Attached files

file filename
EX-32.1 - INFRAX SYSTEMS, INC.ex32-1.htm
EX-31.2 - INFRAX SYSTEMS, INC.ex31-2.htm
EX-32.2 - INFRAX SYSTEMS, INC.ex32-2.htm
EX-31.1 - INFRAX SYSTEMS, INC.ex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
 
FORM 10-K/A
(Amendment No. 2)
______________
 
x     ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2011
 
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ______________
 
Commission File No.000-52488
 
Infrax Systems, Inc.
(Exact name of Registrant as specified in its charter)
  
Nevada
 
20-2583185
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
  6365 53 rd Street No., Pinellas Park, FL
 
33781
(Address of principal executive offices)
 
(Zip Code)
 
                                                                                                         
(Former name, former address, if changed since last report)
 
Tel:   (727) 498-8514
(Issuer’s telephone number)
 
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 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    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.
 
Large accelerated filer
  o
 
Accelerated filer                            
  o
Non-accelerated filer
(Do not check if a smaller reporting company)
  o
 
Smaller reporting company                
  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No x
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2008: N/A.
 
Number of the issuer’s Common Stock outstanding as of October 13, 2011:  11,963,325
 
Documents incorporated by reference: None.
 
Transitional Small Business Disclosure Format (Check One): Yes o  No o
 
 
 

 
 
INFRAX SYSTEMS, INC
 Annual Report on Form 10-K
For the Fiscal Year Ended June 30, 2011
 
INDEX
 
   
Page  
Number
PART  I
   
Item 1.
3
Item 1A.
14
Item 1B.
17
Item 2.
17
Item 3.
17
Item 4.
17
     
     
PART  II
   
Item 5.
18
Item 6.
19
Item 7.
20
Item 8.
26
Item 9.
47
Item 9A.
47
Item 9A(T)
47
Item 9B.
48
     
     
PART  III
   
Item 10.
49
Item 11.
52
Item 12.
55
Item 13.
56
Item 14.
57
     
     
PART  IV
   
Item 15.
58
     
     
 
59
 
 
-2-

 
 
Forward-Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expects,” “anticipates,” “intends,” “believes,” “estimates” or similar language, and among other things:  (i) events that may occur in the future, (ii) implementation of our business model; development and marketing of our products and services and (iii) prospects for revenues and profitability.  All forward-looking statements included in this document are based on information available to us on the date hereof.  We caution investors that our business and financial performance and the matters described in these forward-looking statements are subject to substantial risks and uncertainties.  Because of these risks and uncertainties, some of which may not be currently ascertainable and many of which are beyond our control, actual results could differ materially from those projected in the forward-looking statements. Deviations between actual future events and our estimates and assumptions could lead to results that are materially different from those expressed in or implied by the forward looking statements. We do not intend to update these forward looking statements to reflect actual future events. 
 
Item 1.  Business  
 
Background information
 
OUR HISTORY
 
“We” , “us” , “our”, “Opticon” and “Infrax” refer to Infrax Systems, Inc. (formally known as OptiCon Systems, Inc.), a Nevada corporation. We were incorporated in Nevada on October 22, 2004. On January 10, 2010, we officially changed the name of the Company from OptiCon Systems, Inc. to Infrax Systems, Inc. to reflect the change in the Company’s direction and were issued a new trading symbol as “IFXY”.
 
The address of our executive offices is 6365 53rd St. N, Pinellas Park, FL 33781 and our telephone number at that address is 727-498-8514. The address of our web site is  www.infraxinc.com. The information at our web site is for general information and marketing purposes and is not part of this annual report for purposes of liability for disclosures under the federal securities laws.
 
We were incorporated in Nevada on October 22, 2004.
J. Marshall Batton, Jeffrey A. Hoke, Jacques Laurin and Douglass W. Wright were our founders and original stockholders, each then owning twenty-five percent of our common stock.
On July 29, 2005, FutureTech Capital LLC, a company entirely owned by SamTalari, acquired eighty percent of our common stock as a result of our acquisition of the Opticon Network Manager software (see below) from FutureTech and the stock ownership of each of our founders was reduced to five percent.
Also on July 29, 2005, following our acquisition of the Opticon Network Manager software, FutureTech and our founders exchanged all of our issued and outstanding common stock for an aggregate of sixty-six percent of FutureWorld Energy, Inc., (formerly Isys Medical) issued and outstanding common and all of its preferred stock; and, as a result of the exchange, we became a wholly owned subsidiary of FutureWorld Energy, Inc.
Before the exchange of our shares for FutureWorld Energy Inc.’s shares, Mr. Talari legally and beneficially owned eighty-eight percent of FutureWorld Energy Inc.’s common stock and beneficially owned through FutureTech eighty percent of our common stock.
After the exchange, our founders each owned directly four percent of FutureWorld Energy Inc.’s common stock and Mr. Talari, directly and indirectly, owned eighty percent of FutureWorld Energy Inc.’s common stock.
On April 4, 2006, we consolidated (reverse split) our issued and outstanding common stock by a factor of 0.30107143.
In connection with FutureWorld Energy Inc.’s announcement to spin off OptiCon Systems, our Board of Directors approved a stock dividend of 99,118 of our common stock payable to our sole shareholder, FutureWorld Energy, Inc.
 
 ●
On July 31, 2007, Mr. Batton and Mr. Wright, our founders, accepted 35,000 shares of our common stock in lieu of deferred compensation and in cancellation their respective, non-expiring rights under their employment agreements to maintain their individual ownership of our common stock to a level of four percent of our issued and outstanding shares.
On August 31, 2007, FutureWorld Energy, Inc. paid a stock dividend to its stockholders consisting of 100% of our outstanding common.  As of this date, we ceased being a subsidiary of FutureWorld Energy, Inc.
On June 10, 2008, we consolidated (reverse split) our issued and outstanding common stock by a factor of 0.05 (1 for 20).  Statement of all share amounts, whether before of after June 10, 2008 in this annual report have been adjusted for the share consolidation.
On May 13, 2009, Mr. Talari converted the principal amount and accrued interest of one convertible note, and the accrued interest and a portion of the principal amount of a second note into 50,000,000 shares of our common stock respectively.  After these conversions, Mr. Talari legally and beneficially owned eighty-four percent of our common stock.
On August 11, 2009, we organized Infrax Systems SA (Pty) Ltd., a South African company, as a wholly owned subsidiary, to penetrate the South Africa fiber optic telecommunication market.
On August 12, 2009, we organized PowerCon Energy Systems, Inc., a Nevada corporation, as a wholly owned subsidiary to develop, market and distribute software, based on the R4 architecture, to the power industry.
On January 10, 2010, we officially changed the name of the Company from OptiCon Systems, Inc. to Infrax Systems, Inc. and were issued a new trading symbol: “IFXY”.
On June 29, 2010, the Company acquired the assets and management of Trimax Wireless Systems, Inc. (“Trimax”), in exchange for equity and a note payable.    The Trimax product line is expected to provide an operating platform and enhanced operating effectiveness to the Secure Intelligent Energy Platform.
On May 8, 2011 we acquired a 70% controlling interest in Lockwood Technology Corporation, to supply RFID and asset tracking, among other technology value to our product lines.
On July 14, 2011 the Company's Board of Directors affected a 1:500 reverse stock split, effective August 26, 2011 (record date).  The shares have been retroactively stated to reflect the reverse-split shares.
 
 
-3-

 
 
Before our acquisition of the Opticon Network Manager software, both FutureWorld Energy, Inc. (formerly Isys Medical) and FutureTech were under the direct, common control of Mr. Talari. Prior to our acquisition of the Opticon Network Manager software, Mr. Talari did not have a controlling interest in  us. With that acquisition, however, we also came under Mr. Talari’s indirect control. Although Mr. Talari may be deemed to have determined or had a controlling influence on the terms of the exchange of stock between our stockholders and FutureWorld Energy, Inc., because he owned (a) all the stock of FutureTech which was our then eighty-percent stockholder and (b) eighty-eight percent of FutureWorld Energy Inc.’s common stock, Mr. Talari did not control the decision of our founders who owned twenty percent of our common stock and who have advised us they made independent, individual decisions to enter into the exchange of their stock in us for FutureWorld Energy Inc. common stock. The Company’s investment in FutureWorld Energy, Inc.’s common stock was distributed to Infrax’s stockholders of record, effective June 2010.
 
OUR BUSINESS
 
While we continue to enhance the OptiCon Network Management platform, the Company has shifted its focus and energies towards the “Smart Grid” energy sector. The Company believes our secure integrated platform will hasten the deployment of all Smart Grid technology for resource constrained small and mid-sized utilities.  Infrax’s advantage comes from our products ability to enable the creation of a secure platform scalable to deliver a broad set of intelligent Smart Grid initiatives across millions of endpoints for Utilities.
 
INFRAX market opportunity exists in one of the largest industries in the world. Globally, according to the International Energy Agency (IEA), this industry is expected to spend close to $10 trillion dollars by 2030 to upgrade electrical infrastructure. Technology innovations in power delivery have been fermenting for years, but only now is the confluence of physical need and social expectations creating an environment in which real and sustained monetary commitments are being made to create a “Smart Grid” built on information-based devices, digital communication and advanced analytics. Networking giant Cisco has estimated that the market for smart grid communications will grow into a $20 billion-a-year opportunity as the infrastructure is built out over the next five years. Researchers at Specialists in Business Information (SBI) forecast the market will grow to $17 billion-per-year by 2014 from today’s $6 billion. Globally, SBI expects the market for smart grid technologies to grow to about $171 by 2014 up from approximately $70 billion in 2009.
 
According to a report issued to Congress by the Office of Electricity Delivery and Energy Reliability, as required by Section 1309 of Title XIII of the Energy Independence and Security Act of 2007, the security of any future Smart Grid is dependent on successfully addressing the cyber security issues associated with the nation’s current power grid.
 
The complexity of the grid implies that vulnerabilities exist that have not yet been identified. It is particularly difficult to estimate risk from cyber-attack because of the size, complexity, and dynamic nature of the power grid and the unpredictability of potential attackers.
 
Infrax creates a unified solution path to securely manage Advanced Metering Infrastructure (AMI) and other Smart Grid optimization applications such as substation and distribution automation. Our product portfolio provides Network Transport and Management, Secure Intelligent Devices, Threat Detection, and Grid Optimization, all integral components of a state-of-the-art Smart Grid solution.
 
Through our wireless broadband business unit, Infrax Networks, we provide outdoor mesh-relay based wireless broadband networks used by customers as the metro-scale IP foundation upon which to run one or many applications that help build greener, safer, smarter communities. Our products have been deployed globally to help connect the unconnected. In addition, our networks are used by electric utilities to build large scale, reliable, and secure networks that deliver the high bandwidth and low latency required for deploying smart grids.
 
 
-4-

 
 
Every utility, telecommunications carrier, wireless service provider, government and businesses with the need to securely transmit data and manage their network is a potential customer for the Infrax product line.
 
Infrax’s innovative and comprehensive solutions have the power to secure the future.
 
Industry Background
 
In today’s environment of increasing threat sophistication and regulatory pressures, managing risk has become a primary concern for Utility IT organizations. Today, a single breach can cost millions, be devastating to industrial, commercial and residential consumers, and create a threat to national security. Infrax’s Secure Network Interface Card (SNIC), GridMesh and GRid Intrusion Management (GRIM) products provide a secure solution for complete grid, network and intelligent device management.
 
Like the internet does today, the utility network needs to able to connect millions of devices and still operate in a reliable and secure grid. Because of increased demand and growing environmental concerns, this grid also needs to become far more flexible than it is today, accommodating distributed power generation from renewable sources and use several energy efficiency techniques. The vision of tomorrow’s utility grid involves a number of technologies that need to be put in place to make the power grid smarter, with more automation within the network and tools to give end users better information and control. The overall change that the utility needs to make is to go from a centralized generation and distribution model to one that is more distributed and diverse.
 
Today’s electric system was not designed to handle extensive, well-organized acts of terrorism aimed at strategic elements. The threat of attack is growing and a widespread attack against the infrastructure is more likely today than ever before.  It is therefore critical that the Smart Grid address security from the outset, making it a requirement for all the elements of the grid and ensuring an integrated and balanced approach across the system.
 
Ongoing Mandates
 
Title XIII of the Energy Independence and Security Act of 2007, mandates that the Department of Energy provides a quantitative assessment and determination of the existing and potential impacts of the deployment of Smart Grid systems on improving the security of the Nation’s electricity infrastructure and operating capability, including recommendations on:
 
(1) How smart grid systems can help in making the Nation’s electricity system less vulnerable to disruptions due to intentional acts against the system.
 
(2) How smart grid systems can help in restoring the integrity of the Nation’s electricity system subsequent to disruptions.
 
(3) How smart grid systems can facilitate nationwide, interoperable emergency communications and control of the Nation’s electricity system during times of localized, regional, or nationwide emergency.
 
(4) What risks must be taken into account that smart grid systems may, if not carefully created and managed, create vulnerability to security threats of any sort, and how such risks may be mitigated.
 
 
-5-

 
 
The National Institute for Standards and Technology (NIST) stated, “Identifying and implementing security controls is vital in protecting the confidentiality, integrity, and availability of the connected systems and the data that is transferred between the systems. If security controls are not in place or if they are configured improperly, the process of establishing the interconnection could expose the information systems to unauthorized access.”
 
Our SNIC and GRid Intrusion Management (GRIM) systems provide an enhanced Cyber Security platform which prevents unwarranted intrusion into any part of the electrical grid. Using advanced encryption algorithms, a secure virtual network can be created over a private or public network. Infrax's GRIM technologies will evolve to include software and hardened hardware solutions for substation deployment.
 
The energy industry’s assets and systems are not equipped to handle well designed acts of cyber terrorism. With the growing threat of internet attacks, it is critical that robust security is introduced for all the elements of the grid. The deployment of a Smart Grid that reaches from the producer to the consumer, will ultimately add over 150,000,000 communications capable meters in the U.S. alone, creating over 150,000,000 unsecure access points into the grid that previously did not exist.  The lack of secure AMI solutions is a major concern of utilities and regulators alike, and Infrax can fill the void.
 
The market for Infrax’s SNIC and GRIM solutions includes over 3,400 electric utilities in the United States, several thousand more globally, large consumers of commercial power, as well as power producers and utilities providing water and gas.
 
According to the research-based business strategy firm Zpryme, Smart Grid IT hardware and software spending in the U.S. was $15.2 billion in 2009 and is forecasted to increase to $39.4 billion by 2014.
 
INFRAX Solution
 
 
 
-6-

 
 
Our Secure Intelligent Energy Platform (SIEP) ™ competes in three distinct market segments of the smart grid industry;
 
·  
Network Transport and Management,
 
·  
Secure Smart Sensors and Devices (i.e. Smart Meters, and
 
·  
Threat Detection, Grid Optimization and Security.
 
SIEP™ - The Complete Solution to Secure the Grid
Infrax Systems has developed a series of interrelated operational management, communications, and grid security related products and services, under one platform (SIEP), that together enable a comprehensive and unified solution for communications and applications management of the Smart Grid. Each product meets a specific need in the spectrum of controls necessary to effectively manage a Smart Grid and together they will offer unparalleled security and data management.
 
Secure Network Interface Card (SNIC)
The Infrax SNIC is the next generation of grid security products. SNIC addresses the Advanced Metering Infrastructure requirements of electric utilities worldwide and provides the highest level of meter security available to date. The SNIC employs military grade encryption, meeting or exceeding current and emerging security standards. The universal host interface board carries a single wireless module for both Home Area Networking (HAN) and for communicating the data to the utilities control center using standards based communications technology called GridMesh.
 
GridMesh
Infrax’s revolutionary wireless smart meter mesh platform solves what has been the biggest challenge faced by utilities, connecting each home to the Smart Grid in an efficient, scalable and secure way. Utilizing our proprietary wireless system, GridMesh enables each smart meter to interconnect with one another to create a large, scalable mesh network.
 
UMAX and UMAX +
The Utility Max (UMAX) Product Family is an extremely cost effective wireless solution for Utilities and Telco’s who are looking to either set up a point-to-point or point-to-multipoint Ethernet links. The UMAX+ uses an adjunct box that is connected to the UMAX radio over an Ethernet link to provide T1/E1s at the remote locations. Due to the advanced implementation of both, Frequency Division Duplex and Time Division Duplex in the wireless domain the UMAX products can operate on a single channel eliminating the need for a guard band between the transmit and receive signals.
 
AssetTracker
 
The Infrax Asset Tracker solution provides for complete inventory management of utility Smart Grid assets including meters, collectors and concentrators, as well as all substation and field deployable assets. Asset Tracker validates inventory and equipment information received via RFID from tagged assets and seamlessly provides that information across the enterprise bus of an electric utility in a format customizable for each utility. Access to real time information provides operations personnel with the ability to locate material, track consumption and streamline procurement.
 
What Our Technology Does
 
INFRAX is a pioneer designer, developer, systems integrator and manufacturer of turnkey secure solutions for the utility industry. We are a provider of unique secure, cost-efficient solutions that provide everything required to bring the utility’s technological platform into the 21st. century. Our SIEP™ platform provides: 1) Network Transport and Management (secure 2 way communications), 2) Secure Smart Devices (Smart Meters), and 3) Asset management, Grid Optimization and Security, all in an integrated state-of-the-art Smart Grid solution that truly provides our customers with end to end grid management capability.
 
We believe our Secure Integrated Platform will facilitate and hasten the deployment of Smart Grid technology among resource constrained small and mid-sized utilities. INFRAX’ advantage comes from our advanced patented technologies, which provide a highly secure, reliable platform that allows two-way communication with our Secure Intelligent Endpoint Devices for Advanced Metering Infrastructure and Substations applications.
 
Based on our review of the Smart Grid related products against which the Secure Intelligent Energy Platform now competes, we believe that none of them provide the required encryption and threat detection capabilities required to secure the energy grid.
 
The Utility industry’s aggressive deployment of Advanced Metering Infrastructure (AMI) and data management devices has led to the accelerated reliance on fiber optic communications to many of the key substations. However, the existing utility networks cannot provide the security, reliability and connectivity to extend the reach to the consumer locations.
 
Today’s evolution of Smart Grid design and implementations actually began several years prior to the current initiatives. The same applies to the products designed by most of the major players including Itron, Silver Spring and GridPoint. Although the current security initiatives and elected officials have good intentions, they have missed the window of opportunity to truly integrate security from the beginning by several years. Similar to the credit card industry, banking, health care, and most other industries that conduct business online, the next electrical infrastructure will need to feature security as an add-on that is applied after the Smart Grid is implemented.
 
 
-7-

 
 
Recently discovered vulnerabilities in smart meters have been identified that could allow an attacker to obtain complete control of the meters. Specifically, an attacker could exploit these vulnerabilities to turn off electricity to hundreds of thousands of homes. Thus, an attacker could execute a wide-scale Denial of Service (“DoS”) attack against homes and businesses.
 
The Advantage of Our Technology
 
By entering the market without the burden of legacy products and technology, Infrax is able to focus on future technologies and will be poised to provide advanced solutions for companies that are yet to deploy AMI and harden previously installed networks and devices.
 
While the current use of RF technology is inherently less reliable, Infrax is focused on using highly encrypted data over secure tunnels using a variety of communications medium including WiFi, Cellular or other public communication media. Infrax's secure smart grid platform incorporates a communications transport known as GridMesh™, and a device and data security management tool known as GRiM. Secure management of the "last mile" backhaul is necessary for utilities to implement Smart Grid applications such as AMI, and substation and distribution automation.
 
Infrax is in the process of completing a Security and Network Interface Card (SNIC), based on higher levels of encryption, which can be imbedded in all intelligent end devices including Smart Meters and sensors. The SNIC will be offered in a variety of configurations, all equipped with standards based encryption with robust authentication schemes.
 
 
-8-

 
 
Data traffic passing through SNIC will be encrypted using AES 256, once the devices are authenticated. . These keys are periodically rotated to negate “man in the middle” attacks. When combined with our security based software and management tools, our SNIC creates an impenetrable barrier against cyber-attacks.
 
We believe that our Secure Intelligent Energy Platform will give us a competitive advantage in the emerging and evolving Smart Grid environment.  By utilizing our solution, Utilities can secure their networks and prolong the lifecycle of previously deployed components by eliminating the security concerns that would necessitate replacement.
 
INFRAX Strategy
 
We intend to generate revenues from the design, sales, installation, and support of the hardware, software and technology, associated with our integrated solution, Infrax Secure Intelligent Energy Platform (SIEP) ™.  Additionally, revenues may be generated from licensing our Security, GRiM and, Infrax Networks wireless communications and future products.
 
Our efforts are presently focused on attaining the following:
 
INCREASED MARKET PENETRATION OF OUR WIRELESS BROADBAND PRODUCTS
 
Our strategy is to capitalize on the millions of dollars and thousands of man hours invested in one of our core technologies, the T-Max family of wireless broadband products, developed by Trimax Wireless, Inc, which we acquired in June 2010. We own the Intellectual Property of these systems having acquired Trimax Wireless, Inc and have enhanced the T-Max product line for use in Smart Grid applications for utility infrastructure management.
 
The new UMAX and UMAX+ product lines provide additional functionality and features to an already robust platform. Designed to provide data acquisition, network extension and backhaul capabilities, the UMAX+ is now available in 4-port and 8-port configurations supporting either 4 or 8 T1 links. The units provide Ethernet on the drop side in addition to handling TDM traffic. 
 
 
-9-

 
 
INCREASED MARKET PENETRATION AND INTEGRATION OF OUR ASSET MANAGEMENT PRODUCTS
 
We continue to discover new and exciting applications for the asset management, tracking and security products developed by Lockwood Technology. Infrax acquired controlling interest in Lockwood in April 2011 and has been focused on integrating Lockwood’s capabilities into the Secure Intelligent Energy Platform. While we continue to support Lockwood’s existing municipal and public safety applications, there is vast potential to deploy this technology within the utility sector.
 
Asset management has long been a goal of utilities, especially in times of storms and weather related circumstances. Disaster response can be greatly improved through comprehensive reporting on asset and material location and availability. The Asset Tracker allows utility vehicles to be quickly and accurately inventoried each time they are deployed and return for restocking. Mobile solutions are also available to relay asset utilization over wireless links on a real time basis from the site of a service interruption.
 
EXPAND OUR STRATEGIC ASSOCIATIONS
 
Since our inception, we have built relationships with Utilities, Manufacturers, major DC Lobbyist Firms, and International Law firms, and certain Government Officials nationally and locally. These relationships will afford us the visibility needed for Government grants, loan guarantees, and funding, as well as aid in the prioritization of global markets.
 
DRIVE BUSINESS DEVELOPMENT
 
We believes the industry will be driven by a few, key early adopters who will set the stage for North American smart grid deployments, especially those companies that have been awarded millions in stimulus grants . Initially we have been focusing our efforts on utilities that have recently obtained grants from the Stimulus Act.  Upon funding, we will direct our business development effort towards the 3,448 small to mid-sized utilities in the United States, as the majority of these utilities lack the resources to adequately migrate to the Smart Grid infrastructure.
 
PURSUE OUR ROLE AS A SECURE SYSTEMS INTEGRATOR
We are committed to our role as a supplier of secure Smart Grid communications platforms. We will continue to expand our professional services including network design, hardware and software development and integration, installation support, operator training and network management. Our understanding of the architecture, hardware, and software requirements of  major utilities from our prior experience enables us to design solutions from the ground up and to meet utility requirements. We intend to design, manufacture and market all of the key components of the network.
 
BECOME A LEADING SOLUTIONS PROVIDER WITH A DIVERSIFIED PLATFORM AND A GLOBAL PRESENCE
 
Our customers’ requirements create the need for our products and our goal is to drive application development to meet these needs. While Infrax’s Secure Intelligent Energy Platform incorporates our secure wireless technology, we believe that growth in the Smart Grid communications industry will come primarily as utilities deploy Smart Grid applications including AMR/AMI, distribution and substation automation. These future points of entry for Smart Grid applications may include home energy management systems, demand response tools and other applications which will require the secure access provided by our Secured Network Interface Card (SNIC) ™ technology currently under development.
 
 
-10-

 
 
EXPAND OUR STRATEGIC COLLABORATIVE RELATIONSHIPS
 
Continued collaboration with our development partners, utility customers and synergistic smart grid application providers will further enhance the development and functionality of our Secure Intelligent Energy Platform. We have established joint development arrangements with a host of technology providers to keep us on the cutting edge of new technologies, and we will continue to create working relationships with leading suppliers of critical network and IEDs (Intelligent Endpoint Devices) components such as sensors, integrated communication hub and aggregators, consumer centric energy management devices as well as metering solution providers.  We are working with electric utilities to conduct application trials. We intend to strengthen these relationships and to seek out new strategic and commercial relationships with utilities and other technology companies.
 
Infrax Systems has entered into a Technical Information License Agreement (TIL) with Itron, the leading manufacturer of smart meters.  The license agreement allows Infrax to design its Secure Network Interface Card (SNIC) and communications module for inclusion in Itron Centron I & Centron II meters. We have been working closely with Itron during this process to ensure that we are fully compliant and the results to date have all met Itron’s criteria. When the qualification testing process is finished, Infrax can license the communications module to Itron and sell the product directly as Itron-compliant.
 
While we have also been in discussions with several other global meter manufacturers regarding the inclusion of the SNIC and GridMesh into their AMI meters, we believe that Itron’s dominant market position and the strength of our relationship will drive the results required to meet our business objectives.
 
ACTIVELY PURSUE TARGETED STRATEGIC ACQUISITIONS
 
We intend to actively pursue selective acquisitions to enhance our product/service offerings and to further expand our solutions into the alternative energy and intelligent energy solutions sector. Utilizing our core platform as the foundation for additional products and services, we can increase the potential of other technology products by integrating them with our solution. We have identified several potential technology companies which have technologically advanced products to complement our solution.  We intend to look for opportunities to acquire technologies that would support and enhance our current technology platform with a particular focus on growing managed services offerings through our energy management solutions.
 
Contracts and Agreements
 
In July 2010, we signed an agreement with Tampa Electric Company (TECO) to provide a wireless network interconnecting multiple substation facilities.
 
In August 2010, we received an order from USKS to deliver and install the next phase of the wireless network in Abuja, Nigeria. This phase will include WiMax/LTE capability.
 
In January 2011, we received an order to provide a wireless public safety network in Hamilton, Bermuda.
 
In June 2011, we received an additional order to provide wireless communications to the Bermuda Dockyards.
 
Our Intellectual Property and Its Protection
 
Infrax Systems:  Opticon Network Manager software and Smart Grid products
 
Our intellectual property consists of all of Corning Cable, Inc,’s intellectual property related to the Opticon Network Manager software. Our rights by purchase in our intellectual property are equivalent to that of any developer or creator of intellectual property. We have exclusive ownership of the Opticon Network Manager software and all its revisions and new versions, including R4, with the exclusive right to license it to others.
 
 
-11-

 
 
Additionally, our intellectual property relating to our Smart Grid products includes the design of the Secure Network Interface Card (SNIC) and its associated proprietary mesh routing scheme, customized modifications to our security software platform, and the wireless equipment hardware and software designs as well as the associated patents included in the Trimax Wireless, Inc. acquisition.
 
We regard all of our hardware, software and its documentation as proprietary and the source code for the software as a trade secret. We intend to complete the implementation of confidentiality procedures, contractual arrangements, physical security systems and other measures to protect our proprietary and trade secret information when we begin to hire employees. As part of our confidentiality procedures, we will generally enter into non-disclosure agreements with our key employees, and our license agreements will include provisions for protection of our proprietary information. We also plan to educate our employees on trade secret protection and employ measures to protect our facilities and equipment.  We plan to license our software products under signed license agreements that impose restrictions on the licensee’s ability to utilize the software and do not permit the re-sale, sublicense or other transfer of the software.
 
We have not yet filed patent applications for our Smart Grid products, but intend to do so as development progresses. We do hold patents associated with the Trimax acquisition and continue to patent our wireless mesh technology as we complete each development phase.
 
Our software is protected under U.S. and international copyright laws and laws related to the protection of intellectual property and proprietary information. We do not need to do any further steps to protect our IP than stated. Neither we, nor to our knowledge Corning Cable, has filed a U.S. copyright registration. We will file a registration for the Secure Intelligent Energy Platform products as they are completed. We take measures to label our product with the appropriate proprietary rights notices, and we plan to actively enforce such rights in the U.S. and abroad. We believe that our ability to maintain and protect our intellectual property rights is important to the success of our business. Our intellectual property is at this time our only asset that will enable us to engage in our planned business. The measures for its protection described in this section may not provide sufficient protection and our intellectual property rights may be challenged. Efforts to enforce our intellectual property rights in litigation, or defend suits brought against us for copyright infringement, which we do not have reason to expect, would be expensive and consume substantial amounts of our management’s time. Our ability to pursue remedies against person who we believe may infringe our intellectual property rights will depend on our financial condition from time to time.
 
Trimax Wireless Systems (acquired intellectual property June 29, 2010)
 
Trimax' solutions enable multiple applications to run concurrently over the same standards-based infrastructure, leveraging capital investment and operating costs.  Trimax has a growing list of Solution Partners that provide best-of-breed complementary products to help customers implement whole product solutions.
 
The Trimax Wireless TMAX™ Cross Platform product line is the first to combine Wi-Fi, WiMAX and DECT into a single unified system. TMAX includes base stations, broadband wireless routers, edge nodes and CPE devices. The entire TMAX product line is based on modular, rugged outdoor platforms that support a common set of radio modules.
 
Around the world, Trimax leads the way in helping to increase public safety, improve mobile worker efficiency, boost the local economy, and deliver wireless broadband connectivity to people wherever they are...and wherever they're going.
 
 
-12-

 
 
Lockwood Technology Corporation (acquired controlling interest April 8, 2011)
 
Lockwood has focused on developing world class asset tracking software and asset tracking services using bar coding, radio frequency (RFID), imaging, and wireless technologies. The "Lockwood solution" is comprised of a "set" of services and products, which can be implemented as a whole or implemented as building blocks. Each component is able to work independently of the others, yet when combined, serve to provide a complete seamless, integrated system.
 
Our proprietary softwares provide:
 
·
Mobile Public Safety - Providing public safety workers in the field with timely access to the information they need is reducing crime and saving lives
·
Video Surveillance - A cost-effective alternative to adding additional people to increase security coverage, cameras are extending the visual reach of police, fire, lifeguards and park rangers
·
Utility Meter Reading - Centrally connected utility meters are improving customer satisfaction and encouraging conservation while lowering operational costs
·
Intelligent Transportation Systems (ITS) - Real-time traffic analytics and control is minimizing congestion and improving safety on crowded roadways as well as reducing emissions
·
Municipal Modernization and Mobility - Extending office IT resources to the field is improving worker efficiency, lowering costs, and raising citizen satisfaction
·
Automated Parking Meters - Variable parking rates, and flexible payment options, are improving main street business.
·
Industrial - Often operating in hostile conditions, industrial site networks are used for a range of activities that improve business operational efficiencies, reduce operating cost, and increase worker and site safety
·
Public Access - Citywide, campus-wide, and hot zone Wi-Fi networks increase quality of life, educational opportunities, and economic development
 
Security and Network Interface Card (SNIC)(Intellectual Property Rights to be filed)
 
We will file for global patent for our Security and Network Interface Card after the successful completion of the field trials in 2011.
 
GridMesh (Intellectual Property Rights to be filed)
 
We will file for global patent for our GridMesh technology after the successful completion of the field trials in 2011.
 
 
-13-

 
 
Competitive Landscape
 
We face strong competition from traditional grid optimization providers, both larger and smaller than us. We compete in four distinct market sectors:
 
 
·
advanced metering,
 
·
networking and communications,
 
·
grid optimization/distribution automation, and
 
·
software.
 
We may compete directly with certain companies in certain sectors and indirectly in others. It is important to note that some market segments are more defined than others.
 
The market for our products is in its infancy and there is no clear market leader, which provides Infrax entry with a unique product line. We also believe that none of our competitors offer a unique blend of network, device, data and security management as Infrax.  In order to maintain and improve our competitive position in the market, we must continue to invest in research and development, and continue to anticipate changes in the market and our customers’ requirements.
 
Recent Competitor Activity
 
 
·         Silver Spring Networks
 
o   Developed Smart Energy Platform with NIC for GE meters and end to end management.
 
o   Have won several utility contracts for AMI deployment mainly through PG&E.
 
o   Filed S-1 to IPO on July 7, 2011.
 
o   Anticipated to be priced at $15.00/share = Market Cap of @ $2B.
 
o   Anticipated IPO date to be October. 2011, upon SEC effectiveness notice.
 
o   Anticipated Price per Revenue of 30.
 
o   Shares currently traded off market @ sharespost.com @ $10 per share.
 
o   Highly anticipated IPO, will create a strong indicator to the whole industry . Many other Smart Grid related companies to follow suit like eMeters & GridCom.
 
 
·         Ambient Corporation (AMBT)
 
o   Started in 1996.
 
o   Historically products were Broadband over Power Line (BPL) based.
 
o   X-Series of communications nodes utilize 802.11 Wi-Fi communications.
 
o   Primary customer is Duke Energy.
 
o   Reverse Split effective July 20, 2011. Stock price trading up post reverse. Uplist to NASDAQ effective 8/3/2011.
 
Our Employees
 
At the date of this annual report, we have seven (7) full-time and four part-time employees. The majority of employees work out of our offices in Pinellas Park. We have several remote employees dedicated to sales and deployments.
 
Item 1A.  Risk factors  
 
We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward looking statements that we make from time to time in filings with the U.S. Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications as well as oral forward looking statements made from time to time by our representatives. These risks and uncertainties include, but are not limited to, those risks described below that we are presently aware of. Additional risks and uncertainties that we currently deem immaterial may also impair our business operations, and historical results are not necessarily an indication of the future results. The cautionary statements below discuss important factors that could cause our business, financial condition, operating results and cash flows to be materially adversely affected.
 
 An investment in our common stock involves a high degree of risk. Therefore, if you are considering buying our common stock, you should consider all of the risk factors discussed below, as well as the other information contained in this annual report. You should not invest in our common stock unless you can afford to lose your entire investment and you are not dependent on the funds you are investing in order to pay your monthly expenses.
 
Without minimum funding of $5 million and additional funding of up to $20 million, we may not be able to establish, maintain and grow our business.
 
 
-14-

 
 
At the date of this annual report, we do not have the funding we require to maintain our business and we have had limited success in raising capital in the past 2 years.  We have concentrated mainly on developing our hardware and software solutions. Furthermore, we do not have any existing or ongoing arrangement, understandings, commitments or agreements for additional funding.  Failure to raise additional debt or equity funding would prevent us from completing development of the Secure Intelligent Energy Platform and associated products and possibly cease operations. There is no assurance that we will be able to obtain sufficient debt or equity funding, or that the terms of available funding will be acceptable to us. Failure to raise additional debt or equity funding would most probably result in a complete loss of their investment by purchasers of our common stock.
 
“Penny Stock” rules may make buying or selling our common stock difficult.
 
Trading in our securities is expected to be subject, at least initially, to the “penny stock” rules. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions, none of which apply to our common stock. These rules require that a broker-dealer, who recommends our common stock to persons other than its existing customers and accredited investors, must, prior to the sale:
 
Make a suitability determination prior to selling a penny stock to the purchaser;
Receive the purchaser’s written consent to the transaction;
Provide certain written disclosures to the purchaser;
Deliver a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market;
Disclose commissions payable to both the broker-dealer and the registered representative; and
Disclose current quotations for the common stock.
 
The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market price and liquidity of our common stock. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
 
The price of our common stock may fluctuate significantly and you may find it difficult to sell your shares at or above the price you paid for them.
 
We do not know the extent to which the market for our shares of common stock may be volatile. Therefore, your ability to resell your shares may be limited. Actions or announcements by our competitors and economic conditions, as well as period-to-period fluctuations in our financial results and other factors, may have significant effects on the price of our common stock and prevent you from selling your shares at or above the price you paid for them.
 
 
-15-

 
 
We have a limited operating revenue history that can be used to evaluate us, and the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays that we may encounter because we are a small business. As a result, we may not be profitable and we may not be able to generate sufficient revenue to develop as we have planned.
 
Our ability to achieve and maintain profitability and positive cash flow will be dependent upon:
 
Ø
Management’s ability to maintain the technology skills for our services;
Ø
The Company’s ability to keep abreast of the changes by the government agencies and law;
Ø
Our ability to attract customers who require the services we offer; and
Ø
Our ability to generate revenues through the sale of our services to potential clients who need our services.
 
Based upon current plans, we expect to incur operating losses in future periods because we will be incurring expenses and not generating sufficient revenues to cover our expenses.  We cannot be sure that we will be successful in generating revenues in the future.  Failure to generate sufficient revenues will cause us to go out of business and any investment in our Company would be lost.
 
Managing a small public company involves a high degree of risk. Few small public companies ever reach market stability and we will be subject to oversight from governing bodies and regulations that will be costly to meet.  Our present officers and directors do not have any experience in managing a fully reporting public company so we may be forced to obtain outside consultants to assist with our meeting these requirements.  These outside consultants are expensive and can have a direct impact on our ability to be profitable. This will make an investment in our Company a highly speculative and risky investment .
 
While the Company is attempting to disclose all of the potential risks associated with an investment in the Company, there can be no assurance that all of the risks are visible to management.  Events occurring in the future may caus additional risks to an investment in the Company which are currently unforeseen.
 
We have a limited operating history that you can use to evaluate us, and the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays that we may encounter because we are a small company.  As a result, we may not be profitable and we may not be able to generate sufficient revenue to develop as we have planned.
 
The success of our business depends, in part, upon proprietary technologies and information which may be difficult to protect and may be perceived to infringe on the intellectual property rights of third parties.
 
 
-16-

 
 
We believe that the identification, acquisition and development of proprietary technologies are key drivers of our business. Our success depends, in part, on our ability to obtain patents, maintain the secrecy of our proprietary technology and information, and operate without infringing on the proprietary rights of third parties. We cannot assure you that the patents of others will not have an adverse effect on our ability to conduct our business, that the patents that provide us with competitive advantages or will not be challenged by third parties, that we will develop additional proprietary technology that is patentable or that any patents issued to us will provide us with competitive advantages or will not be challenged by third parties. Further, we cannot assure you that others will not independently develop similar or superior technologies, duplicate elements of our technology or design around it.
 
Item 1B.  Unresolved staff comments  
 
None.
 
Item 2.  Properties
 
Our executive office is now located in an office complex under annual three year lease, beginning May 1, 2010 at a rent of $2,756 per month. We entered into this 3-year commercial lease agreement in Pinellas Park, Florida with Accu Centre. Our lease provides us with approximately 4,100 square feet of: reception area, nine offices, eight cubicles, a lab/production area, kitchenette and two conference rooms.  We believe the facilities are adequate for our operational needs.  We may require additional offices in the event we obtain funding and acquire additional customers.
 
Item 3.  Legal proceedings  
 
(a)   During the fourth quarter of our year ended June 30, 2011, Trimax Wireless filed a complaint relating to the unpaid balance of the Promissory Note executed with the acquisition of Trimax Wireless. The Company has filed a motion to dismiss such action which is set for hearing. The note is unsecured, however, if holders prevail, they may be entitled to legal cost, in addition to payments per the term of the agreement. The Company believes that it has sufficient affirmative defenses to this complaint and does not believe that it will have a material effect on the Company.
 
(b)  We did not terminate any legal proceedings during the fourth quarter of our 2011 fiscal year.
 
Item 4.  Submission of matters to a vote of security holders
 
We did not submit any matter to a vote of our security holders, through the solicitation of proxies or otherwise during the fourth quarter of our 2011 fiscal year.
 
 
-17-

 
  
PART II  
 
Item 5.  Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities  
 
Our common stock is quoted on OTC Bulletin Board under the symbol “IFXY”. The Company began trading on January 11, 2008.
 
Price History of our common stock.
 
The following table sets forth high and low bid quotations for the quarters indicated and trading volume data for our common stock for the period indicated.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
 
   
High  Bid
   
Low  Bid
 
Fiscal Year 2010*
           
    Fourth Quarter Ended June 30, 2010
  $ 16.00     $ 2.00  
    Third Quarter Ended March 31, 2010
  $ 22.50     $ 5.60  
    Second Quarter Ended December 31, 2009
  $ 42.50     $ 10.05  
    First Quarter Ended September 30, 2009
  $ 62.50     $ 25.00  
                 
Fiscal Year 2011*
               
    Fourth Quarter Ended June 30, 2011
  $ 3.05     $ .80  
    Third Quarter Ended March 31, 2011
  $ 6.00     $ 2.25  
    Second Quarter Ended December 31, 2010
  $ 4.85     $ 2.50  
    First Quarter Ended September 30, 2010
  $ 12.00     $ 1.40  
 
* On July 14, 2011 the Company's Board of Directors affected a 1:500 reverse stock split, effective August 26, 2011 (record date). The share prices have been retroactively stated to reflect the reverse-split shares.
 
As of October 13, 2011 we had 65 shareholders of record and approximately 4, 352 beneficial shareholders, and we had 2,835,417,440 (5,670,835 post reverse split) shares of $0.001 par value common stock outstanding.
 
Dividend Policy
 
We have never declared or paid any cash dividends on our capital stock, except for distribution of shares previously held in FutureWorld (FWDG), that were acquired in the exchange for intellectual property. We do not have earnings out of which to pay cash dividends.  Our board of directors has the authority to declare cash dividends when and if we have earning sufficient for that purpose.

Equity Compensation Plan

See description our Stock Option Plan in Item 12.
 
 
-18-

 
 
Transfer Agent

We have engaged ClearTrust, Inc. to serve as our stock register and transfer agent.  ClearTrust’s address is 17961 Hunting Bow Circle, Unit 102, Lutz, FL 33558.
 
Sales of Unregistered Securities 
 
The following table sets forth information about our unregistered sales of securities during the three months ended June 30, 2011.
 
Date
 
Title of Security
 
Amount
 
Purchaser
   
Price  
 
Exemption
6/3/2011
 
Common
    70,000,000  
Richared Dea
(1)  
Acquisition
 
Section 4(2)
6/3/2011
 
Common
    70,000,000  
Eric Littman
(1)  
Acquisition
 
Section 4(2)
 
We did not pay and no one acting on our behalf or to our knowledge paid any commissions or other compensation with respect to the sale of any of the shares listed in the tables above.  
 
 
(1)
Mr. Richard Dea  and Littman have been issued shares in connection with the acquisition of Lockwood Technology, Inc.
 
Item 6.  Selected financial data  
 
The following financial data is derived from, and should be read in conjunction with, the “Financial Statements” and notes thereto. Information concerning significant trends in the financial condition and results of operations is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
 
-19-

 
 
   
2011
   
2010
 
             
Cash
  $ 25,498     $ 115,015  
Current assets
    152,998       230,361  
Total Assets
    7,049,266       7,112,507  
                 
Total current liabilities
    2,106,199       1,668,635  
Total liabilities
    2,681,156       1,854,339  
Total stockholders' equity
    4,368,110       5,258,168 )
                 
Working Capital
    (1,953,201     (1,438,274 )
                 
Net Cash (Used) Provided by Operating Activities
    (592,774 )     26,362  
 
For the Year Ended June 30,
 
2011
   
2010
 
             
Revenues
 
$
518,388
   
$
9,895
 
Direct costs
   
87,327
     
-
 
Gross Profit
   
431,061
     
9,895
 
Operating expenses:
   
4,247,134
     
963,463
 
Net loss
 
$
(3,884,305
)
 
$
(986,710
)
 
Item 7.  Management’s discussion and analysis of financial condition and results of operations  
 
Our significant accounting policies are more fully described in Note 1 to the financial statements. However, certain accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on knowledge of our industry, historical operations, terms of existing contracts, and our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.
 
PLAN OF OPERATIONS
 
As more fully described in “LIQUIDITY AND CAPITAL RESOURCES”, we had approximately $25,000 in cash at June 30, 2011, and extended in excess of the line of credit from Mr. Talari with which to satisfy our future cash requirements. Mr. Talari has extended his support and is in the process to extend his support to a total of $1 million. Our management believes our cash and majority shareholder commitment will support only limited activities for the next twelve months. We are attempting to secure other sources of financing to develop our business plan, and to implement our sales and marketing plan. We believe full implementation of our plan of operations, completion of development of the smart grid related hardware and software, completion of pending acquisitions and the integration of the Lockwood will cost approximately $5 million. We have no assurance we will be able to obtain additional funding to sustain even limited operations beyond twelve months based on the available cash and balance of our line of credit with Mr. Talari. If we do not obtain additional funding, we may need to cease operations until we do so and, in that event, may consider a sale of our technology. Our plan of operations set forth below depends entirely upon obtaining additional funding.
 
 
-20-

 
 
We are currently in ongoing discussions, arrangements, understandings, commitments or agreements for additional funding with two firms. In this endeavor, we will consider equity funding, either or both of a private sale or a registered public offering of our common stock; however, it seems unlikely that we can obtain an underwriter. We will consider a joint venture in which the joint venture partner provides funding to the enterprise. We will consider debt financing, both unsecured and secured by a pledge of our technology. As noted previously, we our intermediary funding is provided through our line of credit arrangement with Mr. Talari.
 
Our Marketing Plan
 
The first phase in our plan of operations, subject to adequate funding, will be implementation of our sales and marketing plan. We plan to initially select several resource constrained small to mid-sized utilities to function as beta test sites for our Secure Intelligent Energy Platform.  We are currently working with one mid-sized utility during the design phase of product development.  We will also be targeting utilities for the immediate deployment of our “Smart Grid Ready” wireless products in preparation of the completion and launch of our SIEP.
 
Infrax Systems has entered into a Technical Information License Agreement (TIL) with Itron, the leading manufacturer of smart meters.  The license agreement allows Infrax to design its Secure Network Interface Card (SNIC) and communications module for inclusion in Itron Centron I & Centron II meters. We have been working closely with Itron during this process to ensure that we are fully compliant and the results to date have all met Itron’s criteria. When the qualification testing process is finished, Infrax can license the communications module to Itron and sell the product directly as Itron-compliant.
 
While we have also been in discussions with several other global meter manufacturers regarding the inclusion of the SNIC and GridMesh into their AMI meters, we believe that Itron’s dominant market position and the strength of our relationship will drive the results required to meet our business objectives.
Additionally, during this stage we will continue to design and implement wireless networks in developing countries in continuation of the former Trimax Wireless strategy. In parallel with this activity we plan to continue to target wireless ISP’s and carriers, offering our current wireless voice and data communications products.
 
We may explore the opportunities to locate local and regionally based companies in emerging markets with existing relationships with the key decision makers in Africa, and Middle East, that would be willing establish strategic relationships in those markets and establishing their own Network Operating Centers to increase our visibility and support our customers in those markets. We are considering the establishment of this concept as our business model for countries in these emerging markets.
 
Product Research and Development
 
Our Smart Grid products are in the late stages of development and we anticipate delivering prototype solutions to our targeted beta customers by the end of the 1 st quarter of 2012. We have budgeted $1.8M for the completion of our hardware and software products. We do not have financial or other resources to undertake this development. Without additional funding sufficient to cover this budgeted amount, we will not have the resources to conduct this development.
 
We anticipate that as funding is received, of which there is no assurance, and we will begin hiring the appropriate technical staff that will be able to handle support requirements for this market segment. We anticipate a need for up to forty-four employees by the end of the first year of full operation after funding. The number of employees we hire during the next twelve months will depend upon the level of funding and sales achieved.
 
 
-21-

 
 
Funding
 
To support our activities and provide the initial sales and support for entry into the Utility marketplace, as noted above, we will require an initial investment of approximately $5 million. We expect this level of funding to carry us into the Smart Grid and Utility marketplaces and provide the capital necessary to complete the development of our SIEP and SNIC products .
 
RESULTS OF OPERATIONS
 
Comparison year ended June 30, 2011 to June 30, 2010
 
For the year ended June 30, 2011 and 2010, we incurred net losses of $3,884,305 and $986,710, respectively.   Losses consisted of $500,900 and $510,267 of stock based compensation for the years ended June 30, 2011 and 2010, respectively.  Losses also include depreciation and amortization, non-cash expenses, in the amount of $1,347,819 and $2,398 for the years ended June 30, 2011 and 2010, respectively. The increase was primarily due to the amortization charges for intangible and tangible assets acquired from Trimax. Additionally, there were impairments and write downs of certain assets, due to valuation assessments by management, incurring charges of approximately $892,000 in year 2011. Compensation and consulting expenses increased approximately $653,000 for the comparative periods, due to the increase in full-time equivalents and the full year operations of the Trimax acquisition, as well as a full year increase in employment agreement, both in number of individuals under contract and annual amount. General and administrative increased approximately $327,000, while professional fees decreased approximately $67,000.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of June 30, 2011, we had approximately $25,000 in cash. We have exceeded the line of credit from Mr. Talari for which to pay normal operating expenses. Mr. Talari has continued funding our operations. Mr. Talari has expressed commitment to $1 million dollars of funding, the Company is currently in process of formalizing the agreement. We believe this support will allow our continuation while we attempt to secure other sources of financing to develop our business plan, and increase efforts of our marketing plan.  Cash used in operations was $592,774, which was primarily provided from advances from our majority shareholder.
 
 
-22-

 
 
On September 6, 2005, we obtained a loan commitment from Mr. Talari, one of our director and controlling person in the aggregate amount of $350,000, which was amended to $500,000, under a revolving master promissory note, due on demand, with interest at the rate of five percent per annum. We have been receiving advances on this note on an as needed basis and through June 30, 2011, we have received a total of $494,253 for the year ended June 30, 2011 and $574,957, net, since the inception of the commitment.  During the course of this agreement Mr. Talari has made a number of conversions, reducing the note and accrued interest in exchange for our common stock.
 
On June 29, 2010 the Company entered into an agreement with the shareholders of Trimax Wireless, Inc. (“Trimax”) for the purchase of their business assets and technology.  As part of the agreement a promissory note, in the amount of $712,500 was entered.  The note is interest bearing at 6% per annum until fully paid with a start period of 90 (September 29, 2010) days for the first payment.  The Company  shall make interest-only payments on the first day of each month from the date of this Note until the earlier of (a) receipt of Investment Funding as defined; or (b) 180 days from the date hereof ("Maturity Date") (December 29, 2010).  Principal plus all accrued and unpaid interest on such principal shall be due and payable on the Maturity Date We have not made our required payments on this note.
 
On June 17, 2010 the Company entered into a Bridge Loan Agreement with Blue Diamond Consulting, LLC (“Lender”).  The Company may be advanced up to $500,000, secured by the Company’s common stock.  Advances may be requested in increments of $25,000 and bear interest of 8% per annum.   Advances have repayment terms of six months from the date of the requested advance.  The Lender has the right, at their option, to convert any amounts due, plus interest, into the Company’s common stock at a conversion rate, as defined, at 50% of the closing bid price at the date of conversion request.  As of June 30, 2011, there have been no requested advances and no amount is due to Lender.
 
We anticipate that, depending on market conditions and our plan of operations, we may incur operating losses in the future. We base this expectation, in part, on the fact that we may not be able to generate enough gross profit from our sales and services to cover our operating expenses and increased sales and marketing efforts. Consequently, there remains doubt about the Company’s future and sustained profitability.
 
Recent Accounting Pronouncements
 
We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term.  The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.  Those standards have been addressed in the notes to the audited financial statement and in our Annual Report, filed on this Form 10-K. 
 
 
-23-

 
 
Critical Accounting Policies
 
The Company’s significant accounting policies are presented in the Company’s notes to financial statements for the period ended June 30, 2011 and 2010, which are contained in this filing, the Company’s 2011 Annual Report on Form 10-K. The significant accounting policies that are most critical and aid in fully understanding and evaluating the reported financial results include the following:
 
The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America. These principals require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual results could differ from those estimates.
 
The Company issues restricted stock to employees and consultants for various services.  Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is measurable more reliably measurable.  The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.  
 
Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable.  When required impairment losses on assets to be held and used are recognized based on the fair value of the asset.  The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required.  If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset.  When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets.  We did not recognize any impairment losses for any periods presented.
 
Off-Balance Sheet Arrangements
 
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
 
 
-24-

 
 
Management Consideration of Alternative Business Strategies
 
In order to continue to protect and increase shareholder value management believes that it may, from time to time, consider alternative management strategies to create value for the company or additional revenues.  Strategies to be reviewed may include acquisitions; roll-ups; strategic alliances; joint ventures on large projects; and/or mergers.
 
The Company is currently in merger or acquisition negotiations with entities which management believes to be key components of the Smart Grid solutions we envision. Management believes that acquisitions will be a catalyst for advancing the Company’s existing technology to attain greater market share. We are currently in valuation negotiations with the targeted companies; acquisitions will be primarily share exchanges. Additionally, we are seeking capital financing for the purposes of furthering our plan of operations. These negotiations have not advanced, at this point, to an issuance of a letter of intent; however management believes this ongoing strategy will best serve existing shareholders.
 
The Company has been approached as a potential target for acquisition.  Preliminary discussions were brought to the attention of the Board of Directors.  Although negotiations have not advanced, we believe that those discussions were validation of our technology.   Management and the Board of Directors are aware of our position and potential of our technology and will consider any offer that increases shareholder value.
 
Management will only consider these options where it believes the result would be to increase shareholder value while continuing the viability of the company.
 
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.
 
Not Required.
 
 
-25-

 

Item 8.  Financial statements and supplementary data
 
 
Infrax Systems, Inc.
2011 Annual Report
Index to Financial Statements and Financial Statement Schedules
 
 
 

 
-26-

 
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Infrax Systems, Inc.
Pinellas Park, Florida
 
We have audited the accompanying consolidated balance sheet of Infrax Systems, Inc as of June 30, 2011 and 2010 and the related consolidated statements of operations, stockholders’ equity, and consolidated cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Infrax Systems, Inc. as of June 30, 2011 and 2010, and the results of their operations, changes in their stockholders' equity and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements and discussed in Note 3 of the accompanying consolidated financial statements, the Company has incurred significant recurring losses from operations and is dependent on outside sources of financing for continuation of its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The consolidated financial statements of Infrax Systems, Inc. as of June 30, 2010 and for the year then ended have been restated for the correction of a misstatement during the period. Additional disclosures have been added to Note 13 regarding the issuance of common stock and preferred stock during the period.
 
 
/s/    Randall N. Drake, CPA, PA
Clearwater Florida
October 13, 2011
 
 
-27-

 
 
Infrax Systems, Inc.
(Previously A Development Stage Enterprise)
Consolidated Balance Sheets
 
   
June 30, 2011
   
June 30, 2010
 
Assets
       
RESTATED
 
Current assets
           
Cash
  $ 25,498     $ 115,015  
Accounts receivable
    22,050       1,091  
Inventory
    55,450       110,726  
Loan receivable from affiliate
    -       580  
Note receivable
    50,000       -  
Prepaid expenses
    -       2,949  
Total current assets
    152,998       230,361  
                 
Property & equipment, net of accumulated
depreciation of $45,807 and $11,229, respectively
    193,169       183,251  
                 
Intangible property, net of accumulated
amortization of  $1,314,775 and $1,329, respectively
    6,700,599       6,698,895  
Deposits
    2,500       -  
Total Assets
  $ 7,049,266     $ 7,112,507  
                 
Liabilities and Stockholders' Equity
               
Current liabilities
               
Accounts payable
  $ 434,789     $ 196,153  
Accrued expenses
    889,108       478,967  
Customer deposits and deferred revenue
    -       267,213  
Notes payable
    774,500       718,500  
Loans and notes payable, related parties
    7,802       7,802  
Total current liabilities
    2,106,199       1,668,635  
                 
Notes payable to Shareholder
    574,957       185,704  
Total liabilities
    2,681,156       1,854,339  
                 
Stockholders' Equity
               
Preferred Stock, 50,000,000 authorized, $.001 par value:
               
Series A Convertible: 5,000,000 shares designated;   
   385,702 and 0 issued and outstanding
    386       386  
Series B Convertible: 100,000,000 shares designated;   
   257,764 and 890,600 issued and outstanding
    257       890  
Common Stock, $.001 par value, 5,000,000,000 shares
   authorized; 6,282,275 and 5,231,524 shares
   issued and outstanding, respectively *
    6,283       5,232  
Additional paid-in capital
    11,451,683       8,464,710  
Subscriptions (receivable) payable
    408       (1 )
Minority interest in subsidiary
    5,447       -  
Accumulated deficit
    (7,096,354 )     (3,212,049 )
Total stockholders' equity
    4,368,110       5,258,168  
                 
Total Liabilities and Stockholders' Equity
  $ 7,049,266     $ 7,112,507  
 
* On July 14, 2011 the Company's Board of Directors affected a 1:500 reverse stock split, effective August 26, 2011 (record date).  The shares have been retroactively stated to reflect the reverse-split shares.
 
The accompanying notes are an integral part of these financial statements.
 
 
-28-

 

Infrax Systems, Inc.
(Previously A Development Stage Enterprise)
Consolidated Statements of Operations
 
   
For the Year Ended June 30,
 
   
2011
   
2010
 
             
Revenues
  $ 518,388     $ 9,895  
Direct costs
    87,327       -  
Gross Profit
    431,061       9,895  
                 
Operating expenses:
               
  Salaries and benefits
    1,014,062       644,512  
  Consulting
    411,770       128,111  
  Professional fees
    127,120       60,886  
  General and administrative
    454,101       127,556  
  Impairments and write-downs
    892,057       -  
  Amortization and depreciation
    1,348,024       2,398  
Total operating expenses
    4,247,134       963,463  
                 
Other income (expense):
               
  Interest expenses
    (62,785 )     (11,861 )
  Equity losses of investee
    -       (22,250 )
  Miscellaneous
    -       969  
Total other income (expense)
    (62,785 )     (33,142 )
                 
Loss from operations before income taxes
    (3,878,858 )     (986,710 )
                 
Provision for income taxes
    -       -  
      (3,878,858 )     (986,710 )
                 
Minority Interest
    (5,447 )     -  
                 
Net loss
  $ (3,884,305 )   $ (986,710 )
                 
                 
Earnings (loss) per share:
               
Basic and dilutive
  $ (0.67 )   $ (2.65 )
                 
Weighted average shares outstanding
               
Basic and dilutive
    5,807,756       372,718  
 
* On July 14, 2011 the Company's Board of Directors affected a 1:500 reverse stock split, effective August 26, 2011 (record date).  The shares have been retroactively stated to reflect the reverse-split shares.
 
The accompanying notes are an integral part of these financial statements.
 
 
-29-

 
 
Infrax Systems, Inc.
(Previously A Development Stage Enterprise)
Consolidated Statements of Cash Flows
 
   
For the Year Ended June 30,
 
   
2011
   
2010
 
Cash Flows from Operating Activities:
           
   Net loss
  $ (3,884,305 )   $ (986,710 )
   Adjustment to reconcile Net Income to net
cash provided by operations:
               
    Depreciation and amortization
    1,348,024       2,398  
    Issuance of stock in settlement of services
    500,900       510,267  
    Impairment of goodwill
    762,750          
    Minority interest
    5,447       -  
   Changes in assets and liabilities:
               
   Accounts receivable
    (20,959 )     48,124  
   Inventory
    55,276       (110,726 )
   Due from affiliate
    580       (580 )
   Deferred contract costs
    -       26,696  
   Prepaid and other
    2,949       (949 )
   Accounts payable
    238,636       168,318  
   Accrued expenses
    665,141       151,526  
   Customer deposits and deferred revenue
    (267,213 )     217,998  
   Net Cash (Used) in Provided by Operating Activities
    (592,774 )     26,362  
                 
Cash Flows from Investing Activities:
               
   Purchase of property and equipment
    (1,107 )     (2,799 )
   Acquisition of assets, net
    (43,389 )     -  
   Decrease (increase) in other assets
    (2,500 )     -  
   Net Cash (Used) in Investing Activities
    (46,996 )     (2,799 )
                 
Cash Flows from Financing Activities:
               
   Proceeds from issuance of note payable
    56,000       -  
   Related party advances
    494,253       89,456  
   Net Cash (Used) Provided by Financing Activities
    550,253       89,456  
                 
                 
Net increase/decrease in Cash
    (89,517 )     113,019  
Cash at beginning of period
    115,015       1,996  
Cash at end of period
  $ 25,498     $ 115,015  
                 
                 
Supplemental cash flow information:
               
   Interest paid
  $ -     $ -  
   Taxes paid
  $ -     $ -  
                 
Supplemental Schedule of Noncash Investing and Financing Activities
               
   Issuance of common stock in exchange of debt
  $ 105,000     $ 45,000  
   Issuance of common stock in exchange for accrued salaries
  $ 255,000     $ -  
   Investment in affiliate by transfer of software
  $ -     $ 22,500  
   Conversion of convertible debentures into common stock
  $ -     $ 50,000  
   Stock issued for assets acquired
  $ 2,127,900     $ -  
   Promissory note issued (receivable) for the acquisition of assets
  $ (50,000 )   $ -  
 
The accompanying notes are an integral part of these financial statements.
 
 
-30-

 
 
Infrax Systems, Inc.
(Previously A Development Stage Enterprise)
Restated Consolidated Statement of Stockholders' Equity
 
    Preferred     Common    
Additional
Paid in
         
Minority
   
Accumulated
Deficit
Development
   
Stock-
holders'
 
   
shares
   
$.001 par
   
shares *
   
$.001 par
   
Capital
   
Subscription
   
Interest
   
Stage
   
Equity
 
Balance at June 30, 2009
    -     $ -       279,749     $ 280     $ 2,005,838     $ (1 )   $ -     $ (2,225,339 )   $ (219,222 )
                                                                         
Stock for services
            -       15,672       15       246,210                               246,225  
Conversion of promissory note
            -       59,720       60       72,940                               73,000  
Conversion of accrued officers salaries
            -       3,000       3       15,922                               15,925  
Conversion of accrued officers salaries
    1,017,034       1,017               -       299,770                               300,787  
Officer bonus
    181,868       182               -       66,618                               66,800  
Acquisition of Trimax Wireless, Inc.
    2,500,000       2,500               -       5,796,364                               5,798,864  
Conversion of preferred A to common
    (600,000 )     (600 )     3,600,000       3,600       (3,000 )                             -  
Conversion of preferred A-1 to common
    (157,575 )     (158 )     55,625       56       102                               -  
Conversion of preferred A-2 to common
    (55,625 )     (56 )     252,120       252       (196 )                             -  
Conversion of preferred B to common
    (1,609,400 )     (1,609 )     965,638       966       643                               -  
Adjustment of accrued salaries
            -               -       (37,501 )                             (37,501 )
                                                                         
Net loss
                                                            (986,710 )     (986,710 )
                                                                         
Balance at June 30, 2010
    1,276,302       1,276       5,231,524       5,232       8,463,710       (1 )     -       (3,212,049 )     5,258,168  
                                                                         
Issuance of shares in exchange for:
                                                                       
   Shares issued for services
                    37,900       38       72,962                               73,000  
   Shares for services
                    140,000       140       349,860                               350,000  
   Shares for services
                            -       72,471       29                       72,500  
   Conversion of salaries payable
                    143,850       144       254,856                               255,000  
   Compensation settlement
                    1,800       2       5,398                               5,400  
   Conversion of debt
                    147,500       148       74,852                               75,000  
   Conversion of debt
                    30,000       30       14,970                               15,000  
   Conversion of debt
                    30,000       30       14,970                               15,000  
                                                                      -  
Acquisition of Lockwood Technologies, Inc.
                    140,000       140       1,649,480       380                       1,650,000  
Acquisition, warrants issued upon acquisition
                            -       477,900                               477,900  
                                                                      -  
Conversion of preferred B to common
    (632,182 )     (632 )     379,309       379       253                               -  
Conversion of Preferred B shates to common
    (654 )     (1 )     392       -       1                               -  
                                                                      -  
Net loss
                                                    5,447       (3,884,305 )     (3,878,858 )
                                                                         
Balance at June 30, 2011
    643,466     $ 643       6,282,275     $ 6,283     $ 11,451,683     $ 408     $ 5,447     $ (7,096,354 )   $ 4,368,110  
 
* On July 14, 2011 the Company's Board of Directors affected a 1:500 reverse stock split, effective August 26, 2011 (record date).  The shares have been retroactively stated to reflect the reverse-split shares.

The accompanying notes are an integral part of these financial statements.
 
 
-31-

 
 
 Infrax Systems, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2011 and 2010
 
1.           History of the Company and Nature of the Business
 
History of the Company
 
Infrax Systems, Inc. (formerly OptiCon Systems, Inc.) ( the Company ”, “Infrax” ) was formed as a Nevada corporation on October 22, 2004.  On July 29, 2005, the stockholders of the Company entered into an agreement to exchange 100% of the outstanding common stock of the Company, for common and preferred stock of FutureWorld Energy, Inc. (formerly Isys Medical, Inc.), a publicly traded company, at which time, the Company became a wholly owned subsidiary of FutureWorld Energy, Inc..
 
FutureWorld Energy, Inc. ( “FutureWorld” ), Infrax’s parent company, announced its intention to spin off Infrax (formerly OptiCon Systems, Inc.) through by the payment of a stock dividend.  In connection with the proposed spinoff, Infrax’s board of directors approved a stock dividend of 99,118 shares to FutureWorld, its sole shareholder.  On August 31, 2007, FutureWorld paid a stock dividend to its stockholders, consisting of 100% of the outstanding common stock of the Company, at the rate of one share of Infrax’s stock for every two shares they own of FutureWorld.  As of August 31, 2007, Infrax ceased being a subsidiary of FutureWorld.
 
 Nature of Business
 
Since its inception, the Company has been dedicated to selling and/or licensing a fiber optic management software system under the name OptiCon Network Manager, originally developed, and acquired from Corning Cable System, Inc. through a related company, FutureTech Capital, LLC.    In October 2009, the Company began developing smart grid energy related products.
 
While we continue to enhance the OptiCon Network Management platform, the Company has shifted its focus and energies towards the “Smart Grid” energy sector. The Company believes our secure integrated platform will hasten the deployment of all Smart Grid technology for resource constrained small and mid-sized utilities.  Infrax’s advantage comes from our products ability to enable the creation of a secure platform scalable to deliver a broad set of intelligent Smart Grid initiatives across millions of endpoints for Utilities.
 
As of June 29, 2010, the Company acquired the assets and management of Trimax Wireless Systems, Inc. (“Trimax”), in exchange for equity and a note payable.    The Trimax product line is expected to provide an operating platform and enhanced operating effectiveness to the OptiCon Network Manager. Furthering our development towards becoming a leader in the emerging smart-grid industry, on April 8, 2011 we acquired a 70% controlling interest in Lockwood Technology Corporation, to supply RFID and asset tracking, among other technology value to our product lines.
 
2.           Summary of Significant Accounting Policies
 
Basis of Accounting
 
The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America. These principals require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual results could differ from those estimates.
 
Use of Estimates
 
The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America. These principals require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual results could differ from those estimates.
 
 
-32-

 
 
Principles of Consolidation
 
The consolidated financial statements include the accounts and operations of Infrax Systems, Inc., and its wholly owned subsidiary, Infrax Systems SA (Pty) Ltd. and Lockwood Technology Corporation, net of minority interests (collectively referred to as the “Company”).  Accordingly, the assets and liabilities, and expenses of this company have been included in the accompanying consolidated financial statements, and material intercompany transactions have been eliminated.
 
The Trimax Wireless, Inc. acquisition was effective June 29, 2010.  The agreement acquired all the assets and certain liabilities of Trimax Wireless, Inc.  As an asset purchase the acquired assets and liabilities are included in the accounts of Infrax Systems, Inc.
 
The Company acquired a controlling interest (70%) of Lockwood Technology Corporation (“LTC”) on May 8, 2011. LTC’s activities, during the period of ownership, have been included in the reported consolidated financial statements.
 
Development Stage Enterprise
 
The Company, in prior periods, presented financial statements as a development stage enterprise.   In the initial years the Company, devoted substantially all of its efforts to raising capital, planning and implementing the principal operations.   The Company may continue to incur significant operating losses and to generate negative cash flow from operating activities.  The Company's ability to eliminate operating losses and to generate positive cash flow from operations in the future will depend upon a variety of factors, many of which it is unable to control.   However, based on current and subsequent events, primarily the acquisitions of Trimax Wireless Systems, Inc. and Lockwood Technology Corporation, management believes that the Company has established the primary business development plan.
 
Deconsolidation of a Subsidiary
 
On August 12, 2009, the Company organized PowerCon Energy Systems, Inc., a Nevada corporation, as a wholly owned subsidiary with the transfer of the R-4PC software architecture in exchange for 3,000,000 shares of PowerCon’s common stock.  On October 8, 2009, PowerCon issued Mr. Sam Talari, one of the Company’s directors, 16,000,000 shares of PowerCon in connection with a private placement, at which time PowerCon ceased being a wholly-owned subsidiary.
 
Variable Interest Entities
 
The Company considers the consolidation of entities to which the usual condition (ownership of a majority voting interest) of consolidation does not apply, focusing on controlling financial interests that may be achieved through arrangements that do not involve voting interest.  If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary.  The primary beneficiary is generally required to consolidate assets, liabilities and non-controlling interests at fair value (or at historical cost if the entity is a related party) and subsequently account for the variable interest as if it were consolidated based on a majority voting interest.    The Company has evaluated all related parties, contracts, agreements and arrangements in which it may hold a variable interest.  All companies identified have been included in the consolidated financial statements.
 
Financial Instruments
 
The Company’s balance sheets include the following financial instruments: cash, accounts receivable, notes receivable, inventory, accounts payable and note payable and notes payable to stockholder. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization. The carrying values of the note payable to stockholder  approximates fair value based on borrowing rates currently available to the Company for instruments with similar terms and remaining maturities.
 
 
-33-

 
 
In September 2006, the Financial Accounting Standards Board (FASB) introduced a framework for measuring fair value and expanded required disclosure about fair value measurements of assets and liabilities.  The Company adopted the standard for those financial assets and liabilities as of the beginning of the 2008 fiscal year and the impact of adoption was not significant. FASB Accounting Standards Codification (ASC) 820 “ Fair Value Measurements and Disclosures ” (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
 
 
·
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
 
·
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
 
·
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
 
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2011. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include accounts receivable, other current assets, accounts payable, accrued compensation and accrued expenses. The fair value of the Company’s notes payable is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value.
 
The Company applied ASC 820 for all non-financial assets and liabilities measured at fair value on a non-recurring basis. The adoption of ASC 820 for non-financial assets and liabilities did not have a significant impact on the Company’s financial statements.
 
As of June 30, 2011 and 2010, the fair values of the Company’s financial instruments approximate their historical carrying amount.
 
Cash and Cash Equivalents
 
The majority of cash is maintained with major financial institutions in the United States.  Deposits with these banks may exceed the amount of insurance provided on such deposits.  Generally, these deposits may be redeemed on demand and, therefore, bear minimal risk.  The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
Accounts Receivable and Credit
 
Accounts receivable consist of amounts due for the delivery of sales or services to its customers.   Prepayments on account are recorded as customer deposit, a current liability.   An allowance for doubtful accounts is considered to be established for any amounts that may not be recoverable, which is based on an analysis of the Company’s customer credit worthiness, and current economic trends.  Based on management’s review of accounts receivable, no allowance for doubtful accounts was considered necessary.   Receivables are determined to be past due, based on payment terms of original invoices.  The Company does not typically charge interest on past due receivables.
 
 
-34-

 
 
Inventories
 
Inventories are stated at the lower of standard cost or market, which approximates actual cost. Cost is determined using the first-in, first-out method.  Inventory is comprised of component parts and accessories available for sale.  Parts are generally purchased for projects, as minimal inventory is held to supply customers.
 
Property & Equipment
 
Property and equipment are recorded at historical cost or acquisition value. Depreciation is computed on the straight-line method over estimated useful lives of the respective assets, ranging from three to five years. The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted. Based upon the Company's most recent analysis, management believes that no impairment of property and equipment exists at June 30, 2011 and 2010.
 
Intangible Property
 
On June 29, 2010 the Company acquired the assets of Trimax Wireless Systems, Inc., including licenses and trademarks.  The purchase price was allocated first to the identifiable assets received, allocating the remaining costs to the intellectual property.  The valuation considered future cash flows of the operating intangible assets acquired.  The valuation of the intellectual property was limited to the acquisition price, less the fair market value of identifiable assets.  The acquisition carrying value of the intellectual property was $6,329,342.  Intellectual property has an estimated useful life of 15 years.
 
On May, 2011 the Company completed the acquisition of controlling interest (70%) in Lockwood Technology Corporation, in exchange for stock and certain considerations (cash and warrants). The shares were issued at the fair market value at the date of the transaction ($1,650,000) and warrants were valued using an option price model ($477,900). The total purchase price, net of cash, notes receivable, and net assets acquired was $1,956,158. The Company recognized an immediate impairment in the amount of $641,008 in consideration of its analysis of future discounted cash flows and industry multiples of the acquired Company, resulting in a net intangible assets of $1,315,150. Management’s allocation of the purchase price was based on our assessment of the fair market value of the assets acquired, in accordance with Accounting Standard Codification, Topic 805. Fixed assets and other tangible assets were evaluated for market value. There were no identifiable assets that had any significant appreciation or impairment; therefore those assets have been brought over at the historical basis, net of depreciation. The analysis of the intangible values purchased were allocated to the Lockwood customer list (30% or $394,550) and the developed software and licensing technology (70% or $920,600).
 
Capitalized Software Development Costs
 
The Company capitalizes software development costs, under which certain software development costs incurred subsequent to the establishment of technological feasibility have been capitalized and are being amortized over the estimated lives of the related products. Capitalization of computer software costs is discontinued when the computer software product is available to be sold, leased, or otherwise marketed.
 
Amortization begins when the product is available for release and sold to customers. Software development costs will be amortized based on the estimated economic life of the product, anticipated to be 10 years.  
 
Impairment of Long-Lived Assets
 
Periodically, the Company assesses the recoverability of the Company’s intangible assets, consisting of the Trimax acquired intellectual property, OptiCon Network Manager software and its trademark, and record an impairment loss to the extent that the carrying amounts of the assets exceed its fair value.  Based upon management's most recent analysis, the Company believes that no impairment of the Company’s tangible or intangible assets exist at June 30, 2011 and 2010, as reported. Certain impairments have been recorded to reflect the net realizable value of the associated assets, based on fair value (inventory) or discounted cash flows (goodwill and intangibles).
 
Revenue Recognition
 
The Company is principally in the business of providing solutions for a secure intelligent energy platform that incorporates our secure wireless technology.  Contracts include multiple revenue components, comprised of our software licensing, hardware platforms, installation, training and maintenance.  In accordance with ASC 605-25 Multiple-Element Arrangements, revenue from licensing the software will be recognized upon installation and acceptance of the software by customers.  When a software sales arrangement includes rights to customer support, the portion of the license fee allocated to such support is recognized ratably over the term of the arrangement, normally one year.  Revenue from professional services arrangements will be recognized in the month in which services are rendered over the term of the arrangement.
 
 Revenue associated with software sales to distributors is recognized, net of discounts, when the Company has performed substantially all its obligations under the arrangement.  Until such time as substantially all obligations under the arrangement are met, software sales are recognized as deferred revenue.  Costs and expenses associated with deferred revenue are also deferred.  When a software sales arrangements include a commitment to provide training and/or other services or materials, the Company estimates and records the expected costs of these training and/or other services and/or materials.
 
 
-35-

 
 
Stock Based Compensation
 
The Company issues restricted stock to consultants for various services.  Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.   The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services.  Stock compensation for the periods presented were issued to consultants for past services provided, accordingly, all shares issued are fully vested, and there is no unrecognized compensation associated with these transactions.  
 
Shipping Costs
 
The Company includes shipping costs and freight-in costs in cost of goods sold.  
 
Advertising Costs
 
The costs of advertising are expensed as incurred.  Advertising expenses are included in the Company’s operating expenses.   Advertising expense was $92,553 and $3,049for the years ended June 30, 2011 and 2010, respectively
 
Research and Development
 
The Company expenses research and development costs when incurred.  Indirect costs related to research and developments are allocated based on percentage usage to the research and development.
 
Income Taxes
 
The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purpose, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
 
Earnings (Loss) Per Share
 
Basic EPS is calculated by dividing the loss available to common shareholders by the weighted average number of common shares outstanding during each period.  Diluted EPS is similarly calculated, except that the denominator includes common shares that may be issued subject to existing rights with dilutive potential, except when their inclusion would be anti-dilutive.
 
Based on an estimated current value of the Company’s stock being equal to or less than the exercise price of the warrants, none of the shares assumed issued upon conversion of the warrants, nor any of the stock assumed issued under the Company's 2004 Non statutory Stock Option Plan, are included in the computation of fully diluted loss per share, since their inclusion would be anti-dilutive.  Convertible preferred shares have been included in the dilutive computation, as if they would have been converted at the end of the period.
 
   
June 30,  2011
   
June 30, 2010
 
Earnings (Loss) per share:
           
Net Loss
  $ (3,884,305 )   $ (986,710 )
                 
Common shares
    5,807,756       372,718  
Common share equivalents
    1,523,674       8,349  
Dilutive common shares
    7,331,429       381,067  
                 
Earnings (loss) per share, basic
  $ (0.67 )   $ (2.65 )
Earnings (loss) per share, dilutive
  $ (0.53 )   $ (2.59 )
 
 
-36-

 
 
Impact of Recently Issued Accounting Pronouncements
 
In December 2010, the FASB issued ASU 2010-28, “Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.”  For reporting units with zero or negative carrying amounts, if it is more likely than not that a goodwill impairment exists, ASU 2010-28 requires performance of an additional test to determine whether goodwill has been impaired and to calculate the amount of impairment. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist.  ASU 2010-28 is effective for fiscal years and interim periods within those years beginning after December 15, 2010.  The Company adopted ASU 2009-28 during FY 2011 and the impact of adopting ASU 2010-28 was considered in our evaluation for goodwill impairment at our annual impairment testing date in considering existence and recognition of potential impairment.
 
In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.  ASU 2010-29 specifies that for material business combinations when comparative financial statements are presented, revenue and earnings of the combined entity should be disclosed as though the business combination had occurred as of the beginning of the comparable prior annual reporting period.  ASU 2010-29 also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations with an acquisition date on or after the beginning of the first annual reporting period after December 15, 2010.  The Company adopted this standard in 2011, and has included proforma projections for current year acquisitions requiring combination.
 
Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the Company's present or future consolidated financial statements.
 
3.           Going Concern
 
As of June 30, 2011, the Company has a working capital deficit and has incurred a loss from operations and recurring losses since its inception resulting in a significant accumulated deficit.  As of June 30, 2011, the Company had negative working capital in excess of $1.9 million, and approximately $25,000 in cash with which to satisfy any future cash requirements. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company depends upon capital to be derived from future financing activities such as loans from its officers and directors, subsequent offerings of its common stock or debt financing in order to operate and grow the business. There can be no assurance that the Company will be successful in raising such capital. The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to, acceptance of the Company’s business plan, the ability to raise capital in the future, to continue receiving funding from its officers, directors and shareholders, the ability to expand its customer base, and the ability to hire key employees to grow the business. There may be other risks and circumstances that management may be unable to predict.
 
4.           Property and Equipment
 
Property and equipment consists of the following:
 
   
June 30,  2011
   
June 30, 2010
 
  Office and computer equipment
  $  180,518     $  137,129  
  Furniture and fixtures
    52,990       51,883  
  Computer software
    5,468       5,468  
      238,976       194,480  
  Accumulated depreciation
    45,807       11,229  
    $  193,169     $  183,251  
 
For the years ended June 30, 2011 and 2010 the total depreciation expense charged to operations totaled $34,578 and $1,975, respectively.
 
 
-37-

 
 
5.           Intangible Assets and Goodwill
 
Intangible assets consist of the following:
 
   
June 30,  2011
   
June 30, 2010
 
  Opticon fiber optic management software
  $  189,862     $ 189,862  
  Trademarks
    1,000       1,000  
  TriMax  intellectual property
    6,329,342       6,329,342  
  TriMax software
    180,020       180,020  
  Lockwood customer list
    364,550       --  
  Lockwood licensing and technology
    920,600       --  
      8,015,374       6,700,224  
  Accumulated amortization
    1,314,775       1,329  
    $ 6,700,599     $  6,698,895  
 
For the years ended June 30, 2011 and 2010 the total amortization expense charged to operations totaled $1,313,241 and $423, respectively.
 
Future amortization of intangible property is expected as follows:
 
For the year ended June 30,:
     
   2012
  $ 1,647,863  
   2013
    1,647,863  
   2014
    1,647,663  
   2015
    1,647,663  
   2016
    109,547  
   thereafter
    --  
    $ 6,700,599  
 
Opticon fiber optic management software
 
The Company purchased all rights, titles and interest in the Opticon fiber optic management software on July 26, 2005, from FutureTech, LLC. in exchange for common stock.  The agreement became effective upon FutureTech purchasing the acquired assets from Corning Cable Systems, LLC in exchange for $100,000 in cash.  The Company recorded the common stock at the transferor’s historical cost basis determined under generally accepted accounting principles.
 
On July 26, 2005, the Company purchased the OptiCon Network Manager software system which consisted of version R3 and R4.  At the time of the purchase, the software system was out of date and had to be updated and integrated with other current business software systems, before it could be distributed to customers.  The development of R3 software system was completed during the quarter ended December 31, 2006, and is available for distribution to customers. In September 2010 a transfer of 50% of the R3 license was returned to FutureTech, LLC at a carrying cost value of $22,250.
 
During the years ended June 30, 2011 and 2010, the Company did not allocate any direct labor costs, and indirect costs and expenses to this effort.  The capitalized software costs are amortized when the software is actually sold to customers.  Amortization is provided based on the number of software units sold relative to the number of expected to be sold during the software’s economic life.  At June 30, 2011 and 2010 amortization expense was $200 and $423, respectively.
 
TriMax intellectual property
 
On June 29, 2010 the Company acquired the assets of Trimax Wireless Systems, Inc., including licenses and trademarks.  The purchase price was allocated first to the identifiable assets received, allocating the remaining costs to the intellectual property.  The valuation considered future cash flows of the operating intangible assets acquired.  The valuation of the intellectual property was limited to the acquisition price (valuation of stock consideration and note payable), less the fair market value of identifiable assets.  The shares issued in exchange for the acquired property were valued at the fair market value of the equivalent common stock as of the date of closing.  The acquisition carrying value assigned to the intellectual property was $6,329,342. At June 30, 2011 and 2010 amortization expense was $1,287,324 and $0, respectively.
 
 
-38-

 
 
TriMax software
 
Software development costs, in the amount of $180,020, were acquired in the Trimax acquisition.  The proprietary software was an identified asset of the acquisition and valued at cost.  The capitalized software is available for sale and is to be amortized over a 5 year period. At June 30, 2011 and 2010 amortization expense was $25,717 and $0, respectively.
 
Lockwood Technology Corporation
 
On May, 2011 the Company completed the acquisition of controlling interest in Lockwood Technology Corporation, a leading RFID software and hardware solutions provider, from Daedalus Capital, LLC. Infrax Systems acquired 70% interest in exchange for stock and certain considerations, including a $50,000 note receivable (due in 180 days) from the sellers to Infrax and $112,000 in cash received by Infrax at closing. Additionally, warrants were issued for the purpose of possible future investment capital, to be received by Infrax. Shares were issued at the fair market value at the date of the transaction ($1,650,000). The agreement included warrants for the purchase of 660,000 (post reverse split) common shares at an exercise price of $5.00 (split adjusted, for a term of 3 years. The warrants are callable by Infrax at certain fair market values of the common stock. Warrants were valued at $477,900 using an option price model (assumptions used in calculation: volatility 400%; risk free rate 1.02%; dividend rate 0%). The total purchase price, net of cash, notes receivable, and net assets acquired was $1,956,158 and was allocated to goodwill. The Company recognized an immediate impairment in the amount of $641,008 in consideration of its analysis of future discounted cash flows and industry multiples of the acquired Company, resulting in a net intangible assets of $1,315,150. Infrax also plans to utilize their expertise in future smart grid deployment projects. Management’s allocation of the purchase price was based on our assessment of the fair market value of the assets acquired, in accordance with Accounting Standard Codification, Topic 805. Fixed assets and other tangible assets were evaluated for market value. There were no identifiable assets that had any significant appreciation or impairment, therefore those assets have been brought over at the historical basis, net of depreciation. The analysis of the intangible values purchased were allocated to the Lockwood customer list (30% or $394,550) and the developed software and licensing technology (70% or $920,600).
 
6.           Accrued Expenses
 
Accrued expenses at June 30, 2011 and 2010 were as follows:
 
   
June 30,  2011
   
June 30, 2010
 
Accrued salaries
  $ 528,795     $ 278,034  
Accrued consulting
    137,118        125,118  
Accrued professional
     125,000        47,000  
Accrued interest
    80,338       24,649  
Accrued expenses
    17,857       4,166  
    $ 889,108     $ 478,967  
 
7.           Debt Agreements
 
On June 29, 2010 the Company entered into an agreement with the shareholders of Trimax Wireless, Inc. (“Trimax”) for the purchase of their business assets and technology for preferred shares of the Company, the assumption of certain liabilities and a note payable, in the amount of $712,500.  The note is interest bearing at 6% per annum until fully paid with a start period of 90 (September 29, 2010) days for the first payment.  The Company  shall make interest-only payments on the first day of each month from the date of this Note until the earlier of (a) receipt of Investment Funding as defined; or (b) 180 days from the date hereof ("Maturity Date") (December 29, 2010).  Principal plus all accrued and unpaid interest on such principal shall be due and payable on the Maturity Date. As of the balance sheet date the Company is currently in default, as no payments have been made on this loan and is currently in negotiations to extend terms. See note 14, legal matters.
 
The Company issued a demand note to an unrelated party, with an unpaid balance in the amount of $6,000, with an annual interest rate of 18%. There are no repayment terms. As of June 30, 2011 accrued interest, since inception, is $4,719.
 
The Company has a Master Note Agreement, as an unsecured line of credit, from Mr. Sam Talari. The Master Note is for operational capital, in the amount of $350,000 and bears interest at 5% per annum. Mr. Talari has pledged additional funding for operating capital, up to $500,000 as evidenced by agreement. Subsequent to the year end, Mr. Talari has pledged a total of $1 million dollars, under the same terms as the original Master Note.
 
On June 17, 2010 the Company entered into a Bridge Loan Agreement with Blue Diamond Consulting, LLC (“Lender”).  The Company may be advanced up to $500,000, secured by the Company’s common stock.  Advances may be requested in increments of $25,000 and bear interest of 8% per annum.   Advances have repayment terms of six months from the date of the requested advance.  The Lender has the right, at their option, to convert any amounts due, plus interest, into the Company’s common stock at a conversion rate, as defined, at 50% of the closing bid price at the date of conversion request.  As of June 30, 2011, there have been no requested advances and no amount is due to Lender.
 
 
-39-

 
 
8.           Related Parties Disclosures
 
Employment Agreements
 
The following agreements are with Shareholders, Directors and Members of the Board:
 
 Sam Talari
 
Effective August 1, 2009, the Company entered into a three-year employment agreement with Sam Talari, one of the Company’s directors.  The agreement was automatically renewed for an additional one-year period, and subsequently renewed by the Board for an additional one-year period through July 31, 2013.  The Agreement provides for (a) a base salary of $15,000 per month, (b) a signing bonus equal to one month salary, (c) four weeks’ vacation within one year of the starting date, and (d) all group insurance plans and other benefit plans and programs made available to the Company’s management employees.
 
Paul J. Aiello
 
On October 19, 2010, as amended January 1, 2010, the Company entered into a three-year employment agreement with Paul Aiello, one of the Company’s directors.  The Agreement provides for (a) a base salary of $12,000 per month, (b) a signing bonus of $10,000, (c) four week vacation within one year of the starting date, and (d) all group insurance plans and other benefit plans and programs made available to the Company’s management employees.  Additionally Mr. Aiello has the option to purchase 15,000,000 shares of common stock at $.02 per share, ratably vesting at the employment anniversary date.
 
Malcolm F. Welch
 
 On October 6, 2009, the Company entered into a one-year employment agreement with Malcolm F. Welch, one of the Company’s directors and Co-Chairman of the Board.    The agreement is automatically extended for successive one one-year periods, unless previously terminated.    The Agreement, as amended effective January 1, 2010 provides for (a) a base salary of $2,000 per month; (b) eligibility to receive 375,000 shares of  the Company’s common stock based on the employee’s achievement of goals and objectives approved by the Board; (c) an option to purchase 375,000 shares of  the Company common stock at $0.025 per share to be granted over a 3 years based on the achievement of goals and objectives established by the Board; (d) a bonus based on the level of funding  the Company achieves through  December 31, 2010 ; (e) two week vacation during first year of employment; and (f) all group insurance plans and other benefit plans and programs made available to  the Company ’s management employees.
 
Other employment agreements exist with employees.  As of June 30, 2011 and 2010, the accrued compensation under the employment agreements was $450,225 and $189,989, respectively.  
 
Line of Credit, Master Agreement
 
On September 6, 2005, Mr. Sam Talari, one of the Company’s directors, agreed to make advances to the Company as an interim unsecured loan for operational capital up to a maximum of $350,000, evidenced by a master promissory note, with interest at the rate of 5% per annum, based on amounts advanced from time to time, payable annually.  Mr. Talari has pledged additional funding for operating capital, up to $500,000, under the same terms as the original Master Note. Mr. Talari, from time to time, has converted advances and accrued interest in exchange for equity shares ($105,000 and $45,000 for the years ended June 30, 2011 and 2010, respectively). Mr. Talari continued making advances to the Company on the loan, of which $574,957 and $185,704 remains outstanding at June 30, 2011 and 2010, respectively.  In addition, the Company has accrued interest on this loan in the amount of $30,235 and $5,390 at June 30, 2011 and 2010, respectively.
 
 Loan from Related Parties
 
During the year ended June 30, 2008, FutureWorld Energy, Inc. (formerly Isys Medical), OptiCon’s former parent company, paid expenses on behalf of the Company and made cash advances.  Most of these expenses were paid, and the advances made, by FutureWorld Energy at the time OptiCon was still a subsidiary, and are included in Loan & Note Payable – Related Parties on the balance sheet. At June 30, 2011 and 2010, the amount owed to FutureWorld Energy on this promissory note was $7,802 and $7,802 respectively, and has accrued interest of $2.517 and $655, respectively.
 
 
-40-

 
 
Accounts Payable
 
The Company relies on advances from the majority shareholder and other key members.  Advances are normally in the form of a loan.   Payments are made on behalf of the Company by these individual and are treated as trade payables.  These amounts are considered liquid and if payment is not made, may be formally converted in the form of a note.  The Company currently has an aggregate of $56,185 and $180,505 due to two individuals as of June 30, 2011 and 2010.
 
Stock Transactions
 
On October 3, 2009, the Company agreed to split a portion of the existing debt balance on the Master Note, described above, into two (2) $25,000 convertible notes, with interest at the rate of 5% per annum, and convertible into shares of the Company’s common stock at 40% discount to the 5-day average bid price per share.  Mr. Talari assigned these notes to Eventus Capital, Inc., an unrelated company, for business unrelated to the Company.  On February 9, 2010 and March 25, 2010 respectively, the Company agreed to the conversion of these notes by Eventus Capital into 1,860,119 and 5,000,000 shares respectively of the Company’s restricted common stock.
 
On January 15, 2010, the Company agreed to issue Mr. Talari 1,500,000 shares of the Company’s common stock in exchange for the cancellation of $45,000 of accrued salary owed to Mr. Talari.  The number of shares issued was determined based on the market price of $.03 per share on January 15, 2010.  The Board agreed to issue these shares from shares previously authorized under the Company’s 2009 Employees and Consultants Stock Compensation Plan.
 
The amounts and terms of the above transactions may not necessarily be indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent third parties.
 
9.           Stock Options and Warrants
 
On December 2, 2005, the Company granted two unrelated individuals Series A Warrants to purchase 4 shares, at an adjusted average exercise price of $17300, as adjusted for the reverse split.  All of the Warrants expire on November 11, 2011.  All of the Warrants granted were non-qualified fixed price warrants.
 
               
Weighted Average
 
Remaining
   
Options
   
Options
   
Intrinsic
   
Exercise
 
Contractual
   
Outstanding
   
Vested
   
Value
   
Price
 
Term
  Options, June 30, 2009
    4       4     $ 17,300.00     $ 17,300.00  
.375 years
    Granted
    -       -                    
    Exercised
    -       -                    
    Forfeited
    -       -                    
  Options, June 30, 2010
    4       4                    
    Granted
    660,000       660,000       477,900       3,300,000  
3.0 years
    Exercised
    -       -                    
    Forfeited
    -       -                    
  Options, June 30, 2011
    660,004       660,004                    
 
The following are the weighted average assumptions for the options granted:
 
Weighted Average:
     
    Dividend rate
    0.0 %
    Risk-free interest rate
    1.02 %
    Expected lives (years)
    5.0  
    Expected price volatility
    400.0 %
    Forfeiture Rate
    0.0 %
 
 
-41-

 
 
10.         Stock Option Plan
 
On October 22, 2004, the Company adopted a 2004 Non-statutory Stock Option Plan ( “Option Plan” ) for the benefit of its key employees (including officers and employee directors), consultants and affiliates. The Option Plan is intended to provide those persons who have substantial responsibility for the management and growth of the Company with additional incentives and an opportunity to obtain or increase their proprietary interest in the Company, encouraging them to continue in employment.
 
The Board of Directors authorized 120 shares of the Company's common stock to be set aside (adjusted for reverse split), which may be issued under the Option Plan.  As of June 30, 2011 and 2010, no shares have yet been issued under the Option Plan.
 
On October 2, 2009, the Company adopted a 2009 Employees and Consultants Stock Compensation Plan (“Stock Plan”) for the benefit of employees and consultants (including officers and employee directors). The Stock Plan is intended to provide those persons who have substantial responsibility for the management and growth of the Company with additional incentives and an opportunity to obtain or increase their proprietary interest in the Company, encouraging them to continue in employment, and to pay independent consultants that perform services to the Company. The Board of Directors authorized 10,000 shares (adjusted for reverse split) of the Company's common stock to be set aside, which may be issued under the Stock Plan.
 
On November 24, 2009, the Company filed a registration statement on Form S-8 with the Securities and Exchange Commission registering the 10,000 shares (S-8 shares) (adjusted for reverse split) under the Stock Plan.  As of June 30, 2011, all shares have been issued.
 
On May 12, 2010 the Company’s Board of Directors authorized an additional 10,000 shares of common stock (adjusted for reverse split) available under the Employees and Consultants Stock Compensation Plan, to pay for services from employees and consultants.  The Company may file a registration statement on Form S-8 in the future.
 
11.         Income Taxes
 
Income tax benefit resulting from applying statutory rates in jurisdictions in which the Company is taxed (Federal and State of Florida) differs from the income tax provision (benefit) in our financial statements.  The following table reflects the reconciliation for the years ended June 30, 2011 and 2010:
  
   
Year Ended June 30,
 
   
2011
   
2010
 
Federal at federal statutory rate
   
(34.0)
%
   
(34.0)
%
State, net of federal deduction
   
(3.3)
%
   
(3.3)
%
Change in valuation allowance
   
37.3
%
   
37.3
%
Effective tax rate
   
0.0
%
   
0.0
%
 
There is no current or deferred income tax expense or benefit allocated to continuing operations for the years ended June 30, 2011 and 200 9 or for the period October 22, 2004 (date of inception) through June 30, 2011.
 
The income tax provision differs from the amount of tax determined by applying the federal statutory rate as follows:
 
   
Year Ended
June 30, 2010
   
Year Ended
June 30, 2009
 
             
Income tax benefit at statutory rate
 
$
(1,461,700
)
 
$
(371,300
)
Increase (decrease) in income taxes due to:
               
   Change in valuation allowance
   
1,461,700
     
371,300
 
   
-
   
-
 
 
 
-42-

 
 
Net deferred tax assets and liabilities were comprised of the following:
 
   
For the Year Ended
 
   
June 30, 2011
   
June 30, 2010
 
  Deferred tax asset (liability), current:
           
  Accounts receivable
    8,300       400  
  Accrued salaries
    199,000       104,600  
  Accrued consulting
    51,600       47,100  
  Accrued professional
    47,000       17,700  
  Accrued interest
    30,200       9,300  
  Accrued expenses
    6,700       100  
  Deferred revenue
    -       100,600  
  Valuation allowance
    (342,800 )     (279,800 )
    
    -       -  
                 
  Deferred tax asset (liability), non-current
               
   Net operating loss
    1,142,900       92,200  
   Property and equipment
    (24,000 )     (700 )
   Valuation allowance
    (1,118,900 )     (91,500 )
    
    -       -  
 
The Company has not recognized an income tax benefit for its operating losses generated through June 30, 2011 or 2010 based on uncertainties concerning the Company’s ability to generate taxable income in future periods.  The tax benefit is offset by a valuation allowance established against deferred tax assets arising from operating losses and other temporary differences, the realization of which could not be considered more likely than not.  In future periods, tax benefits and related deferred tax assets will be recognized when management considers realization of such amounts to be more likely than not.
 
For income tax purposes the Company has available a net operating loss carry-forward of approximately $5,081,000 from inception to June 30, 2011, which will expire, unless used to offset future federal taxable income beginning in 2024.
 
12.         Capital Equity
 
The Company has issued convertible preferred shares. Shares are convertible into the Company’s common stock, at the option of the holder, at the prescribed conversion rate. Conversions are as follows:
 
   
Shares
   
Conversion
 
   
Outstanding
   
Rate to Common
 
  Preferred Series A
    200,000       6.0  
  Preferred Series A1
    52,425       .4  
  Preferred Series A2
    107,431       4.5  
  Preferred Series A3
    25,846       .8  
  Preferred Series B