption. The Company does not believe ASC 350 will materially
impact their financial position, results of operations or cash
flows.
In May
2008, ASC 470-20, “Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“ASC
470-20”), was issued. ASC 470-20 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. ASC 470-20 is effective for
fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe that the adoption of ASC 470-20
will have a material effect on its financial position, results of operations or
cash flows.
In June
2008, ASC 815-40, “Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity’s Own Stock” (“ASC 815-40”), was issued. ASC
815-40 provides guidance for determining whether an equity-linked financial
instrument (or embedded feature) is indexed to an entity’s own stock and it
applies to any freestanding financial instrument or embedded feature that has
all the characteristics of a derivative. ASC 815-40 also applies to
any freestanding financial instrument that is potentially settled in an entity’s
own stock. The Company is determining what impact, if any, ASC 815-40
will have on its financial position, results of operations and cash
flows.
In June
2008, ASC 470-20-65, “Transition Guidance for Conforming Changes to, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, (“ASC 470-20-65”), was issued. ASC 470-20-65 is
effective for years ending after December 15, 2008. The overall
objective of ASC 470-20-65 is to provide for consistency in application of the
standard. The Company has computed and recorded a beneficial
conversion feature in connection with certain of their prior financing
arrangements and does not believe that ASC 470-20-65 will have a material effect
on that accounting.
In May
2009, ASC 855, “Subsequent Events”, (“SFAS 165”), was published. ASC 855
requires the Company to disclose the date through which subsequent events have
been evaluated and whether that date is the date the financial statements were
issued or the date the financial statements were available to be issued. ASC 855
is effective for financial periods ending after June 15,
2009. Management has evaluated subsequent events through August 4,
2010, the date the condensed consolidated financial statements were
issued.
Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurement and
Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a
quoted market price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using certain
techniques. ASU 2009-05 also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of a liability.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
2-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Recent Issued Accounting
Standards (continued)
ASU
2009-05 also clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required for Level 1 fair value
measurements. Adoption of ASU 2009-05 did not have a material impact on the
Company’s results of operations or financial condition.
In
January 2010, the Company adopted FASB ASU No. 2010-06, Fair Value Measurement
and Disclosures (Topic 820) - Improving Disclosures about Fair Value
Measurements (“ASU 2010-06”). These standards require new disclosures on the
amount and reason for transfers in and out of Level 1 and 2 fair value
measurements. The standards also require new disclosures of activities,
including purchases, sales, issuances, and settlements within the Level 3 fair
value measurements. The standard also clarifies existing disclosure requirements
on levels of disaggregation and disclosures about inputs and valuation
techniques. These new disclosures are effective beginning with the first interim
filing in 2010.
The
disclosures about the roll forward of information in Level 3 are required for
the Company with its first interim filing in 211. The Company does
not believe this standard will impact their financial statements.
Other
ASU’s that have been issued or proposed by the FASB ASC that do not require
adoption until a future date and are not expected to have a material impact on
the financial statements upon adoption.
|
FIXED
ASSETS
|
Fixed
assets consist of the following as of March 31, 2010 (unaudited) and December
31, 2009, respectively:
|
|
Estimated Useful
|
|
March 31,
|
|
|
December 31
|
|
|||
|
Lives
(Years)
|
2010
|
2009
|
||||||||
|
Computer
equipment
|
5
|
$ |
299,915
|
$ |
299,915
|
|||||
|
Office
machinery and equipment
|
5
|
15,099
|
15,638
|
|||||||
|
Furniture and
fixtures
|
5
|
86,934
|
86,934
|
|||||||
|
Computer
software
|
3
|
14,895
|
14,895
|
|||||||
|
Automobile
|
5
|
50,914
|
50,914
|
|||||||
|
467,757
|
468,296
|
|||||||||
|
Less:
Accumulated depreciation
|
(426,450
|
) |
(418,574
|
)
|
||||||
|
Total,
net
|
$ |
41,307
|
$ |
49,722
|
||||||
Depreciation
expense was $8,415 and $10,386 for the three months ended March 31, 2010 and
2009, respectively.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
4-
|
COMPUTER SOFTWARE
DEVELOPMENT COSTS
|
Computer
software development costs consist of the following as of March 31, 2010
(unaudited) and December 31, 2009, respectively:
|
|
Estimated Useful
|
|
March 31,
|
|
|
December
31,
|
|
|||
|
|
Lives (Years)
|
|
2010
|
|
|
2009
|
|
|||
|
Computer
software development costs
|
5
|
$ |
986,724
|
$ |
986,724
|
|||||
|
Less:
Accumulated amortization
|
(938,058
|
) |
(921,836
|
)
|
||||||
|
Total,
net
|
$ |
48,666
|
$ |
64,888
|
||||||
Amortization
expense was $16,222 and $0 for the three months ended March 31, 2010 and 2009,
respectively.
Amortization
expense anticipated through December 31, 2010 is as follows:
|
Period
ended December 31:
|
||||
|
$
|
48,666
|
|||
|
NOTE
5-
|
NOTES
PAYABLE
|
SBA
Loan
On July
22, 2003, the Company and the U.S. Small Business Administration (“SBA”) entered
into a Note (the “Note”) under the SBA’s Secured Disaster Loan program in the
amount of $377,100.
Under the
Note, the Company agreed to pay principal and interest at an annual rate of 4%
per annum, of $1,868 every month commencing twenty-five (25) months from the
date of the Note (commencing August 2005). The Note matures July
2034.
The
Company must comply with the default provisions contained in the Note. The
Company is in default under the Note if it does not make a payment under the
Note, or if it: a) fails to comply with any provision of the Note, the Loan
Authorization and Agreement, or other Loan documents; b) defaults on any other
SBA loan; c) sells or otherwise transfers, or does not preserve or account to
SBA’s satisfaction for, any of the collateral (as defined therein) or its
proceeds; d) does not disclose, or anyone acting on their behalf does not
disclose, any material fact to the SBA; e) makes, or anyone acting on their
behalf makes, a materially false or misleading representation to the SBA; f)
defaults on any loan or agreement with another creditor, if the SBA believes the
default may materially affect the Company’s ability to pay this Note; g) fails
to pay any taxes when due; h) becomes the subject of a proceeding under any
bankruptcy or insolvency law; i) has a receiver or liquidator appointed for any
part of their business or property; j) makes an assignment for the benefit of
creditors; k) has any adverse change in financial condition or business
operation that the SBA believes may materially affect the Company’s ability to
pay this Note; l) dies; m) reorganizes, merges, consolidates, or otherwise
changes ownership or business structure without the SBA’s
prior written consent; or n) becomes the subject of a civil or criminal action
that the SBA believes may materially affect the Company’s ability to pay this
Note. The Company is not in default and current on its
obligation. The Company has accrued interest at a rate of $38.90 per
day.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
5-
|
NOTES PAYABLE
(CONTINUED)
|
SBA
Loan (continued)
As of
March 31, 2010, the Company has an outstanding principal balance of $354,936.
Interest expense on the SBA loan for the three months ended March 31, 2010 and
2009 were $3,501 and $0, respectively.
Tangiers
Investors, LP
On
February 26, 2010, the Company entered into a Promissory Note with Tangiers
Investors, LP in the amount of $40,000. The $40,000 was the value of services
performed for the Company and not for cash paid. The Company has agreed to repay
the note in two tranches of $20,000. The initial payment is due April 30, 2010
and the final payment is due June 30, 2010. Interest is calculated at 5% per
annum.
In May
2010, upon failure of the Company to pay the initial $20,000, the Company and
Tangiers Investors, LP entered into a Forbearance Agreement, which extended the
due dates to June 30, 2010 and August 31, 2010, respectively, and requires the
Company to issue 50,000 shares of stock to Tangiers Investors, LP.
Interest
expense for the three months ended March 31, 2010 and accrued interest at March
31, 2010 related to this note is $181.
|
LINE OF
CREDIT
|
The
Company has a line of credit with a bank in the amount of $850,000 as of March
31, 2010. The Company has outstanding $350,587 as of March 31,
2010.
The line
of credit accrues interest at annual interest rates of prime plus ¼ % and renews
each year for a one-year period. Interest expense for the three months ended
March 31, 2010 and 2009, is $3,380 and $5,594, respectively. The line of credit
is secured by the Company’s accounts receivables.
|
NOTE
7-
|
CONVERTIBLE
DEBENTURE
|
On
December 23, 2009, the Company entered into a Debenture and Warrant Purchase
Agreement pursuant to which Street Capital, LLC, the placement agent, agreed to
use its best efforts to provide bridge financing through unnamed prospective
purchasers in return for an 8% secured convertible debenture (“Debenture”) in
the principal amount of $300, 000 at a conversion price of $0.20 per share of
the Company’s common stock and quity participation in the form of a class A
common stock purchase warrant to purchase an aggregate of up to 450,000 shares
of the Company’s common stock with an exercise price of $0.20, and a class B
common stock purchase warrant to purchase an aggregate of up to 120,000 shares
of the Company’s common stock, with an exercise price per share equal to $0.50.
On July 9, 2010, the exercise price was changed to $0.20 as the Company failed
to convert or repay the instrument by the due date of June 23, 2010. The Company
received only $150,000 of the $300,000 total principal on December 23, 2009, and
has not received any further proceeds.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
7-
|
CONVERTIBLE
DEBENTURE (CONTINUED)
|
The
Company also entered into a Security Agreement pursuant to which ti granted to
the Debenture holders a first lien against all of its assets, including its
software, as security for repayment of the Debenture. As a result of the Company
only raising $150,000 of the $300,000 in proceeds, they issued half of the class
A and class B warrants. Interest expense for the three months ended and accrued
as of March 31, 2010 is $2,959 and $0, respectively.
In
accordance with ASC 470-20, the Company separately accounted for the conversion
feature and recognized each component of the transaction separately. As a
result, the Company recognized a discount on the convertible debenture in the
amount of $98,130 that will be amortized over the life of the convertible
debenture which is six-months as it matures June 23, 2010. The Company will
amortize the discount in the first six months of 2010.
The
Company recognized the discount as a derivative liability, and in accordance
with the ASC, values the derivative liability each reporting period to market.
The Company has recognized a loss of $112,500 in the three months ended March
31, 2010 due to the beneficial conversion of the various
instruments.
|
NOTE
8-
|
STOCKHOLDERS’ EQUITY
(DEFICIT)
|
Preferred
Stock
The
Company was incorporated on May 26, 2005, and the Board of Directors authorized
10,000,000 shares of preferred stock with a par value of $0.0001. The Company as
of December 31, 2009 has authorized the issuance of 2,000,000 shares of
preferred stock. 1,000,000 of the shares were authorized to be issued to Vijay
Suri in connection with the Merger Agreement, and 1,000,000 shares of preferred
stock were authorized to be issued to B.K. Gogia the former CEO upon his
resignation as CEO. None of these shares has been issued as of March 31, 2010,
however, the Company has recorded the value of these shares $200 (par value) as
a liability for stock to be issued on the consolidated balance sheet as of March
31, 2010. The Company and Vijay Suri and BK Gogia on June 2, 2010, agreed to
rescind the issuance of the preferred stock. As a result of the recession, the
Company and its officers agreed to issue them each 1,000,000 shares of common
stock for their personal guarantees of certain debt of the Company.
Common
Stock
The
Company was incorporated on May 26, 2005, and since then the Board of Directors
authorized 75,000,000 shares of common stock with a par value of $0.0001. On
March 13, 2009, the Company’s Board of Directors approved the increase of the
authorized shares of common stock to 400,000,000.
The
Company as of March 31, 2010 had
3,920,645 shares of common stock issued and outstanding.
During
the three months ended March 31, 2010 the Company has not issued any shares of
common stock.
From
January 1, 2009 through October 27, 2009, the period prior to the reverse merger
with Irus, the following transactions occurred:
|
|
·
|
The
Company effectuated a reverse 1:20 stock split. All shares of common stock
have been reflected with the 1:20 reverse split, retroactively in
accordance with SAB Topic 14C;
|
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
8-
|
STOCKHOLDERS’ EQUITY
(DEFICIT) (CONTINUED)
|
Common
Stock (continued)
|
|
·
|
1,875,000
shares of common stock were issued in conversion of $393,500 in
convertible notes, interest and warrants that were issued with the
convertible notes;
|
|
|
·
|
617,500
shares of common stock were issued for cash in the amount of
$135,000;
|
|
|
·
|
187.500
shares of common stock were issued for services rendered valued at
$53,000;
|
|
|
·
|
232,940
shares of common stock were issued in connection with the exercise of
warrants issued in the prior financing that InferX completed in 2007. The
Company valued these warrants at $2,236,224, which is what the exercise
price would have been had the warrants been exercised for cash. The
Company provided the warrant holders a cashless exercise as a result of
the Merger; and
|
|
|
·
|
100,750
shares of common stock were issued in the exercise of stock options for
$0, as a result of the Merger, no cash was
required.
|
The
transactions resulted in the Company going from 886,955 shares issued and
outstanding to 3,920,645 shares.
Additional
items impacting equity prior to the reverse merger were:
|
|
·
|
Conversion
of accrued interest to additional paid in capital in the amount of
$45,913; and
|
|
|
·
|
Conversion
of accrued compensation to related parties to additional paid in capital,
as a result of their forgiveness of the accrued compensation in the amount
of $524,226.
|
The
Merger Agreement called for the Company to issue 9,089,768 shares of common
stock in exchange for 100% of the shares of Irus. These shares have been
authorized to be issued, yet the certificates have not been issued. The Company
has recognized a liability for shares to be issued for this, and for other
services that were rendered and certificates not issued for them.
Post-merger,
the Company recognized $877,060 in stock based compensation (for the year ended
December 31, 2009) relating to vested stock options issued to the officers of
the Company.
Warrants
The
Company prior to the reverse merger with Irus, converted all of their previous
issued and outstanding warrants form the private placement completed in 2007 as
well as the warrants issued with the convertible notes.
The
Company issued 225,000 class A warrants and 60,000 class B warrants in
connection with the convertible debenture on December 23, 2009. The class A
warrants have an exercise price of $0.20 per share and the class B warrants have
an exercise price of $0.50 per share. All warrants have a term of 5 years. The
value of the warrants at inception was $98,130 which represented the debt
discount. The Class B warrants exercise price was amended on July 9, 2010 to a
price of $0.20 due to the Company’s failure to convert or repay the instrument
by June 23, 2010.
The
Company also issued 150,000 warrants to an investment banker to try and raise
the Company funds. The warrants have an exercise price of $0.20 per share and
expire in 5 years. These warrants vest in June 2010, and have not been recorded
as of March 31, 2010 in stock-based compensation.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
8-
|
STOCKHOLDERS’ EQUITY
(DEFICIT) (CONTINUED)
|
Warrants
(Continued)
The
following is a breakdown of the warrants:
|
Exercise
|
Date
|
||||||
|
Warrants
|
Price
|
Issued
|
Term
|
||||
|
225,000
|
$
|
0.20
|
12/23/2009
|
5
years
|
|||
|
60,000
|
$
|
0.50
|
12/23/2009
|
5
years
|
|||
|
150,000
|
$
|
0.20
|
1/26/2010
|
5
years
|
|||
The
warrants have a weighted average price of $0.25.
The class
A warrants and class B warrants were valued utilizing the Black – Scholes method
as follows:
|
Class A
|
Class B
|
|||||||
|
Stock
Price
|
$ | .15 | $ | .15 | ||||
|
Strike
Price
|
$ | .20 | $ | .50 | ||||
|
Expected
Life of Warrant
|
5
yrs.
|
5
yrs.
|
||||||
|
Annualized
Volatility
|
261.6 | % | 261.6 | % | ||||
|
Discount
Rate
|
1.25 | % | 1.25 | % | ||||
|
Annual
Rate of Quarterly Dividends
|
None
|
None
|
||||||
Options
Since
October 2007, the Company’s Board of Directors and Shareholders approved the
adoption of an option plan for a total of 5,000,000. The Company
prior to the reverse merger with Irus exercised all of the options that were
outstanding at the time. Subsequent to the reverse merger, the Company issued
stock options in connection with certain employment agreements. The Company
granted 3,250,000 options, none of which have been exercised as of December 31,
2009. Of the stock options granted, 2,950,000 are vested. In the three
months ended March 31, 2010, the Company granted 20,000 stock options to an
employee which vest two years from the grant date in January 2012.
These
options all have strike prices that are equal to the market value at the time of
grant. The options were valued based on the black-scholes model with the
following criteria:
|
Stock
Price
|
$
|
0.15
– 0.50
|
||
|
Strike
Price
|
$
|
0.15
– 0.50
|
||
|
Expected
Life of Option
|
5
yr.
|
|||
|
Annualized
Volatility
|
261.60
|
%
|
||
|
Discount
Rate
|
1.25
|
%
|
||
|
Annual
Rate of Quarterly Dividends
|
None
|
|||
The value
attributable to these options that vested for the three months ended March 31,
2010 and 2009 is $0 and $0, respectively and is reflected in the consolidated
statements of operations as stock based compensation.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
9-
|
COMMITMENTS
|
Office
Lease
The
Company leases office space in Virginia pursuant to a lease with a related party
through common ownership which expires in 2010. The lease provides for an annual
rental of approximately $78,000.
Rent
expense for the three months ended March 31, 2010 and 2009 was $23,500 and
$18,000, respectively.
Consulting
Agreements
The
Company has entered into consulting agreements with marketing and strategic
consulting groups with terms that do not exceed one year. These companies are to
be paid fees for the services they perform. The Company has included these fees
in their condensed consolidated statements of operations for the three months
ended March 31, 2010 and 2009.
On
January 26, 2010, the Company entered into an agreement with Coady Diemar
Partners, LLC, an investment banker in connection with investment banking
services. Pursuant to the agreement, Coady Diemar Partners, LLC will receive a
retainer of $30,000 payable in two tranches of $15,000 and receive 150,000
warrants as well as receive an 8% fee on amounts raised. The term of the
agreement is one-year. The warrants did not vest until June 2010.
Employment
Agreements
During
the year ended December 31, 2009, the Company entered into four separate
employment agreements with their key executives. The employment
agreements range in years from 3 to 5, and require the Company to compensate the
key executives for a base salary, as well as provide for incentive compensation.
In addition, the executives were granted in total 3,250,000 stock options that
vest through December 2011. The Company also entered into another employment
agreement in January 2010 which granted an additional 20,000 options to an
employee. This agreement was for a period of two years.
|
NOTE
10-
|
PROVISION FOR INCOME
TAXES
|
Deferred
income taxes will be determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company’s assets and liabilities. Deferred income taxes are measured based on
the tax rates expected to be in effect when the temporary differences are
included in the Company’s tax return. Deferred tax assets and liabilities are
recognized based on anticipated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases.
At March
31, 2010, deferred tax assets consist of the following:
| $ |
863,064
|
|||
|
Valuation
allowance
|
(863,064
|
) | ||
| $ |
-
|
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
10-
|
PROVISION FOR INCOME
TAXES (CONTINUED)
|
At March
31, 2010, the Company had net operating loss carryforward in the approximate
amount of $2,538,423, available to offset future taxable income through
2030. The Company established valuation allowances equal to the full
amount of the deferred tax assets due to the uncertainty of the utilization of
the operating losses in future periods.
A
reconciliation of the Company’s effective tax rate as a percentage of income
before taxes and federal statutory rate for the three months ended March 31,
2010 and 2009 is summarized below.
|
2010
|
2009
|
|||||||
|
Federal
statutory rate
|
(34.0
|
)%
|
(34.0
|
)%
|
||||
|
State
income taxes, net of federal benefits
|
6.0
|
6.0
|
||||||
|
Valuation
allowance
|
28.0
|
28.0
|
||||||
|
0
|
%
|
0
|
%
|
|||||
|
NOTE 11-
|
RELATED
PARTY TRANSACTIONS
|
The
Company has expensed subcontractor fees in the amount of $0 and $56,500 for the
three months ended March 31, 2010 and 2009, respectively to a company owned by a
relative of an officer of the Company. In addition, the Company has
outstanding fees due the President of $725,000 as of March 31, 2010 relating to
past due distributions prior to the reverse merger.
|
NOTE
12-
|
MAJOR
CUSTOMER
|
The
Company has derived 93% of its revenue and accounts receivable as of and for the
three months ended March 31, 2010 and 2009 respectfully from two and three
customers, respectively.
|
NOTE
13-
|
FAIR VALUE
MEASUREMENTS
|
The
Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value,
provides a consistent framework for measuring fair value under generally
accepted accounting principles and expands fair value financial statement
disclosure requirements. ASC 820’s valuation techniques are based on observable
and unobservable inputs. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect our market assumptions.
ASC 820 classifies these inputs into the following hierarchy:
Level 1
inputs: Quoted prices for identical instruments in active markets.
Level 2
inputs: Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
Level 3
inputs: Instruments with primarily unobservable value drivers.
The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of March 31,
2010:
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
13-
|
FAIR VALUE
MEASUREMENTS (CONTINUED)
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
||||||||||
|
Cash
|
9,003
|
-
|
-
|
9,003
|
||||||||||||
|
Total
assets
|
9,003
|
-
|
-
|
9,003
|
||||||||||||
|
Convertible
debentures, net of discount
|
-
|
-
|
93,367
|
93,367
|
||||||||||||
|
Embedded
conversion feature and derivative
|
-
|
-
|
332,552
|
332,552
|
||||||||||||
|
Total
liabilities
|
-
|
-
|
425,919
|
425,919
|
||||||||||||
|
NOTE
14-
|
SUBSEQUENT
EVENTS
|
The
Company’s board of directors approved the addition of two members to its Board
of Advisors. Each of these members will provide assistance to the Company with
respect to their healthcare solution and predictive technology to prospective
banking, insurance and healthcare customers. As consideration for the placement
on the Board of Advisors, the Company has granted those options under their 2007
Stock Incentive Plan that vest over a two-year period of time commencing in May
2010. In addition, the advisors will receive quarterly cash payments for
services rendered.
In June
2010, the Company entered into a consulting agreement with a company to provide
financial services and locate potential investment opportunities. The term of
the agreement is for one-year, and the consultant will receive monthly payments
of $7,500 as well as be issued 300,000 shares of restricted common stock , and
900,000 warrants that vest over the one-year period and upon certain financing
criteria being met. None of the warrants have vested as of March 31,
2010.
In April
2010, the Company granted 4,500,000 warrants to BK Gogia for his assistance in
advancing the Company’s business plan. The warrants, which are five-year
warrants with an exercise price of $0.20, vest upon certain criteria being met.
The criteria include financing, as well as the execution of contracts and
recognition of revenue from those contracts.
In April
2010, the Company agreed to issue 300,000 warrants to an individual for partial
recognition of past services currently accrued for. The warrants are five-year
warrants with an exercise price of $0.20.
In April
2010, the Company entered into two separate promissory notes with Vijay Suri who
loaned the Company a total of $26,000 on April 16, 2010 and $24,600 on April 30,
2010. Payments of $1,000 per month commence July 1, 2010 for five months and the
balance due on December 1, 2010. Interest is calculated at 1.5% per annum,
escalating to 2.5% per month should the monthly $1,000 payments not be made
timely.
In May
2010, the Company entered into a Forbearance Agreement with Tangiers Investors,
LP as the Company failed to make the required initial payment of $20,000. The
Forbearance Agreement extended the due date of the $40,000 Promissory Note to
June 30, 2010 ($20,000) and August 31, 2010 ($20,000) and requires the Company
to issue 50,000 shares of common stock.
INFERX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 AND 2009
|
NOTE
14-
|
SUBSEQUENT
EVENTS (CONTINUED)
|
In June 2010, Vijay Suri and BK Gogia agreed to rescind
the 1,000,000 shares of preferred stock that are owed to them, and the Company
agreed to issue them each 1,000,000 shares of common stock. The shares of common
stock are to be issued to these individuals for their personal guarantees on
certain debt of the Company.
In June 2010, a vendor of the Company agreed to convert
their accounts payable into 90,083 shares of common stock.
The convertible debenture matured in June 2010, without
conversion or repayment. The Company entered into an Amendment to Debenture and
Warrants which extended the due date of the debentures from June 2010 to August
31, 2010 and amended the exercise price of the Class B warrants from $0.50 to
$0.20.
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of
Operation.
|
The information set forth and
discussed in this Management’s Discussion and Analysis or Plan of Operation is
derived from our financial statements and the related notes, which are included.
The following information and discussion should be read in conjunction with
those financial statements and notes, as well as the information provided in our
Annual Report on Form 10-K for our fiscal year ended December 31,
2009.
Overview
Our
company was formed in May 2005 to pursue a business combination. On October 24,
2006, we acquired InferX Corporation, a Virginia corporation (“InferX
Virginia”), and on October 27, 2006 we merged InferX Virginia into our company
and changed our name to “InferX Corporation.” After the acquisition of InferX
Virginia, we succeeded to its business as our sole line of business. InferX
Virginia was formed in August 2006 by the merger of the former InferX
Corporation, a Delaware corporation (“InferX Delaware”), with and into Datamat
Systems Research, Inc., a Virginia corporation and an affiliate of InferX
Delaware (“Datamat”), pursuant to which Datamat was the surviving corporation
and changed its name to “InferX Corporation.”
Datamat
was formed in 1992 as a professional services research and development firm,
specializing in technology for distributed analysis of sensory data relating to
airborne missile threats under contracts with the Missile Defense Agency and
other DoD contracts. InferX Delaware was formed in 1999 to
commercialize Datamat’s missile defense technology to build applications of real
time predictive analytics. The original technology was developed in part with
grants by the Missile Defense Agency.
Historically,
we have derived nearly all of our sales revenues under federal government
contracts. Under these contracts, we performed research and development that
enabled us to retain ownership of the intellectual property, which led to the
creation of our current products. Due to the relatively small and uncertain
margins associated with fixed price government contracts and the inherent limit
of the market size, in fiscal 2002 we began to develop our software as a
commercial product, concentrating on building specific applications that we
believed would meet the needs of potential new customers. In fiscal 2003-2004,
we sold two commercial licenses. However, since fiscal 2004, all of our revenues
have derived from government contracts. Currently, we have one contract with the
Missile Defense Agency to develop a prototype application of our
software.
On
October 27, 2009 we merged with The Irus Group, Inc., a company providing
consulting services in the business intelligence (“BI”) market. The Irus Group
specialized in the
planning, implementation and development of complex BI and corporate performance
management solutions for government, financial services, retail and healthcare
clients. Since its founding in 1996, The Irus Group has conducted
engagements for over 200 clients, including MasterCard, JP Morgan Chase,
ConAgra, US Navy, US Army, US Air Force, and the Peace Corps. We
initiated the merger both to obtain additional financial support in advance of
the full roll out of our enterprise software solutions and to serve as a source
of sales leads for our PA enterprise software product. We believe
that ourPA product suite has been enhanced with Irus’ BI expertise and is being
offered through Irus’ consulting relationships as a large scale enterprise
solution for the three targeted verticals – health care, financial services and
the public sector.
Driving
Operational Efficiency
We have
implemented an ongoing program to optimize efficiency and reduce cost across the
company. As part of those efforts, we are continuing to execute on our
multi-year program to consolidate core functions in order to reduce our IT
spending and operational costs. In addition, we are continuing to implement the
restructuring plan announced in the fourth quarter of fiscal 2009 to optimize
the cost structure of our business.
Investing
for Growth through Innovation
We are
investing some of the savings derived from our efficiency initiatives for
growth. For example, we are increasing our sales coverage to better
address the markets that we cover, including further expansion in markets such
as Healthcare research. We are creating innovative new products and
developing new channels to connect with our customers, particularly within the
healthcare in government business area. We are able to do this due to unique
offering of our product suites:
Critical
Accounting Policies
The
preparation of 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 disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. We rely on historical experience and on other assumptions
we believe to be reasonable under the circumstances in making our judgments and
estimates. Actual results could differ from those estimates. We consider our
critical accounting policies to be those that are complex and those that require
significant judgments and estimates, including the following: recognition of
revenue, capitalization of software development costs and income
taxes.
Principles
of Consolidation
The
consolidated financial statements include those of InferX and our wholly-owned
subsidiary. All intercompany accounts and transactions have been eliminated in
consolidation.
Use
of Estimates
The
preparation of consolidated 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 disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
We
consider all highly liquid debt instruments and other short-term investments
with a maturity of six months or less, when purchased, to be cash
equivalents.
We
maintain cash and cash equivalent balances at one financial institution that is
insured by the Federal Deposit Insurance Corporation up to
$250,000.
Allowance
for Doubtful Accounts
We
provide an allowance for doubtful accounts, which is based upon a review of
outstanding receivables as well as historical collection
information. Credit is granted to substantially all customers on an
unsecured basis. In determining the amount of the allowance,
management is required to make certain estimates and assumptions.
Fixed
Assets
Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets (primarily three to five years). Costs of maintenance and repairs
are charged to expense as incurred.
Computer
Software Development Costs
During
2009, the Company capitalized certain software development costs. The
Company capitalizes the cost of software in accordance with ASC 985-20 once
technological feasibility has been demonstrated, as the Company has in the past
sold, leased or otherwise marketed their software, and plans on doing so in the
future. The Company capitalizes costs incurred to develop and market
their privacy preserving software during the development process, including
payroll costs for employees who are directly associated with the development
process and services performed by consultants. Amortization of such
costs is based on the greater of (1) the ratio of current gross revenues to the
sum of current and anticipated gross revenues, or (2) the straight-line method
over the remaining economic life of the software, typically five years. It is
possible that those anticipated gross revenues, the remaining economic life of
the products, or both, may be reduced as a result of future
events. The Company has not developed any software for internal
use.
Recoverability
of Long-Lived Assets
We review
the recoverability of its long-lived assets on a periodic basis whenever events
and changes in circumstances have occurred which may indicate a possible
impairment. The assessment for potential impairment is based
primarily on the Company’s ability to recover the carrying value of its
long-lived assets from expected future cash flows from its operations on an
undiscounted basis. If such assets are determined to be impaired, the
impairment recognized is the amount by which the carrying value of the assets
exceeds the fair value of the assets. Fixed assets to be disposed of
by sale are carried at the lower of the then current carrying value or fair
value less estimated costs to sell.
Revenue
Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is
probable. We enter into certain arrangements where we are obligated
to deliver multiple products and/or services (multiple elements). In
these transactions, we allocate the total revenue among the elements based on
the sales price of each element when sold separately (vendor-specific objective
evidence). The Company generates revenue from application license
sales, application maintenance and support, professional services rendered to
customers as well as from application management support contracts with
governmental units. The Company’s revenue is generated under
time-and-material contracts and fixed-price contracts.
Our
business is not seasonal in nature. The timing of contract awards,
the availability of funding from the customer, the incurrence of contract costs
and unit deliveries are the primary drivers of our revenue
recognition. These factors are influenced by the federal government’s
October-to-September fiscal year. This process has historically
resulted in higher revenues in the latter half of the year. Many of
our government customers schedule deliveries toward the end of the calendar
year, resulting in increasing revenues and earnings over the course of the
year.
We do not
derive revenue from projects involving multiple revenue-generating
activities. If a contract would involve the provision of multiple
service elements, total estimated contract revenue would be allocated to each
element based on the fair value of each element. The amount of
revenue allocated to each element would then be limited to the amount that is
not contingent upon the delivery of another element in the
future. Revenue for each element would then be recognized depending
upon whether the contract is a time-and-materials contract or a fixed-price,
fixed-time contract.
Stock-Based
Compensation
In 2006,
we adopted the provisions of ASC 718-10 “Share-Based Payments” (“ASC
718-10”) which requires recognition of stock-based compensation expense for all
share-based payments based on fair value. Share-based payment
transactions within the scope of ASC 718-10 include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. This adoption had no effect on the Company’s operations.
Prior to January 1, 2006, we measured compensation expense for all of our
share-based compensation using the intrinsic value method.
We have
elected to use the modified–prospective approach method. Under that transition
method, the calculated expense in 2006 is equivalent to compensation expense for
all awards granted prior to, but not yet vested as of January 1, 2006, based on
the grant-date fair values. Stock-based compensation expense for all awards
granted after January 1, 2006 is based on the grant-date fair values. We
recognize these compensation costs, net of an estimated forfeiture rate, on a
pro rata basis over the requisite service period of each vesting tranche of each
award. We consider voluntary termination behavior as well as trends of actual
option forfeitures when estimating the forfeiture rate.
We
measure compensation expense for non-employee stock-based compensation under ASC
505-50, “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services". The fair
value of the option issued is used to measure the transaction, as this is more
reliable than the fair value of the services received. The fair value
is measured at the value of the Company’s common stock on the date that the
commitment for performance by the counterparty has been reached or the
counterparty’s performance is complete. The fair value of the equity
instrument is charged directly to compensation expense and additional paid-in
capital. For common stock issuances to non-employees that are fully
vested and are for future periods, we classify these issuances as prepaid
expenses and expense the prepaid expenses over the service period.At no time
have we issued common stock for a period that exceeds one year.
Concentrations
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. To date,
accounts receivable have been derived from contracts with agencies of the
federal government. Accounts receivable are generally due within 30
days and no collateral is required.
Segment
Reporting
We follow
the provisions of ASC 280-10, “Disclosures about Segments of an
Enterprise and Related Information.” This standard requires that
companies disclose operating segments based on the manner in which management
disaggregates the company in making internal operating decisions. We believe
that there is only one operating segment.
Fair
Value of Financial Instruments (other than Derivative Financial
Instruments)
The
carrying amounts reported in the consolidated balance sheet for cash and cash
equivalents, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments. For
the notes payable, the carrying amount reported is based upon the incremental
borrowing rates otherwise available to the Company for similar
borrowings.
Convertible
Instruments
We review
the terms of convertible debt and equity securities for indications requiring
bifurcation, and separate accounting, for the embedded conversion feature.
Generally, embedded conversion features, where the ability to physical or
net-share settle the conversion option is not within our control, are bifurcated
and accounted for as a derivative financial instrument. Bifurcation of the
embedded derivative instrument requires allocation of the proceeds first to the
fair value of the embedded derivative instrument with the residual allocated to
the debt instrument. The resulting discount to the face value of the debt
instrument is amortized through periodic charges to interest expense using the
Effective Interest Method.
Income
Taxes
Under ASC
740 the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Uncertainty
in Income Taxes
Under ASC
740-10-25 recognition and measurement of uncertain income tax positions is
required using a “more-likely-than-not”
approach. We evaluate our tax positions on an annual basis, and have
determined that no additional accrual for income taxes is
necessary.
(Loss)
Per Share of Common Stock
Basic net
(loss) per common share (“EPS”) is computed using the weighted average number of
common shares outstanding for the period. Diluted earnings per share
include additional dilution from common stock equivalents, such as stock
issuable pursuant to the exercise of stock options and
warrants. Common stock equivalents are not included in the
computation of diluted earnings per share when the Company reports a loss
because to do so would be anti-dilutive for the periods presented.
Research
and Development
Research
and development expenses include payroll, employee benefits, equity
compensation, and other headcount-related costs associated with product
development. The Company has determined that technological feasibility for the
software products is reached shortly before the products are released to
manufacturing. Costs incurred after technological feasibility is established are
not material, and accordingly, the Company expenses all research and development
costs when incurred.
Recent
Issued Accounting Standards
In
September 2006, ASC 820, “Fair
Value Measurements” (ASC 820) was issued. ASC 820
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of ASC 820 is not expected to have a material impact on
the consolidated financial statements.
In
February 2007, ASC 825-10 ,
“The Fair Value Option for Financial Assets and Financial Liabilities”
(“ASC 825-10”), was issued. This included an amendment of ASC 320-10,
which permits entities to choose to measure many financial instruments and
certain other items at fair value at specified election dates. A business entity
is required to report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
This statement is expected to expand the use of fair value measurement. ASC
825-10 is effective for financial statements issued for fiscal years beginning
after November 15, 2008, and interim periods within those fiscal
years.
In
December 2007, ASC 810-10-65, “Noncontrolling Interests in
Consolidated Financial Statements,” (“ASC 810-10-65”), was issued. ASC
810-10-65 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, changes in a parent’s
ownership of a noncontrolling interest, calculation and disclosure of the
consolidated net income attributable to the parent and the noncontrolling
interest, changes in a parent’s ownership interest while the parent retains its
controlling financial interest and fair value measurement of any retained
noncontrolling equity investment.
ASC
810-10-65 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. Management is determining the impact that
the adoption of ASC 810-10-651 will have on our consolidated financial position,
results of operations or cash flows.
In
December 2007, the Company adopted ASC 805, “Business Combinations” (“ASC
805”). ASC 805 has the fundamental requirements that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. ASC 805 defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. ASC 805 will require an entity to record separately from the
business combination the direct costs, where previously these costs were
included in the total allocated cost of the acquisition. ASC 805 will require an
entity to recognize the assets acquired, liabilities assumed, and any
non-controlling interest in the acquired at the acquisition date, at their fair
values as of that date.
ASC 805
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met. Finally, ASC 805 will require an entity to recognize
contingent consideration at the date of acquisition, based on the fair value at
that date. This will be effective for business combinations completed on or
after the first annual reporting period beginning on or after December 15, 2008.
Early adoption of this standard is not permitted and the standards are to be
applied prospectively only. Upon adoption of this standard, there would be no
impact to our results of operations and financial condition for acquisitions
previously completed. The adoption of ASC 815 is not expected to have a material
effect on our consolidated financial position, results of operations or cash
flows.
In March
2008, ASC 815, Disclosures
about Derivative Instruments and Hedging Activities ” (“ASC 815”), was
issued. ASC 815 requires enhanced disclosures about an entity’s derivative and
hedging activities. These enhanced disclosures will discuss: how and why an
entity uses derivative instruments; how derivative instruments and related
hedged items are accounted for and its related interpretations; and how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. ASC 815 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company does not believe that ASC 815 will have an impact
on their results of operations or financial position.
In April
2008, ASC 350, “Determination
of the Useful Life of Intangible Assets” , (“ASC 350”), was issued. ASC
350 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset. The guidance is used for determining the useful life of a
recognized intangible asset shall be applied prospectively to intangible assets
acquired after adoption, and the disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to,
adoption. The Company does not believe ASC 350 will materially impact our
financial position, results of operations or cash flows.
ASC
470-20, “Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)” (“ASC 470-20”) requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. ASC 470-20 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe that the adoption of ASC 470-20 will have a
material effect on its financial position, results of operations or cash
flows.
In May
2008, ASC 470-20, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“ASC 470-20”), was issued. ASC
470-20 requires the issuer of certain convertible debt instruments that may be
settled in cash (or other assets) on conversion to separately account for the
liability (debt) and equity (conversion option) components of the instrument in
a manner that reflects the issuer’s non-convertible debt borrowing rate. ASC
470-20 is effective for fiscal years beginning after December 15, 2008 on a
retroactive basis. The Company does not believe that the adoption of ASC 470-20
will have a material effect on its financial position, results of operations or
cash flows.
In June
2008, ASC 815-40, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”
(“ASC 815-40”), was issued. ASC 815-40 provides guidance for determining
whether an equity-linked financial instrument (or embedded feature) is indexed
to an entity’s own stock and it applies to any freestanding financial instrument
or embedded feature that has all the characteristics of a derivative. ASC 815-40
also applies to any freestanding financial instrument that is potentially
settled in an entity’s own stock. The Company is determining what impact, if
any, ASC 815-40 will have on its financial position, results of operations and
cash flows.
In June
2008, ASC 470-20-65, “Transition Guidance for Conforming
Changes to, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios” , (“ASC
470-20-65”), was issued. ASC 470-20-65 is effective for years ending after
December 15, 2008. The overall objective of ASC 470-20-65 is to provide for
consistency in application of the standard. The Company has computed and
recorded a beneficial conversion feature in connection with certain of their
prior financing arrangements and does not believe that ASC 470-20-65 will have a
material effect on that accounting.
In May
2009, ASC 855, “Subsequent
Events” , (“SFAS 165”), was published. ASC 855 requires the Company to
disclose the date through which subsequent events have been evaluated and
whether that date is the date the financial statements were issued or the date
the financial statements were available to be issued. ASC 855 is effective for
financial periods ending after June 15, 2009.
Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, “ Fair Value Measurement and
Disclosures (Topic 820)” (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, “ Fair Value
Measurements and Disclosures – Overall” , for the fair value measurement
of liabilities. ASU 2009-05 provides clarification that in circumstances in
which a quoted market price in an active market for the identical liability is
not available, a reporting entity is required to measure fair value using
certain techniques. ASU 2009-05 also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of a liability. ASU 2009-05 also clarifies that both
a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
asset are required for Level 1 fair value measurements. Adoption of ASU 2009-05
did not have a material impact on the Company’s results of operations or
financial condition.
In
January 2010, the Company adopted FASB ASU No. 2010-06, Fair Value Measurement
and Disclosures (Topic 820)- Improving Disclosures about Fair Value Measurements
(“ASU 2010-06”). These standards require new disclosures on the amount and
reason for transfers in and out of Level 1 and 2 fair value measurements. The
standards also require new disclosures of activities, including purchases,
sales, issuances, and settlements within the Level 3 fair value measurements.
The standard also clarifies existing disclosure requirements on levels of
disaggregation and disclosures about inputs and valuation techniques. These new
disclosures are effective beginning with the first interim filing in
2010.
The
disclosures about the rollforward of information in Level 3 are required for the
Company with its first interim filing in 2011. The Company does not believe this
standard will impact their financial statements.
Other
accounting standards that have been issued or proposed by the FASB ASC that do
not require adoption until a future date are not expected to have a material
impact on the consolidated financial statements upon adoption.
Three
Months Ended March 2010 and 2009
Revenue
for the three months ended March 31, 2010 was $1,392,058, a 3.67% decrease from
$1,443,108 for the same period in 2009. This was a result of having no new
contracts during the three months ended March 31, 2010.
Costs of
revenues for the three months ended March 31, 2010 were $1,329,365, a 10.8%
increase from $1,185,743 for the same period in 2009. The increase
resulted primarily from a result of the amortization for computer software
development costs and the addition of other direct costs as there were no new
contracts during the three months ended March 31, 2010. Costs of
revenues for the three months ended March 31, 2010 compared to the same period
in 2009 increased by $143,622 to $1,392,058 compared to $1,443,108 for the same
period in 2009.
Operating
expenses for the three months ended March 31, 2010, which include indirect
labor, professional fees, travel, rent, general and administrative, stock issued
for services, stock based compensation, and depreciation, increased $341,125 to
$590,947 for the three month period ended March 31, 2010 from $249,822 for the
same period in 2009. This represents an increase of 55% and is
primarily a result of an increase in accrued salary and accounting fees related
to yearly and quarterly audits. Depreciation also decreased by $1,971
as certain fixed assets became fully depreciated and no fixed assets were
acquired during the three months ending March 31, 2010.
Interest
expense increased for the three months ended March 31, 2010 to $9,489 compared
to $5,594 for the three months ended March 31, 2009 primarily due to interest
having to be paid on the debenture note and SBA loan in 2010 and not in
2009.
Liquidity
and Capital Resources
We had
cash of $9,003 and a working capital deficit of $3,220,780 as of March 31,
2010. During the three months ended March 31, 2010, we used
approximately $33,500 of cash from our operations. Operations were
funded primarily from the consulting revenue generated in the three month
period.
We will
need to generate significant additional revenue to support our projected
increases in staffing and other operating expenses in light of the merger during
the fourth quarter of 2009 with The Irus Group. We are currently expending
approximately $400,000 per month to support our operations, and under our
current business plan that anticipates post-merger expenditures of approximately
$35,000 per month for the next six months. We expect to raise additional
financing through the sale of our common stock during the second half of fiscal
2010 to supplement the cash generated from the services that are provided
through contract backlog that we believe will be sufficient to fund our
operations through the end of the second quarter of 2010. If we are unable to
generate sufficient cash through the sale of our stock it will be necessary for
us to significantly reduce expenses to stay in business. Although we believe the
additional capital we will require will be provided through one of these
sources, we cannot assure you that we will be successful in these financing
efforts or find financing at acceptable prices. Our failure to generate such
revenue, reduce expenses or obtain necessary financing could impair our ability
to stay in business and raises substantial doubt about our ability to remain as
a going concern.
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Not
applicable
|
Item
4T.
|
Controls
and Procedures.
|
Evaluation
of disclosure controls and procedures.
Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act” )) as of March
31, 2010. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are not effective due to the existence of material weaknesses in our
internal control over financial reporting discussed in our Annual Report on Form
10-K for the quarter ended December 31, 2009 and which remain
unremediated.
Changes
in internal control over financial reporting.
During
the last fiscal quarter, there was no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II — OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings.
|
Arnold
Worldwide, Inc., the landlord of InferX at its former premises at 1600
International Drive, Suite 110, McLean, Virginia 22102, commenced an unlawful
detainer action against InferX in the General District Court of Fairfax County,
seeking (i) damages, including rent due under the sublease between InferX and
Arnold Worldwide, late fees due under the sublease, and attorney’s fees due
under the sublease for approximately $94,555; and (ii) an order for possession
of the Premises. The case was dismissed without prejudice in May 2008
subject to a series of payments promised by InferX. InferX has paid
approximately $30,000 leaving a deficiency of approximately $65,000. We agreed
to the entry of a Consent Order of Possession that allowed Arnold Worldwide to
take possession of the premises since we wanted to reduce our expenses as much
as possible and find less expensive office space. The lease for the
premises at 1600 International Drive terminated November 30, 2008.
|
Item
1A.
|
Risk
Factors.
|
We
face intense competition.
Our
business is rapidly evolving and intensely competitive, and is subject to
changing technology, shifting user needs, and frequent introductions of new
products and services. We have many competitors from different industries,
including providers of online products and services. Our current and potential
competitors range from large and established companies to emerging start-ups.
Established companies have longer operating histories and more established
relationships with customers and end users, and they can use their experience
and resources against us in a variety of competitive ways, including by making
acquisitions, investing aggressively in research and development, and competing
aggressively for customers and market share. Emerging start-ups may be able to
innovate and provide products and services faster than we can. If our
competitors are more successful than we are in developing compelling products or
in attracting and retaining clients, our revenues and growth rates could
decline.
If
we do not continue to innovate and provide products and services that are useful
to users, we may not remain competitive, and our revenues and operating results
could suffer.
Our
success depends on providing products and services that make using our
technology a more useful and business impactful experience for our customers.
Our competitors are constantly developing innovations in technology embedded in
their products and services. As a result, we must continue to invest significant
resources in research and development in order to enhance our predictive
analytics technology and our existing products and services and introduce new
products and services solutions that people can easily and effectively use. If
we are unable to provide quality products and services, then our users may
become dissatisfied and move to a competitor’s products and services. In
addition, these new products and services may present new and difficult
technology challenges, and our operating results would also suffer if our
innovations are not responsive to the needs of our users and or are not
effectively brought to market. This may force us to compete in different ways
and expend significant resources in order to remain competitive.
We
generate our revenues almost entirely from federal government contracts, and the
reduction in spending by or loss of government contracts could seriously harm
our business.
We
generated 93% of our revenues in 2009 and 93% of our revenues in the first
quarter of 2010 from our federal government contracts. The federal
government can generally terminate their contracts with us at any time, without
cause, for the benefit and convenience of the government.
Interruption
or failure of our information technology and communications systems could hurt
our ability to effectively provide our products and services, which could damage
our reputation and harm our operating results.
The
availability of our products and services depends on the continuing operation of
our information technology and communications systems. Our systems are
vulnerable to damage or interruption from earthquakes, terrorist attacks,
floods, fires, power loss, telecommunications failures, computer viruses,
computer denial of service attacks, or other attempts to harm our systems. Some
of our systems are not fully redundant, and our disaster recovery planning
cannot account for all eventualities. In addition, our products and services are
highly technical and complex and may contain errors or vulnerabilities. Any
errors or vulnerabilities in our products and services, or damage to or failure
of our systems, could result in interruptions in delivery of our products and
services, which could reduce our revenues and profits, and damage our
brand.
If
we were to lose the services of B.K. Gogia, Vijay Suri, Dr. Jerzy Bala, or Ray
Piluso, or other members of our senior management team, we may not be able to
execute our business strategy.
Our
future success depends in a large part upon the continued service of key members
of our senior management team. In particular, our CEO, Vijay Suri, and B.K.
Gogia our Chairman, Dr. Jerzy Bala, our Chief Technology Officer, and Ray
Piluso, are critical to the overall management of InferX Corporation as well as
the development of our technology, our culture, and our strategic direction. The
loss of any of our management or key personnel could seriously harm our
business.
We
rely on highly skilled personnel and, if we are unable to retain or motivate key
personnel, hire qualified personnel, or maintain our corporate culture, we may
not be able to grow effectively.
Our
performance largely depends on the talents and efforts of highly skilled
individuals. Our future success depends on our continuing ability to identify,
hire, develop, motivate, and retain highly skilled personnel for all areas of
our organization. Competition in our industry for qualified employees is
intense, and certain of our competitors have directly targeted our employees. In
addition, our compensation arrangements, such as our equity award programs, may
not always be successful in attracting new employees and retaining and
motivating our existing employees. Our continued ability to compete effectively
depends on our ability to attract new employees and to retain and motivate our
existing employees.
In
addition, we believe that our corporate culture fosters innovation, creativity,
and teamwork. As our organization grows, and we are required to implement more
complex organizational management structures, we may find it increasingly
difficult to maintain the beneficial aspects of our corporate culture. This
could negatively impact our future success.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
None.
|
Item
3.
|
Defaults
Upon Senior Securities.
|
None.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
|
Item
5.
|
Other
Information.
|
The Company’s board of directors approved the addition
of two members to its Board of Advisors. Each of these members will provide
assistance to the Company with respect to their healthcare solution and
predictive technology to prospective banking, insurance and healthcare
customers. As consideration for the placement on the Board of Advisors, the
Company has granted them options under their 2007 Stock Incentive Plan that vest
over a two-year period of time commencing in May 2010. In addition, the advisors
will receive quarterly cash payments for services rendered.
In June 2010, the Company entered into a consulting
agreement with a company to provide financial services and locate potential
investment opportunities. The term of the agreement is for one-year, and the
consultant will receive monthly payments of $7,500 as well as be issued 300,000
shares of restricted common stock , and 900,000 warrants that vest over the
one-year period and upon certain financing criteria being met. None of the
warrants have vested as of March 31, 2010.
In April 2010, the Company granted 4,500,000 warrants to
BK Gogia for his assistance in advancing the Company’s business plan. The
warrants, which are five-year warrants with an exercise price of $0.20, vest
upon certain criteria being met. The criteria include financing, as well as the
execution of contracts and recognition of revenue from those
contracts.
In April 2010, the Company agreed to issue 300,000
warrants to an individual for partial recognition of past services currently
accrued for. The warrants are five-year warrants with an exercise price of
$0.20.
In April 2010, the Company entered into two separate
promissory notes with Vijay Suri who loaned the Company a total of $26,000 on
April 16, 2010 and $24,600 on April 30, 2010. Payments of $1,000 per month
commence July 1, 2010 for five months and the balance due on December 1, 2010.
Interest is calculated at 1.5% per annum, escalating to 2.5% per month should
the monthly $1,000 payments not be made timely.
In May 2010, the Company entered into a Forbearance
Agreement with Tangiers Investors, LP as the Company failed to make the required
initial payment of $20,000 in connection
with consulting services provided by Tangiers Investors, LP to the
Company. The Forbearance Agreement extended
the due date of the $40,000 Promissory Note to June 30, 2010 ($20,000) and
August 31, 2010 ($20,000) and requires the Company to issue 50,000 shares of
common stock.
In June 2010, Vijay Suri and BK Gogia agreed to rescind
the 1,000,000 shares of preferred stock that are owed to them, and the Company
agreed to issue them each 1,000,000 shares of common stock. The shares of common
stock are to be issued to these individuals for their personal guarantees on
certain debt of the Company.
In June 2010, a vendor of the Company agreed to convert
its
accounts payable into 90,083 shares of common stock.
The convertible debenture in the principal amount of $150,000 in connection with
the bridge financing of up to $300,000 matured in June 2010 without conversion or repayment.
The Company entered into an Amendment to Debenture and Warrants which extended
the due date of the debentures from June 2010 to August 31, 2010 and amended the
exercise price of the Class B warrants from $0.50 to
$0.20.
Except as
otherwise noted, the securities described in this Item were issued pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act. Each such
issuance was made pursuant to individual contracts that are discrete from one
another and are made only with persons who were sophisticated in such
transactions and who had knowledge of and access to sufficient information about
the Company to make an informed investment decision. Among this information was
the fact that the securities were restricted securities.
Item
6. Exhibits.
|
|
10.1
|
Amendment
to Debenture and Warrants dated July 7, 2010
|
|
|
31.1
|
Certification
of the Principal Executive, Financial and Accounting Officer required by
Rule 13a-14(a) or Rule
15d-14(a).
|
|
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer required by
Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
1350.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Dated:
August 10, 2010
|
InferX
Corporation
|
|
|
By:
|
/s/ Vijay Suri
|
|
|
Vijay
Suri, President and CEO
|
||
|
(Principal
Executive, Financial and
|
||
|
Accounting
Officer)
|
||