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EX-32 - XFormity Technologies, Inc. | ex320911.htm |
EX-31 - XFormity Technologies, Inc. | exh310911.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
For the quarterly period ended September 30, 2011
OR
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-23391
XFORMITY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado | 84-1434313 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4100 Spring Valley Road, Suite 800, Dallas, Texas 75244
(Address of principal executive offices, including zip code)
Issuer's Telephone No., including area code: (972) 661-1200
Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
The number of shares outstanding of the Issuers Common stock, $0.0001 par value, at November 10, 2011 is 53,756,553.
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XFormity Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
| September 30, |
| June 30, | |||||
| 2011 |
| 2011 | |||||
| ASSETS | (Unaudited) |
|
| ||||
| Current Assets |
|
|
| ||||
| Cash and cash equivalents | $ 70,968 |
| $ 56,625 | ||||
| Accounts receivable | 72,286 |
| 79,176 | ||||
| Prepaid expenses | 17,930 |
| 7,051 | ||||
| Total current assets | 161,184 |
| 142,852 | ||||
| Property and equipment, net of accumulated depreciation | 21,230 |
| 23,949 | ||||
| Security deposit | 8,707 |
| 8,707 | ||||
| Total Assets | $ 191,121 |
| $ 175,508 | ||||
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| ||||
| LIABILITIES AND STOCKHOLDERS DEFICIT |
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| ||||
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| ||||
| Current Liabilities |
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| ||||
| Accounts payable | $ 110,547 |
| $ 120,882 | ||||
| Accrued expenses | 289,503 |
| 250,953 | ||||
| Deferred revenue | 41,418 |
| 29,706 | ||||
| Current portion deferred credits | 12,614 |
| 12,458 | ||||
| Convertible debentures, net of original discount - related parties | 758,348 |
| 699,935 | ||||
| Convertible debentures | 300,081 |
| 300,081 | ||||
| Derivative liabilities debentures and warrants | 458,131 |
| 514,086 | ||||
| Total Current Liabilities | 1,970,642 |
| 1,928,101 | ||||
| Deferred credits net of current portion | 133,838 |
| 137,050 | ||||
| Total liabilities | 2,104,480 |
| 2,065,151 | ||||
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| Stockholders' Deficit |
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| Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding at September 30, 2011 and June 30, 2011 |
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| ||||
| Common stock, $0.0001 par value, 125,000,000 shares authorized, 53,756,553 shares issued and outstanding at September 30 2011 and 51,931,553 shares issued and outstanding at June 30, 2011 | 5,376 |
| 5,193 | ||||
| Common stock payable 1,825,000 shares | - |
| 183 | ||||
| Additional paid-in capital | 6,933,117 |
| 6,933,117 | ||||
| Accumulated deficit | (8,851,852) |
| (8,828,136) | ||||
| Total Stockholders' Deficit | (1,913,359) |
| (1,889,643) | ||||
| Total Liabilities and Stockholders' Deficit | $ 191,121 |
| $ 175,508 |
The accompanying notes are an integral part of these consolidated financial statements.
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XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
| (Unaudited) | ||
| Three Months Ended September 30, | ||
| 2011 |
| 2010 |
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|
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Revenue | $ 396,452 |
| $ 477,671 |
Cost of revenue | 147,677 |
| 171,349 |
Research and development | 95,678 |
| 105,324 |
Marketing and selling | 31,683 |
| 61,749 |
General and administrative | 112,391 |
| 104,351 |
Total operating expenses | 387,429 |
| 442,773 |
Income from operations | 9,023 |
| 34,898 |
Interest expense, net | (87,033) |
| (20,504) |
Income (loss) before other income and provision for income taxes | (78,010) |
| 14,394 |
Change in fair value - derivatives | 55,955 |
| 17,429 |
Provision for income taxes | 1,661 |
| 2,299 |
Net Income (loss) | $ (23,716) |
| $ 29,524 |
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|
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Net Income (loss) per share basic and diluted | $ (0.00) |
| $ 0.00 |
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Weighted average number of shares basic and diluted | 53,339,977 |
| 51,931,553 |
The accompanying notes are an integral part of these consolidated financial statements.
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XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows
| (Unaudited) | |
| Three Months Ended September 30, | |
| 2011 | 2010 |
Operating activities: |
|
|
Net income | $ (23,716) | $ 29,524 |
Depreciation | 2,718 | 3,739 |
Amortization of deferred commission | - | 9,191 |
Amortization of debt discount | 58,413 |
|
Non-cash transactions for: |
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Change in fair value - derivatives | (55,955) | (17,429) |
Changes in: |
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Accounts receivable | 6,890 | (43,830) |
Prepaid expenses | (10,879) | (24,866) |
Accounts payable | (10,334) | 21,506 |
Accrued expenses | 38,550 | 15,727 |
Deferred revenue | 11,712 | (34,405) |
Deferred credits | (3,056) | (3,730) |
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Net cash provided (used) in operating activities | 14,343 | (44,572) |
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Investing activities: |
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Purchases of property and equipment | - | (1,580) |
Net cash used in investing activities | - | (1,580) |
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Financing activities: |
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Issuance of convertible debentures | - | 198,000 |
Retirement of note payable related party | - | (118,667) |
Net cash used in financing activities | - | 79,333 |
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Increase in cash and cash equivalents | 14,343 | 33,181 |
Cash and cash equivalents, beginning of period | 56,625 | 76,952 |
Cash and cash equivalents, end of period | $ 70,968 | $ 110,133 |
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Supplemental disclosure of non-cash financing and investing activities |
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Interest paid | $ - | $ 6,992 |
The accompanying notes are an integral part of these consolidated financial statements.
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XFormity Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2011
(Unaudited)
Note 1 Organization and Nature of Business.
The reporting entity in this form 10-Q is XFormity Technologies, Inc. (a Colorado Corporation) ("XFormity" or the "Company") and includes the operations of XFormity, Inc. (a Texas Corporation) (XFM), the wholly owned subsidiary of the Company. XFormity provides technology and services to multi-unit business operators. The Companys core products are hosted Business Intelligence (BI), Balanced Scorecard and Benchmarking solutions. These solutions help customers with operational data analysis, trend reporting, issue identification and tracking. The Company provides data integration and management services which feed the BI and Scorecard solution with data from many key data sources. The Companys solutions are provided to customers as a hosted (software-as-a-service) model, which allows the Company to rapidly configure and implement solutions for new customers in an affordable, cost-effective manner.
The Company provides services for franchisors and franchisees in a growing list of customers across the United States and Canada. XFormity is the provider of Burger King Corporation's (BKC) operational reporting for all company owned and operated restaurants in the US and Canada. In addition to this deployment, the Company's success in delivering solutions on a big scale is demonstrated by the use of its balanced scorecard and financial benchmarking tools for all Burger King Corporate restaurants in the United States and Canada, totalling nearly 6,500 restaurants. The Company has expanded its services to customers in both fine and casual dining.
Note 2 Basis of Financial Statement Presentation.
The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been consolidated or omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of such consolidated financial statements.
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operation, financial position or cash flow.
Although management believes the disclosures and information presented are adequate to not make the information misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited financial statements and notes thereto included in its June 30, 2011 Annual Report on Form 10-K. Operating results for the three months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the entire year or any other period.
The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The ability of the Company to continue as a
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going concern is dependent on the Company; (1) to obtain adequate capital from outside sources, or (2) to fund itself through profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 3 Going Concern
As shown in the accompanying consolidated financial statements, the Company has incurred an accumulated deficit of $8,851,852 and a working capital deficit of $1,809,458 through the fiscal quarter ended September 30, 2011. The Company is continually reviewing its operations and attempting to improve operating results and its balance sheet. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 4 Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is computed for financial statement purposes using accelerated methods over a five year estimated useful life of the assets. Accumulated depreciation at September 30, 2011 was $176,282 and $173,564 at June 30, 2011. Management has evaluated the difference between the straight line and accelerated method used and has deemed the difference immaterial.
Note 5 Deferred Credits
In January 2006, the Board of Directors, agreed to offer then seven major customers, (consortium members) the following options in exchange for any further billing credits: (1) a right to receive $150,000 in billing credits applied against their monthly business intelligence software billings at a rate of 25% of the billings commencing July 1, 2006, or (2) a right to receive an additional 833,333 shares of the Companys common stock per consortium member. These shares would be in addition to the shares issued to consortium members in exchange for their original $100,000 investment in fiscal 2004.
Two consortium members elected option (1), one commencing January 1, 2006, and the other commencing July 1, 2006. The five remaining consortium members elected option (2) and in May 2006, the Company issued 4,166,665 shares under this agreement. The deferred credits at September 30, 2011 in the respective amounts of $71,108 and $75,344, net of amortization, are expected to be utilized over a 11 to 12 year period based on their current billing rates using a 5% discount rate that approximated the risk-free rate in effect during the offered option period.
Note 6 Accounts Payable
Accounts payable represents balances due to trade creditors, licensors and fees for professional services incurred for legal, and audit services.
Note 7 Accrued Expenses
| September 30, | June 30, |
| 2011 | 2011 |
401 (K) obligation | $ 25,737 | $ 25,797 |
Accrued interest on convertible debentures | 162,907 | 135,531 |
Other | 100,859 | 89,625 |
Totals | $ 289,503 | $ 250,953 |
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Note 8 Convertible Debentures
-If all of the remaining debenture holders at September 30, 2011 elected to convert their debentures and warrants into shares of the Companys common stock, the Company would be required to issue an additional 17,120,872 shares.
Note 9 Derivative Liabilities
The Companys warrants and its Convertible Notes have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. This ratchet provision results in a derivative liability in our financial statements.
Our derivative liabilities decreased to $458,131 at September 30, 2011, from $514,086 at June 30, 2011. During the three months ended September 30, 2011 and 2010, respectively, the Company recorded gains of $55,955 and $17,429, respectively, for the change in fair value.
The following tabular presentation reflects the components of derivative financial instruments on the Companys balance sheet at September 30, 2011 and June 30, 2011:
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| September 30, 2011 | June 30, 2011 |
Common stock warrants |
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| $ 161,369 | $ 221,402 |
Embedded conversion features |
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| 296,762 | 292,684 |
Total |
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| $ 458,131 | $ 514,086 |
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Note 10 Earnings per Share
Basic earnings per share are calculated based on the weighted-average number of outstanding common shares. As of September 30, 2011, the Company had 53,756,553 shares outstanding, As of September 30, 2011, the Company had convertible debentures of $1,206,763 convertible at a conversion price of the lesser of (i) 70% of the price per share of common stock or common stock equivalent paid by investors in the Companys next round of equity or debt financing consisting of at least $1,000,000 in cumulative gross proceeds, or (ii) $0.12, warrants outstanding of 4,802,642 consisting of 2,401,321 with an exercise price of $0.14 and 2,401,321 with an exercise price of $0.18.
For the three months ended September 30, 2011, the conversion of all of the above would result in a possible dilution of 21,923,519 shares. However, as the convertible debentures, options, and warrants have a strike price equal to or in excess of the market price, $0.04 at September 30, 2011, and are considered not in the money, they are excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.
Note 11 Income Taxes
As of July 1, 2007, the Company adopted the current accounting guidance for the Accounting for Uncertainty in Income Taxes, which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. The Company believes it does not have any uncertain tax positions taken or expected to be taken in its income tax returns.
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At September 30, 2011, the Company had net operating loss carry-forwards approximating $15,100,000 that begin to expire in 2018 through 2029. The carry-forward losses and the related deferred tax benefit are significantly limited by the provisions of Internal Revenue Code Section 382. The Companys taxable losses, as determined by an independent tax advisor, have created a deferred tax benefit of approximately $1,934,000 which is fully reserved.
Note 12 Related Party Transactions
Six of our customers who are also stockholders in the Company, generated revenues approximating $38,200 in the three months ended September 30, 2011. In the same period in the prior year, revenues approximated $67,800. A principal in one current customer serves as a member of the Board of Directors and the Audit Committee.
Of the total 9% convertible debentures issued through September 30, 2011, $906,682 is held by related parties. Interest expense accrued to related parties was $20,795 for the three months ended September 30, 2011.
Note 13 Commitments and Contingencies
The Company entered into a 65 month net lease at its Dallas, Texas office, commencing June 1, 2008, with rent approximating $4,300 per month. The Company also has a month-to-month lease for $700 per month at its Northbrook, Illinois office, which includes administrative services. Total rent expense for the three months ended September 30, 2011 was $15,086 compared to $15,122 for the three months ended September 30, 2010 The Company accounts for these leases as operating leases.
Note 14 Subsequent Events
Management reported that there are no reportable events through the date of this filing.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS |
Safe Harbour - Forward Looking Statements
When used in this Quarterly Report on Form 10-Q, in documents incorporated herein and elsewhere by us from time to time, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements concerning our business operations, economic performance and financial condition, including in particular, our business strategy and means to implement the strategy, our objectives, the amount of future capital expenditures required, the likelihood of our success in developing and introducing new products and expanding the business, and the timing of the introduction of new and modified products or services. These forward looking statements are based on a number of assumptions and estimates which are inherently subject to significant risks and uncertainties, many of which are beyond our control and reflect future business decisions which are subject to change.
A variety of factors could cause actual results to differ materially from those expected in our forward-looking statements, including those set forth from time to time in our press releases and reports and other filings made with the Securities and Exchange Commission. We caution that such factors are not exclusive. Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake
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no obligation to publicly release the results of any revisions of such forward-looking statements that may be made to reflect events or circumstances after the date hereof, or thereof, as the case may be, or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
REVENUE The Companys primary revenue is derived by delivering software as a service, or hosted solutions for its clients billed on a monthly basis for each location serviced. For the three months ended September 30, 2011, the Company generated $396,452 in revenues compared to $477,671 in the comparable prior years period. The decreases in revenues were attributable to; a decrease in license fees of approximately $56,250 that were terminated, one at the end of the fiscal year, and one during the current quarter, a decrease approximating $9,500 attributable to the price reductions required by the competitive market-place, a decrease in professional service contracts for special projects and other revenue sources and was partially offset by an increase primarily attributable to the licensing of the Companys solutions by additional customers in the net amount of $4,468.
In 2008, the Company received payments under contracts for the development of various solutions, subject to multi-year licensing agreements. The revenues under the contracts were recognized over a 3 year period to coincide with the terms of the related licensing fees. As of June 30, 2011, all of the revenues under the agreements were fully recognized. The Company recognized $11,000 in the three months ended September 30, 2010 for the development work and $75,000 in the same period under the license agreements.
COST OF REVENUE The cost of revenue for the three months ended September 30, 2011 and 2010, consist primarily of personnel, related payroll costs and support service costs in the respective amounts of $147,677 and $171,349. Other costs include travel, data hosting services, telecommunication costs and depreciation of computer equipment used in the maintenance and processing of customers' data. The decrease was primarily attributable to a reduction in personnel and related payroll costs, offset by an increase of time from existing personnel allocated to this category, for a net reduction of $17,391. Other operating costs decreased by $6,281.
RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred and consist primarily of personnel, related benefit costs and outside contracted services. The costs for the three months ended September 30, 2011 and 2010 were $95,678 and $105,324, respectively. In the current years period, the Company re-allocated some personnel time from development to operations, resulting in a decrease in payroll and related costs of $1,287, reduced the use of outside contractors by $9,000 and further reduced other costs by $1,933. The Companys research and development is part of its strategic plan to provide enhancements and integration into new and existing franchise operations in the retail market.
MARKETING AND SELLING The costs for the three months ended September 30, 2011 were $31,683 compared to $61,749 in the comparable period of the prior year. The Companys marketing and selling expenses in the current period decreased due to re-allocated personnel time from marketing and sales to operations and administration, in the amount of $839, and a reduction in both sales compensation and commissions in the combined amount of $28,691. Other selling costs decreased by $536. For the current fiscal year, the Company continues to expand its customer base through direct sales, related business partnerships, trade shows and referrals from its relationship with existing clients.
The Company had an agreement with an outside consulting firm that provided for monthly payments of $3,000 for five years terminating on June 30, 2011 and the issuance of one million shares of the Companys common stock valued at $147,048 that was also fully amortized at June 30, 2011.
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GENERAL AND ADMINISTRATIVE The Companys general and administrative costs consist primarily of executive salaries and related benefits, professional fees for attorneys, our independent auditor, rent, expenses related to being a public company and other administrative costs. The costs for the three month period ended September 30, 2011 were $112,392 compared to $104,351 in the comparable period of the prior year. In the current period, due to a reallocation of time from marketing and sales, payroll and related costs increased by $9,828. Other operating costs decreased by $1,787.
INTEREST EXPENSE Interest expense consists of the following:
Interest expense |
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| Three Months Ended September 30, | ||
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| 2011 | 2010 | ||
Accrued interest on convertible debentures |
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| $ 27,375 | $ 17,857 | |||
Amortization of debt discount |
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| 58,413 | - | |||
Accrued interest on loan payable |
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| - | 1,026 | |||
Interest incurred from the deferred credits issued to consortium members |
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| 1,378 | 1,845 |
Interest income earned on cash and cash equivalents |
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| (133) | (224) |
Net interest expense |
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| $ 87,033 | $ 20,504 |
NET (LOSS) INCOME The net loss for the three months ended September 30, 2011 was $23,716 compared to income of $29,524 for the comparable period in 2010. The decrease in the net income was primarily the result of the following: termination of license fee revenues, price reductions due to competition, reduced professional fees offset by the change in fair value of the derivatives compared to the prior year and reductions in most other categories as noted above.
The net (loss) income per share for the three months ended September 30, 2011 was ($0.00) per share on 53,339,977 weighted average common shares outstanding and $0.00 per share in the comparable period in the prior year on 51,931,553 weighted average common shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
While the Company continues to develop a significant pipeline of business opportunities that include multi-unit, full service and casual dining restaurants within the hospitality industry, there can be no assurances that these beliefs will be achievable. Two of the Companys license fee arrangements were cancelled in the new 2012 fiscal year that will result in a decrease in revenues of approximately $290,000. The Company has taken steps to partially offset this decrease through reduced payroll, related costs and other operating expenses.
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As of September 30, 2011, there was an accumulated deficit of $8,851,852 and the Companys cash position is $70,968. While there can be no assurances that the Company will continue to increase its customer base and related revenues necessary to cover its operating costs; the Companys management believes the opportunities identified in its pipeline are achievable to continue generating operating profitability and positive cash flow in the near future.
The Company may need additional financing and there is no assurance that such financing will be available, if at all, at terms acceptable to the Company. If additional funds are raised by the issuance of equity securities, existing stockholders may experience dilution of their ownership interests and these securities may have rights senior to those of holders of the common stock. If adequate funds are not available or not available on acceptable terms, it could have a material adverse effect on the Company's financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were ineffective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Accordingly, management believes that the financial statements included in this report do not fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
In addition, our management with the participation of our Principal Executive Officer and Principal Financial Officer have determined that no change in our internal control over financial reporting occurred during or subsequent to the quarter ended September 30, 2011 that has materially affected, or is (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
None
Item 1A Risk Factors
None
Item 2 Unregistered Sales of Securities and Use of Proceeds
None, except as previously reported.
ITEM 3 Defaults upon Senior Securities
None, except as previously reported.
ITEM 4 [Removed]
ITEM 5 Other information
None
ITEM 6 Exhibits
| Exhibits |
31. | Certification |
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32. | Certification pursuant to USC Section 1350 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
| XFormity Technologies, Inc. |
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Date: November 10, 2011 | /s/ Christopher Ball |
Date: November 10, 2011 | /s/ Jack Rabin |
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