UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:          September 30, 2011 (Second Quarter)

 

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT   For the transition period from ________________to ________________

 

COMMISSION FILE NUMBER 000-52488

 

INFRAX SYSTEMS, INC.

(Exact name of Registrant as specified in charter)

 

NEVADA	20-2583185
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

 

6365 53rd Street N, Pinellas Park, FL 33781

(Address of principal executive offices) (ZIP Code)

 

(727) 498-8514

(Registrant's telephone no., including area code)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  Nox

 

The number of shares outstanding of each of the issuer’s classes of common equity, as of November 14, 2011 was 11,963,325 shares.

 

Transitional Small Business Disclosure Format (Check one):

Yes o  No x

 

 

 

 

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION		PAGE
Item 1	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and June 30, 2011		3
	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2011 and 2010 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2011 and 2010 (unaudited)		5
	Condensed Consolidated Notes to Financial Statements (unaudited)		6
Item 2	Management's Discussion and Analysis or Plan of Operation		20
Item 3	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4	Controls and Procedures		26
Item 4 T	Controls and Procedures		26
PART II	OTHER INFORMATION
Item 1	Legal Proceedings		27
Item 1A	Risk Factors		27
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3	Defaults Upon Senior Securities		27
Item 4	Removed and Reserved		27
Item 5	Other Information		27
Item 6	Exhibits		27
Signatures			28

 

 

 

Infrax Systems, Inc.
Consolidated Balance Sheets
				September 30,			June 30,
				2011			2011
				(unaudited)			(audited)
Assets
Current assets
	Cash		$	4,364		$	25,498
	Accounts receivable			115,512			22,050
	Inventory			42,127			55,450
	Note receivable			50,000			50,000
	Prepaid expenses			225			-
Total current assets				212,228			152,998
Property & equipment, net of accumulated
	depreciation of  $46,846 and $45,807, respectively			132,248			193,169
Intangible property, net of accumulated
	amortization of  $1,721,995 and $1,314,775, respectively			6,293,379			6,700,599
Deposits				2,500			2,500
Total Assets			$	6,640,355		$	7,049,266
Liabilities and Stockholders' Equity
Current liabilities
	Accounts payable		$	477,354		$	434,789
	Accrued expenses			1,150,625			889,108
	Notes payable			754,500			774,500
	Loans and notes payable, related parties			7,802			7,802
Total current liabilities				2,390,281			2,106,199
Notes payable to shareholder				521,491			574,957
Total liabilities				2,911,772			2,681,156
Stockholders' Equity
	Preferred stock, 50,000,000 authorized, $.001 par value:
	Series A Convertible: 5,000,000 shares designated;
	2,723,624 and 385,702 issued and outstanding			2,724			386
	Series B Convertible: 100,000,000 shares designated;
	1,210 and 257,764 issued and outstanding			1			258
	Common stock, $.001 par value,  5,000,000,000 shares
	authorized; 11,963,325 and 6,282,275 shares
	issued and outstanding, respectively			11,9643			6,282
	Additional paid-in capital			12,102,405			11,451,683
	Subscriptions (receivable) payable			(1)			408
	Minority interest in subsidiary			26,655			5,447
	Accumulated deficit			(8,415,164)			(7,096,354)
Total stockholders' equity				3,728,583			4,368,110
Total Liabilities and Stockholders' Equity			$	6,640,355		$	7,049,266
* Effective August, 2011 the Company's Board of Directors affected a 1:500 reverse stock split on common shares.  In September 2011 the Preferred B shares were subject to a reverse split of 1 for 1,000. All shares have been retroactively stated to reflect the reverse-split shares.
The accompanying notes are an integral part of these financial statements.

 

 

Infrax Systems, Inc.
Consolidated Statements of Operations
(unaudited)
				For the Three Months Ended
				September 30,
					2011			2010
Revenues				$	204,975		$	319,644
Direct costs					5,658			40,732
Gross Profit					199,317			278,912
Operating expenses:
	Salaries, benefits and stock payments				214,852			156,139
	Stock-based compensation				658,075			-
	Consulting				10,763			143,054
	Professional fees				15,035			31,439
	General and administrative				118,973			136,550
	Amortization and depreciation				415,671			118,722
	Total operating expenses				1,433,369			585,904
Operating (loss)					(1,234,052)			(306,992)
Other income (expense):
	Interest expenses				(31,080)			(11,667)
	Sale of assets, net				(32,470)			-
	Total other income (expense)				(63,550)			(11,667)
Loss from operations before income taxes					(1,297,602)			(318,659)
Provision for income taxes					-			-
					(1,297,602)			(318,659)
	Minority Interest				(21,208)			-
Net loss				$	(1,318,810)		$	(318,659)
Earnings (loss) per share:
	Basic			$	(0.22)		$	(0.13)
Weighted average shares outstanding
	Basic				5,961,872			2,517,840
* Effective August, 2011 the Company's Board of Directors affected a 1:500 reverse stock split on common shares.  In September 2011 the Preferred B shares were subject to a reverse split of 1 for 1,000. All shares have been retroactively stated to reflect the reverse-split shares.
The accompanying notes are an integral part of these financial statements.

 

 

 

Infrax Systems, Inc.
Consolidated Statements of Cash Flows
(unaudited)
				For the Three Months Ended
				September 30,
					2011				2010
Cash Flows from Operating Activities:
	Net (loss) income			$	(1,318,810)			$	(318,659)
	Adjustment to reconcile Net Income to net
	cash provided by operations:
	Depreciation and amortization				415,671				118,722
	Loss on sale of assets				32,470
	Issuance of stock in settlement of services				658,075				-
	Minority interest				21,208				-
	Changes in assets and liabilities:
	Accounts receivable				(93,462)				(15,301)
	Inventory				13,323				(19,554)
	Prepaid and other				(225)				(299)
	Accounts payable				42,565				94,263
	Accrued expenses				261,517				193,814
	Customer deposits and deferred revenue				-				(267,213)
	Net Cash (Used) Provided by Operating Activities				32,332				(214,227)
Cash Flows from Investing Activities:
	Net Cash (Used) Provided by Investing Activities				-				-
Cash Flows from Financing Activities:
	Proceeds from issuance of note payable				-				15,000
	Repayments of notes payable				(20,000)				-
	Proceeds from sale of assets				20,000				-
	Related party advances				(53,466)				93,100
	Net Cash (Used) Provided by Financing Activities				(53,466)				108,100
Net increase/decrease in Cash					(21,134)				(106,127)
Cash at beginning of period					25,498				115,015
Cash at end of period				$	4,364			$	8,888
Supplemental cash flow information:
	Interest paid			$	-			$	-
	Taxes paid			$	-			$	-
The accompanying notes are an integral part of these financial statements.

 

 

 

Infrax Systems, Inc. 

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended September 30, 2011 and the Period from

(Unaudited)

 

1. History of the Company and Nature of the Business

 

History of the Company

 

Infrax Systems, Inc. (formerly OptiCon Systems, Inc.) (“the Company”, “Infrax”) was formed as a Nevada corporation on October 22, 2004.  On July 29, 2005, the stockholders of the Company entered into an agreement to exchange 100% of the outstanding common stock of the Company, for common and preferred stock of FutureWorld Energy, Inc. (formerly Isys Medical, Inc.), a publicly traded company, at which time, the Company became a wholly owned subsidiary of FutureWorld Energy, Inc..

 

FutureWorld Energy, Inc. (“FutureWorld”), Infrax’s parent company, announced its intention to spin off Infrax (formerly OptiCon Systems, Inc.) through 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. 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 lines are expected to provide an operating platform and enhanced operating effectiveness to the OptiCon Network Manager.

 

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.

 

2.   Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated balance sheet as of September 30, 2011, the consolidated statements of operations and statements of cash flows for the respective periods presented, have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted as allowed by such rules and regulations, and the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three months ended September 30, 2011 are not necessarily indicative of results expected for the full year ending June 30, 2011.

 

In the opinion of management, all adjustments necessary to present fairly the financial position at September 30, 2011, and the results of operations and changes in cash flows for all periods presented, have been made. These financial statements should be read in conjunction with our audited financial statements and notes thereto included in our annual report for the year ended June 30, 2011 on Form 10-K filed with the SEC on October 13, 2012.

 

Certain reclassifications have been made to the Statement of Operations for disclosure purposes and comparability.

 

Use of Estimates

 

The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America. These principals require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual results could differ from those estimates.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts and operations of Infrax Systems, Inc., and its wholly owned subsidiary, Infrax Systems SA (Pty) Ltd, an inactive foreign subsidiary and Lockwood Technology Corporation (70% owned by Infrax Systems, Inc. (collectively referred to as the “Company”).  Accordingly, the assets and liabilities, and expenses of this company have been included in the accompanying consolidated financial statements, and material intercompany transactions have been eliminated.

 

The Trimax Wireless, Inc. acquisition was effective June 29, 2010. The Company, per the agreement, acquired all the assets and liabilities of Trimax Wireless, Inc. As an asset purchase the acquired assets and liabilities are included in the accounts of Infrax Systems, Inc.

 

Variable Interest Entities

 

The Company considers the consolidation of entities to which the usual condition (ownership of a majority voting interest) of consolidation does not apply, focusing on controlling financial interests that may be achieved through arrangements that do not involve voting interest.  If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary.  The primary beneficiary is generally required to consolidate assets, liabilities and non-controlling interests at fair value (or at historical cost if the entity is a related party) and subsequently account for the variable interest as if it were consolidated based on a majority voting interest.    The Company has evaluated all related parties, contracts, agreements and arrangements in which it may hold a variable interest. The Company has determined it is not the primary beneficiary in any of these entities, arrangements or participates in any of the activities.

 

Financial Instruments

The Company’s balance sheets include the following financial instruments: cash, accounts receivable, inventory, accounts payable, accrued expenses, and notes payable and notes payable to stockholder. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization. The carrying values of the note payable to stockholder  approximates fair value based on borrowing rates currently available to the Company for instruments with similar terms and remaining maturities.

 

In September 2006, the Financial Accounting Standards Board (FASB) introduced a framework for measuring fair value and expanded required disclosure about fair value measurements of assets and liabilities. The Company adopted the standard for those financial assets and liabilities as of the beginning of the 2008 fiscal year and the impact of adoption was not significant. FASB Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures” (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of 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 September 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 September 30, 2011 and June 30, 2011, 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 to customers.   Prepayments on account are recorded as customer deposit, a current liability, as they represent deferred revenue. Additionally, the Company invoices projects when signed agreement or statements of work are received. Amounts are recorded at the anticipated collectible amount and recorded as deferred revenue until such time that the work is performed. A contra receivable is recorded for invoiced work orders when collectability is not certain, reducing amount included as deferred revenue. Contract revenue is recognized as the contract is completed, based on defined milestones (see policy on revenue recognition). An allowance for doubtful accounts is considered to be established for any amounts that may not be recoverable, which is based on an analysis of the Company’s customer credit worthiness, and current economic trends.  Based on management’s review of accounts receivable, no allowance for doubtful accounts was considered necessary.   Receivables are determined to be past due, based on payment terms of original invoices.  The Company does not typically charge interest on past due receivables.

 

Inventories

 

Inventories are stated at the lower of 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.

 

Intangible Property

 

On June 29, 2010 the Company acquired the assets of Trimax Wireless Systems, Inc., including licenses and trademarks. The purchase price was allocated first to the identifiable assets received, allocating the remaining costs to the intellectual property. The valuation considered future cash flows of the operating intangible assets acquired. The valuation of the intellectual property was limited to the acquisition price (valuation of stock consideration and note payable), less the fair market value of identifiable assets. The shares issued in exchange for the acquired property were valued at the fair market value of the equivalent common stock as of the date of closing. The fair market value of consideration issued (stock and note payable) to the sellers was an aggregate amount of $6,511,364. The value assigned to the carrying value of the acquired intellectual property was $6,329,342. Intellectual property has an estimated useful life of 59 months (remaining life of patents).

 

On May, 2011 the Company completed the acquisition of controlling interest (70%) in Lockwood Technology Corporation, in exchange for stock and certain considerations (cash and warrants). The shares were issued at the fair market value at the date of the transaction ($1,650,000) and warrants were valued using an option price model ($477,900). The total purchase price, net of cash, notes receivable, and net assets acquired was $1,956,158. The Company recognized an immediate impairment in the amount of $641,008 in consideration of its analysis of future discounted cash flows and industry multiples of the acquired Company, resulting in a net intangible assets of $1,315,150. Management’s allocation of the purchase price was based on our assessment of the fair market value of the assets acquired, in accordance with Accounting Standard Codification, Topic 805. Fixed assets and other tangible assets were evaluated for market value. There were no identifiable assets that had any significant appreciation or impairment; therefore those assets have been brought over at the historical basis, net of depreciation. The analysis of the intangible values purchased were allocated to the Lockwood customer list (30% or $394,550) and the developed software and licensing technology (70% or $920,600).

 

Capitalized Software Development Costs

 

The Company capitalizes software development costs, under which certain software development costs incurred subsequent to the establishment of technological feasibility have been capitalized and are being amortized over the estimated lives of the related products. Capitalization of computer software costs is discontinued when the computer software product is available to be sold, leased, or otherwise marketed.

Amortization begins when the product is available for release and sold to customers. Software development costs will be amortized based on the estimated economic life of the product, anticipated to be 10 years.  

 

Impairment of Long-Lived Assets

 

Periodically, the Company assesses the recoverability of the Company’s intangible assets, consisting of the Trimax acquired intellectual property, OptiCon Network Manager software and its trademark, and record an impairment loss to the extent that the carrying amounts of the assets exceed its fair value.  Based upon management's most recent analysis, the Company believes that no impairment of the Company’s tangible or intangible assets exist at September 30, 2011 and June 30, 2011.

 

Revenue Recognition

 

The Company is principally in the business of providing solutions for a secure intelligent energy platform that incorporates our secure wireless technology. Contracts include multiple revenue components, comprised of our software licensing, hardware platforms, installation, training and maintenance.  In accordance with ASC 605-25 Multiple-Element Arrangements, revenue from licensing the software will be recognized upon installation and acceptance of the software by customers.  When a software sales arrangement includes rights to customer support, the portion of the license fee allocated to such support is recognized ratably over the term of the arrangement, normally one year.  Revenue from professional services arrangements will be recognized in the month in which services are rendered over the term of the arrangement.

 Revenue associated with software sales to distributors is recognized, net of discounts, when the Company has performed substantially all its obligations under the arrangement.  Until such time as substantially all obligations under the arrangement are met, software sales are recognized as deferred revenue.  Costs and expenses associated with deferred revenue are also deferred.  When a software sales arrangements include a commitment to provide training and/or other services or materials, the Company estimates and records the expected costs of these training and/or other services and/or materials.

 

Stock Based Compensation

 

The Company issues restricted stock to consultants for various services.  Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.   The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services.  Stock compensation for the periods presented were issued to consultants for past services provided, accordingly, all shares issued are fully vested, and there is no unrecognized compensation associated with these transactions.  

 

Shipping Costs

 

The Company includes shipping costs and freight-in costs in cost of goods sold.  

 

Advertising Costs

 

The costs of advertising are expensed as incurred.  Advertising expenses are included in the Company’s operating expenses.   Advertising expense was $2,396 and $2,538 for the three month periods ending September 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.

		September 30,
		2011		2010
Earnings (Loss) per share:
Net Loss		$         (1,318,810)		$            (318,659)
Common shares		5,961,872		2,517,840
Common shares		5,961,872		2,517,840
Common share equivalents *		1,060,247,462		273,050,031
Dilutive common shares		1,066,209,334		275,567,872
Earnings (loss) per share, basic		$                  (0.22)		$                  (0.13)
Earnings (loss) per share, dilutive *		$                  (0.00)		$                  (0.01)

 

* Potentially issuable preferred shares, if converted to common, were considered but not included in the calculation of diluted earnings per share for the period ended September 30, 2011 and 2010, respectively, because their inclusion would be anti-dilutive.

 

Recently Issued Accounting Pronouncements

 

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 September 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 September 30, 2011, the Company had negative working capital of approximately $2.1 million and approximately $4,000 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’s is attaining revenues and management expects profitability in the future; however operations have not yet attained a profit or break-even. Accordingly, the Company depends upon capital to be derived from future financing activities such as loans from its officers and directors, subsequent offerings of its common stock or debt financing in order to operate and grow the business. There can be no assurance that the Company will be successful in raising such capital. The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to, acceptance of the Company’s business plan, the ability to raise capital in the future, to continue receiving funding from its officers, directors and shareholders, the ability to expand its customer base, and the ability to hire key employees to grow the business. There may be other risks and circumstances that management may be unable to predict.

 

4.   Accounts Receivable

 

Accounts receivable reflect the amounts that have billed at their anticipated collectible amount. The Company receives contract acceptances on submitted quotes. Due to the advanced planning required, contract modifications occur, therefore, management invoices contracts upon signing, however, may reserve against invoicing until final scope of project negotiations or good faith deposits are made.

 

 

5.   Property and Equipment

 

Property and equipment consists of the following:
		September 30,		June 30,
		2011		2011
		(unaudited)		(audited)
Office and computer equipment		$             120,636		$          180,518
Furniture and fixtures		52,990		52,990
Computer software		5,468		5,468
		179,094		238,976
Accumulated depreciation		46,846		45,807
		$             132,248		$         193,169

 

For the three months ended September 30, 2011 and 2010, the total depreciation expense charged to operations totaled $8,451, and $8,631, respectively. 

 

6.  Intangible Assets

 

Intangible assets consists of the following:
		September 30,  2011		June 30, 2011
		(unaudited)		(audited)
Opticon fiber optic management software		$             189,862		$             189,862
Trademarks		1,000		1,000
TriMax  intellectual property		6,329,342		6,329,342
TriMax software		180,020		180,020
Lockwood customer list		394,550		394,550
Lockwood licensing technology		920,600		920,600
		8,015,374		8,015,374
Accumulated amortization		1,721,995		1,314,775
		$          6,293,379		$          6,700,599

 

For the three months ended September 30, 2011 and 2010, the total amortization expense charged to operations totaled $407,220 and $110,091, respectively.

 

Opticon fiber optic management software

 

The Company purchased all rights, titles and interest in the Opticon fiber optic management software on July 26, 2005, from FutureTech, LLC. in exchange for common stock. The agreement became effective upon FutureTech purchasing the acquired assets from Corning Cable Systems, LLC in exchange for $100,000 in cash. The Company recorded the common stock at the transferor’s historical cost basis determined under generally accepted accounting principles.

 

On July 26, 2005, the Company purchased the OptiCon Network Manager software system which consisted of version R3 and R4.  At the time of the purchase, the software system was out of date and had to be updated and integrated with other current business software systems, before it could be distributed to customers.  The development of R3 software system was completed during the quarter ended December 31, 2006, and is available for distribution to customers. In June 2010 a transfer of 50% of the R3 license was returned to FutureTech, LLC at a carrying cost value of $22,250.

During the years ended June 30, 2009 and 2008, the Company did not allocate any direct labor costs, and indirect costs and expenses to this effort.  The capitalized software costs are amortized when the software is actually sold to customers. Amortization is provided based on the number of software units sold relative to the number of expected to be sold during the software’s economic life.  

 

TriMax intellectual property

 

On June 29, 2010 the Company acquired the assets of Trimax Wireless Systems, Inc., including licenses and trademarks. The purchase price was allocated first to the identifiable assets received, allocating the remaining costs to the intellectual property. The valuation considered future cash flows of the operating intangible assets acquired. The valuation of the intellectual property was limited to the acquisition price (valuation of stock consideration and note payable), less the fair market value of identifiable assets. The shares issued in exchange for the acquired property were valued at the fair market value of the equivalent common stock as of the date of closing. The acquisition carrying value assigned to the intellectual property was $6,329,342.

 

TriMax software

 

Software development costs, in the amount of $180,020, were acquired in the Trimax acquisition. The proprietary software was an identified asset of the acquisition and valued at the historical carrying value, cost. The capitalized software is available for sale and is to be amortized over a 5 year period.

 

Lockwood Technology Corporation

 

On May, 2011 the Company completed the acquisition of controlling interest in Lockwood Technology Corporation, 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 intangible assets. The Company recognized an immediate impairment in the amount of $641,008 in consideration of its analysis of future discounted cash flows and industry multiples of the acquired Company, resulting in a net intangible assets of $1,315,150. Infrax also plans to utilize their expertise in future smart grid deployment projects. Management’s allocation of the purchase price was based on our assessment of the fair market value of the assets acquired, in accordance with Accounting Standard Codification, Topic 805. Fixed assets and other tangible assets were evaluated for market value. There were no identifiable assets that had any significant appreciation or impairment; therefore those assets have been brought over at the historical basis, net of depreciation. The analysis of the intangible values purchased were allocated to the Lockwood customer list (30% or $394,550) and the developed software and licensing technology (70% or $920,600).

 

Future amortization of intangible property remaining is expected as follows:

For the year ended June 30,:
2012		$          1,235,898
2013		1,647,864
2014		1,647,864
2015		1,647,664
2016		114,089
thereafter		-
		$          6,293,379

 

7.    Debt Agreements

 

On June 29, 2010 the Company entered into an agreement with the shareholders of Trimax Wireless, Inc. (“Trimax”) for the purchase of their business assets and technology for preferred shares of the Company, the assumption of liabilities and a note payable, in the amount of $712,500. The note is interest bearing at 6% per annum until fully paid with a start period of 90 (September 29, 2010) days for the first payment. The Company shall make interest-only payments on the first day of each month from the date of this Note until the earlier of (a) receipt of Investment Funding as defined; or (b) 180 days from the date hereof ("Maturity Date") (December 29, 2010). Principal plus all accrued and unpaid interest on such principal shall be due and payable on the Maturity Date. As of the balance sheet date the Company is in default, as it has not made payments on this loan and is currently in negotiations to extend terms. and Lockwood Technology Corporation (70% owned by Infrax Systems, Inc.

 

 

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 September 30, 2011 accrued interest, since inception, is $4,450.

 

The Company has a Master Note Agreement, as an unsecured line of credit, from Mr. Sam Talari. The Master Note is for operational capital, in the amount of $350,000 and bears interest at 5% per annum. Mr. Talari has pledged additional funding for operating capital, up to $1 million dollars, under the same terms as the original Master Note.

 

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 nine 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 September 30, 2011, there have been no requested advances and no amount is due to Lender.

 

 

8. Related Parties Disclosures

 

Employment Agreements

 

The following agreements are with Shareholders, Directors and Members of the Board:

 

Saed (Sam) Talari

 

Effective August 1, 2009, the Company entered into a three-year employment agreement with Saed (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 weeks’ vacation within one year of the starting date, and (d) all group insurance plans and other benefit plans and programs made available to the Company’s management employees. Additionally Mr. 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 June 30, 2011 ; (e) two weeks vacation during first year of employment; and (f) all group insurance plans and other benefit plans and programs made available to the Company’s management employees.

 

Other employment agreements exist with employees.

 

Line of Credit, Master Agreement

 

On September 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 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, time to time, has converted advances and accrued interest in exchange for equity shares. Mr. Talari continued making advances to the Company on the loan, of which $448,804 and $185,704 remains outstanding at September 30, 2011 and June 30, 2011, respectively.  In addition, the Company has accrued interest on this loan in the amount of $21,499 and $5,390 at September 30, 2011 and June 30, 2011, respectively.

 

Mr. Talari has pledged additional funding for operating capital, up to $1 million, under the same terms as the original Master Note.

 

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 September 30, 2011 and June 30, 2011, the amount owed to FutureWorld Energy on this promissory note was $7,802 and $7,802 respectively, and has accrued interest of $2,361 and $655, respectively.

 

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 $99,337 due to three individuals as of September 30, 2011.

 

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 660,004 shares, at an adjusted average exercise price of $ .75.  All of the Warrants expire on November 11, 2011.  All of the Warrants granted were non-qualified fixed price warrants.

 

The following table summarizes the activity related to the stock purchase warrants and options and weighted average assumptions for the period ended September 30, 2011:

 

 

						Weighted Average				Remaining
		Options		Options		Intrinsic		Exercise		Contractual
		Outstanding		Vested		Value		Price		Term
Options, June 30, 2010		4		4		$17,300		$17,300		.125 years
Granted		-		-
Exercised		-		-
Forfeited		-		-
Options, June 30, 2011		4		4
Granted		660.000		660.000		$ .75		$ .75
Exercised		-		-
Forfeited		-		-
Options, September 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%

 

 10. Income Taxes

 

There is no current or deferred income tax expense or benefit allocated to continuing operations for the period ended September 30, 2011 and 2010.

The Company has not recognized an income tax benefit for its operating losses generated through September 30, 2011 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 $1,197,000 from inception to June 30, 2011, which will expire, unless used to offset future federal taxable income beginning in 2024.

 

11. Capital Equity

 

The Company has issued convertible preferred shares. Shares are convertible into the Company’s common stock, at the option of the holder, at the prescribed conversion rate. Conversions are as follows:

	Shares	Conversion
	Outstanding	Rate to Common
Preferred Series A	2,600,000	375
Preferred Series A1	8,889	89
Preferred Series A2	88,889	20
Preferred Series A3	260	16
Preferred Series B	1,210	300
	2,724,834

 

Effective August, 2011 the Company's Board of Directors affected a 1:500 reverse stock split on common shares. In September 2011 the Preferred B shares were subject to a reverse split of 1 for 1,000. Due to the event of the reverse stock split, the preferred shares conversion rate to common were adjusted All shares presented have been retroactively stated to reflect the reverse-split shares.

 

13.  Commitments and Contingencies

 

Lease/Rental Agreements

 

On March 11, 2010, the Company entered into a lease with Accu Centre, an unrelated party for executive offices and computer center in Pinellas Park, Florida. The lease is for a three year period, commencing May 2010, with option to terminate the lease after one year, upon adequate notification (90 days).  Base rent is $2,756 per month, with annual cost increases.  The future annual minimum rental for each of the next three years is $33,075, subject to 4% increases per year.

 

Rent expense for the three months ended September 30, 2011 and 2010 amounted to $20,881 and $14,268, respectively.  

 

Foreign Currency Translation

 

The balance sheets of the Company's foreign subsidiaries are translated at period-end rates of exchange, and the statements of earnings are translated at the weighted-average exchange rate for the period. Gains or losses resulting from translating foreign currency financial statements are included in accumulated other comprehensive income (loss) in the consolidated statements of stockholders' equity and comprehensive income. At September 30, 2011 and 2010 no foreign currency translation was conducted due to the immaterial nature of its subsidiary’s balance sheet.

 

Legal Matters

 

From time to time the Company may be a party to litigation matters involving claims against the Company.  Management believes that there are no current matters that would have a material effect on the Company’s financial position or results of operations as of September 30, 2011 and June 30, 2011.

 

In July, 2011Trimax Wireless filed a complaint relating to the unpaid balance of the Promissory Note executed with the acquisition of Trimax Wireless. 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.

 

 14.  Subsequent Events

 

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 technology’s potential and will consider any offer that increases shareholder value.

 

Management has reviewed subsequent events through the date of this filing, November 14, 2011, and believe that all necessary disclosures have been made.

 

 

 

Item 2.

Management’s Discussion and Analysis or Plan of Operation

 

The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This filing contains a number of forward-looking statements which reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the risks to be discussed in our Annual Report on form 10-K and in the press releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of the risks and factors which may affect our business. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

The following discussions should be read in conjunction with our financial statements and the notes thereto presented in “Item 1 – Financial Statements” and our audited financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our report on Form 10-K for the fiscal year ended June 30, 2011. The information set forth in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to differ materially from those contained in the forward-looking statements.

 

Nature of 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.

 

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.

 

Name Changes

 

None.

 

Changes in Management

 

None

 

Sales Activity

 

The Company’s backlog of proposal activity substantially increased in the quarter. Interest in our core products and development projects continues to increase. We are in discussions with several large, nationwide distribution channels to add our products to their portfolios and are in contract discussions with a national sales channel to sell preconfigured versions of select Infrax products.

 

Critical Accounting Policies

 

Our significant accounting policies are more fully described in Note 2 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 its 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, our observance of trends in the industry and information available from other outside sources, as appropriate.

 

 

Our critical accounting policies include:

 

·

Principals of Consolidation -The consolidated financial statements include the accounts and operations of the Infrax Systems, Inc., and its wholly owned subsidiary Infrax Systems SA (Pty) Ltd. (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 intercompany transactions have been eliminated.

·

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.

 

·

Long-Lived Assets - We depreciate property and equipment and amortize intangible assets, including software development costs over the respective assets’ estimated useful life and periodically review the remaining useful lives of our assets to ascertain that our estimate is still valid. If we determine a useful life has materially changed, we either change the useful life or write the asset down or if we determine the asset has exhausted its useful life, we write the asset off completely.

  

·

Capitalized Software Development Costs - We capitalize software development costs incurred subsequent to the establishment of technological feasibility and amortize them over the estimated lives of the related products. We discontinue capitalization of software when the software product is available to be sold, leased, or otherwise marketed. Amortization of software costs begins when the developed product is available for sale to our customers. We amortize our software development costs over the estimated economic life and estimated number of units of the product to be sold.

 

·

Stock Based Compensation - We recognize stock-based compensation expense net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award.  Calculating stock-based compensation expense requires the input of subjective assumptions, including the expected term of the option grant, stock price volatility, and the pre-vesting option forfeiture rate.  We estimate the expected life of options granted based on historical exercise patterns.  We estimate stock price volatility based on historical implied volatility in our stock.  In addition, we are required to estimate the expected volatility rate and only recognize expense for those shares expected to vest.  We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised or cancelled.

 

 

Recent Accounting Pronouncement

 

We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term.  The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.  Those standards have been addressed in the notes to the unaudited financial statement and in our Annual Report, filed on Form 10-K for the period ended June 30, 2011. 

 

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.

 

Subsequent Events:

 

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 has reviewed subsequent events through the date of this filing, November 14, 2011, and believe that all necessary disclosures have been made.

 

RESULTS OF OPERATIONS

 

For the three months ended September 30, 2011 and 2010:

 

During the three month period ended September 30, 2011, we had sales from the delivery of equipment and services in the amount of $204,975 compared to $319,644 for the comparable three month period ended September 30, 2010. The Company has increased its marketing efforts with the new service and product offerings of Trimax and for the newly acquired Lockwood.

 

Our expenses increased by approximately $847,000 from $585,904 to $1,433,369 for the three month period ended September 30, 2011 and 2010, respectively. Expenses increased due to the additional costs incurred with our acquisition of Lockwood, particularly salaries and consulting expenses. We also incurred $415,671 of depreciation and amortization costs, compared to $118,722, primarily the result of our acquisitions. Additionally, we incurred stock-based service cost in the amount of $658,075, compared to $0 for the comparable quarter. General and administrative costs increased during the period, primarily for the additional infrastructure required.

 

During the three months ended September 30, 2011 we sold furniture, as we consolidated our offices in the closing of the Trimax office. The furniture had a cost of $59,882 and accumulated depreciation of $7,412, which we had sold for gross proceeds of $20,000, resulting in a loss on the sale in the amount of $32,470.

 

For the three months ended September 30, 2011, we incurred a net loss of $1,318,810 compared to a loss of $318,659 and $759,223 for the three months ended September 30, 2011, reflecting primarily the additional employees and infrastructure as we advance our operations from an R&D company to a service provider.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2011, we had approximately $4,000 in cash with which to satisfy our cash requirements for the next twelve months, along with approximately $480,000 remaining on the line of credit from Mr. Talari to pay normal operating expenses, while we attempt to secure other sources of financing.  Additionally, our $500,000 Bridge loan remains unused, however, available.  

 

Since the inception of our Master Note Agreement, Mr. Talari has continued to advance funds to us as needed. Mr. Talari remains committed to continue funding the Company and has regularly converted amounts outstanding and accrued interest, under the note agreement, to our common stock, in order to have money available.  At September 30, 2011, we owe Mr. Talari $521,491 on the master promissory note plus accrued interest.   Mr. Talari has pledged funding for operating capital, up to $1,000,000, under the same terms as the original Master Note.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

We are a Smaller Reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4.

Controls and Procedures

 

Not Applicable

 

Item 4T.

Controls and Procedures

 

Disclosure controls and procedures:  As of September 30, 2011, we carried out an evaluation of the effectiveness of our disclosure controls and procedures, with the participation of our principal executive and principal financial officers.   Disclosure controls and procedures are defined in Exchange Act Rule 15d–15(e) as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.”  Based on our evaluation, our President/Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2011, such disclosure controls and procedures were not effective.

 

Changes in internal control over financial reporting: Based upon an evaluation by our management of our internal control over financial reporting, with the participation of our principal executive and principal financial officers, there were no changes made in our internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected or are reasonably likely to materially affect this control.

 

Limitations on the Effectiveness of Internal Control: Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material errors.  An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations on all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control.  The design of any system of internal control is also based in part upon certain assumptions about risks and the likelihood of future events, and there is no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of ---changes in circumstances and the degree of compliance with the policies and procedures may deteriorate.  Because of the inherent limitations in a cost-effective internal control system, financial reporting misstatements due to error or fraud may occur and not be detected on a timely basis.

 

PART II - OTHER INFORMATION

 

Item 1

Legal Proceedings.

 

During the quarter ended June 30, 2011, Trimax Wireless filed a complaint relating to the unpaid balance of the Promissory Note executed with the acquisition of Trimax Wireless. The Company has filed a motion to dismiss such action which is set for hearing. The note is unsecured, however, if holders prevail, they may be entitled to legal cost, in addition to payments per the term of the agreement. The Company believes that it has sufficient affirmative defenses to this complaint and does not believe that it will have a material effect on the Company.

 

 

Item 1A

Risk Factors.

 

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2011 filed on October 13, 2011 with the Securities and Exchange Commission.

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3

Defaults Upon Senior Securities.

 

Not applicable.

 

 

Item 4

Removed and Reserved.

 

Not applicable

 

 

Item 5

Other Information.

 

None

 

Item 6

Exhibits

 

31.A	Principal Executive Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.B	Principal Financial & Accounting Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.A	Principal Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.B	Principal Financial & Accounting Officer’s Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant cause this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Infrax Systems, Inc.
	(Registrant)
Date: November 14, 2011	By:  /s/  Paul J. Aiello
	Paul J. Aiello
	Principal Executive Officer
Date: November 14, 2011	By:  /s/ Peter Messineo
	Peter Messineo
	Principal Financial & Accounting Officer