UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

FORM 10-Q/A

Amendment 2

  

{X} QUARTERLY REPORT PURSUANT TO SECTION 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2011 

OR

 

{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

 

THE EXCHANGE ACT

 

For transition period from _______________ to _______________

 

Commission File Number: 0-17953

 

Infrared Systems International

 

(Exact Name of Registrant as Specified in its Charter)

 

Nevada		38-3767357
(State or other jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

 

 

4550 NW Newberry Hill Road, Suite 202, Silverdale WA	98383
(Address of Principal Executive Offices)	(zip code)

 

 

(360) 473-1160

(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 of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES {X} NO { }

 

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 { }                   Accelerated filer { }

  

Non-accelerated filer    { }                   Smaller reporting company { X }

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES { } NO {X}

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of August 22, 2011, there were 277,617,428 shares of common stock outstanding.

 

This Form 10-K/A Amendment 2 is being filed to properly account for the non-controlling interest of the subsidiary AquaLiv, Inc. in our balance sheet and statement of operations, and to correct our statement of cash flows as it pertains to the acquisition of AquaLiv, Inc.

 

 

 

 

INFRARED SYSTEMS INTERNATIONAL – QUARTERLY REPORT ON FORM 10-Q

 

Table of Contents

 

 

	PART I	PAGE
Item 1	Financial Statements
	Balance Sheets
	Statement of Operations
	Statement of Cash Flow
	Notes
Item 2.	Management's Discussion and Analysis of financial condition and results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
	PART II
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Security
Item 4.	Submission of Matters to a Vote of Securities Holders
Item 5.	Other Information
Item 6.	Exhibits
	Signatures

 

 

 

PART I

 

ITEM 1.  FINANCIAL STATEMENTS

 

INFRARED SYSTEMS INTERNATIONAL

AND ITS’ SUBSIDIARIES

CONDENSED BALANCE SHEETS

 

  

ASSETS
		June 30, 2011				September 30, 2010
		(Unaudited)				(Audited)
		( restated )
CURRENT ASSETS:
Cash		$	3,528			$	1,034
Accounts receivable			6,395				16,008
Total Current Assets			9,923				17,042
PROPERTY AND EQUIPMENT, net			9,127				5,000
INVENTORY			14,513				—
TOTAL ASSETS		$	33,563			$	22,042
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable		$	105,993			$	146,775
Notes payable			221,329				260,695
Other liabilities			20,946				36,599
Total Current Liabilities			348,268				444,069
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value, 50,000,000 shares authorized,
861,618 and 285,618 shares issued and outstanding, respectively			862				286
Common stock, $0.001 par value, 500,000,000 shares authorized,
246,822,190 and 187,243,870 shares issued and outstanding, respectively			246,822				187,244
Additional paid in capital			1,891,446				1,414,898
Retained (deficit)			(2,461,795)				(2,024,455)
Noncontrolling interest			7,960				—
Total Stockholders' (Deficit)			(314,705)				(422,027)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)		$	33,563			$	22,042

 

 

 

 

 

INFRARED SYSTEMS INTERNATIONAL

AND ITS’ SUBSIDIARIES

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

 

		For the Three Months								For the Nine Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
			(restated)								(restated)
REVENUES:
Royalty		$	53,600			$	55,590			$	100,000			$	86,790
Sales			103,719				—				337,929				—
Service			11,531				15,707				33,549				15,707
Total Revenues			168,850				71,297				471,478				102,497
COST OF GOODS SOLD			45,756				4,273				151,802				4,273
GROSS PROFIT			123,094				67,024				319,677				98,224
OPERATING EXPENSES:
Consulting fees			34,910				—				57,038				—
Management fees			26,190				28,814				71,110				32,906
Payroll expense			32,904				—				86,407				—
Professional fees			14,332				21,449				73,250				68,249
Research and development			1,146				2,755				8,243				3,350
Travel, meals, and entertainment			3,115				—				9,955				4,968
Loss on goodwill impairment, AquaLiv			—				—				315,484				—
Loss on goodwill impairment, Focus			—				305,000				—				305,000
Loss on goodwill impairment, IAI			—				34,970				—				34,970
Other general and administrative			64,126				64,655				210,428				77,424
Total Operating Expenses			176,724				457,643				831,916				526,867
LOSS FROM OPERATIONS			(53,630)				(390,619)				(512,239)				(428,644)
OTHER INCOME (EXPENSE):
Recapture of loss on impairment of
note receivable			—				—				19,400				—
Gain on distribution of IAI, net			74,353				—				74,353				—
Interest expense			(4,551)				(4,050)				(10,895)				(5,879)
NET INCOME (LOSS) BEFORE INCOME TAX PROVISION			16,172				(394,669	)			(429,381)				(434,523)
PROVISION FOR INCOME TAXES			—				—				—				—
CONSOLIDATED NET LOSS			16,172				(394,669)				(429,381)				(434,523)
Add: Net loss attributable to noncontrolling interest, AquaLiv			8,074				—				15,680				—
NET INCOME (LOSS) ATTRIBUTABLE TO COMPANY		$	24,246			$	( 394,669 )			$	(413,701)			$	(434,523)
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE		$	0.00			$	(0.00	)		$	(0.00	)		$	(0.01	)
WEIGHTED AVERAGE SHARES
OUTSTANDING			229,270,190				177,224,960				209,253,370				66,863,513

 

 

 

INFRARED SYSTEMS INTERNATIONAL

AND ITS’ SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

		For the Nine Months
		Ended June 30,
			2011				2010
			( restated )				( restated )
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(413,701	)		$	(712,824	)
Adjustments to reconcile net loss to net cash provided by
(used in)  operating activities:
Noncontrolling interest in income (loss) of consolidated subsidiary			(15,680	)			—
Depreciation			2,746				1,802
Loss (recapture) on impairment of note receivable			(19,400	)			—
Impairment of intangible assets			—				33,970
Impairment of goodwill-Aqualiv			315,484				—
Loss on goodwill impairment, Focus			—				583,301
Gain on distribution of IAI, net of intercompany transfers			(18,298	)			—
Net (increase) decrease in operating assets:
Accounts receivable			9,613				24,555
Prepaid expenses			—				7,974
Net changes in inventory			(14,513	)			—
Net increase (decrease) in operating liabilities:
Accounts payable and credit cards payable			(40,782	)			(212,644	)
Customer deposits			—				(66,168	)
Other liabilities			(10,019	)			59,459
Net Cash  (Used in) Operating Activities			(204,550	)			(280,575	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment			(6,873	)			—
Net Cash (Used in) Investing Activities			(6,873	)			—
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes, net			24,916				76,921
Proceeds of capital stock issuance			189,000				209,024
Net Cash Provided by Financing Activities			213,916				285,945
NET INCREASE IN CASH			2,493				5,370
CASH AT BEGINNING OF PERIOD			1,034				1,015
CASH AT END OF PERIOD		$	3,528			$	6,385
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	—			$	5,880
Income taxes		$	—			$	—
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock to retire notes payable and accrued interest		$	45,000			$	—
Issuance of common stock for acquisition		$	400,000			$	—
Addition to investment and loans		$	—			$	232,191

 

 

 

 

INFRARED SYSTEMS INTERNATIONAL

AND ITS’ SUBSIDIARIES

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying financial statements have been prepared by the Company in accordance with Article 8 of U.S. Securities and Exchange Commission Regulation S-X.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2011 and 2010 and for the periods then ended have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s September 30, 2010 audited financial statements.  The results of operations for the periods ended June 30, 2011 and 2010 are not necessarily indicative of the operating results for the full year.

 

NOTE 2 - GOING CONCERN

 

The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  At June 30, 2011, the Company had a retained deficit of $2,461,795 and current liabilities in excess of current assets by $314,705 .  During the nine months ended June 30, 2011, the Company incurred a net loss of $429,381 and negative cash flows from operations of $204,550 .  These factors create an uncertainty about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

The Company’s continuation as a going concern is dependent upon its ability to increase revenues, decrease or contain costs, and achieve profitable operations.  In this regard, Company management is focused on the development and expansion of the Company’s technology, including water filtration and purification, bioinformation and life sciences, remote desktop and cloud computing, VoIP telephony, and the licensing of patents, as well as exploring strategic acquisitions in the technology field.   Should the Company’s financial resources prove inadequate to meet the Company’s needs before additional revenue sources can be realized, the Company may raise additional funds through loans or through sales of common or preferred stock.  There is no assurance that the Company will be successful in achieving profitable operations or in raising any additional capital.

 

NOTE 3 - RELATED PARTY TRANSACTIONS

 

Shareholder Loans - During the three months ended June 30, 2011, the Company and its subsidiaries maintained a debt to its officer, through a company in his control, in the amount of $19,088.  The loan bears no interest and is due on demand.  Additionally, the Company’s officer extends the use of credit, which was reduced by $1,478 during the same three months. The credit carries an interest rate of 15.24%.

 

Management Compensation - During the three months ended June 30, 2011 and 2010, respectively, the Company paid or accrued salary and management fees of $26,190 and $28,814 to its current and former officers.

 

Office Space - During the three months ended June 30, 2011 and 2010, respectively, the Company paid or accrued $0 and $5,400 in rent to a former officer.

 

 

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

Estimated Useful Lives			June 30, 2011
Optical equipment	5 years		$	39,386
Office equipment	3 - 10 years			8,231
Computers and peripherals	5 years			16,000
Furniture and fixtures	5 years			6,873
				70,490
Less accumulated depreciation				(61,363	)
Net property and equipment			$	9,127

 

Depreciation expense for the nine months ended June 30, 2011 and 2010 was $2,746 and $1,802, respectively.

 

 

NOTE 5 – AQUALIV ACQUISITION

 

	June 30, 2011
Acquisition value
Preferred shares (per contract)	$	400,000
Total Acquisition value	$	400,000
Valuation classification
Physical assets	$	5,516
Cash		79,000
Goodwill		315,484
Impairment of Goodwill		(315,484
Goodwill, net		-
Net value	$	84,516

 

We have concluded, pursuant to the guidance in FASB ASC 810-10-25-38 (previously FIN 46R) that AquaLiv is a Variable Interest Entity, that we are the primary beneficiary with a controlling financial interest in AquaLiv, and we are required to consolidate its financials accordingly. Additionally, the acquisition was recorded at its fair market value in that the cash, computer equipment, and inventory were recorded at their fair market value on the date of the acquisition. Impairment of goodwill from the date of acquisition was written off to its net realizable value in the accompanying statements of operations.

 

 

 

 

INFRARED SYSTEMS INTERNATIONAL

AND ITS’ SUBSIDIARIES

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

 

   

NOTE 6 – INVENTORY

 

Inventories are comprised of the following amounts at the respective dates:
	June 30, 2011
Raw materials	$	6,761
Work in process		2,157
Finished goods		5,595
Provision for obsolete inventories		-0-
Inventory - end of period	$	14,513

 

There was no inventory as of September 30, 2010.

 

 

NOTE 7 - CONCENTRATIONS

 

At June 30, 2011, 32% of the Company's accounts receivable was due from a single customer.  During the three months ended June 30, 2011, 28% of the Company’s service revenue was generated from a single customer, 100% of the Company's royalty revenues was generated from a single licensee in that category, and 1.8% of sales revenue was generated from a single customer. Compared to total revenue, 18% was generated from a single customer during the three months ended June 30, 2011, compared to the three months ended June 30, 2010, where 78% of the Company's revenues were generated from a single customer.

 

 

NOTE 8 – INCOME TAXES

 

At June 30, 2011, the Company has federal net operating loss carryovers of approximately $609,000 available to offset future taxable income and expiring as follows: $2,320 in 2026, $12,616 in 2027, $127,675 in 2028, $38,545 in 2029, and $428,000 in 2030.  The Company also has a federal contribution carryover of $150 that expires in 2014.  At June 30, 2011, the Company had experienced losses since inception and had not yet generated any taxable income; therefore, the Company established a valuation allowance to offset the net deferred tax assets.  The income tax provision consists of the following components for the nine months ended June 30, 2011 and 2010:

 

		2011				2010
Current income tax expense (benefit)		$	-			$	-
Deferred income tax expense (benefit)			-				-
Net income tax expense (benefit) charged to operations		$	-			$	-

 

The income tax provision differs from the amounts that would be obtained by applying the federal statutory income tax rate to loss before income tax provision as follows for the nine months ended June 30, 2011 and 2010:

	2011				2010
Loss before income tax provision	$	(429,381	)		$	(434,523	)
Expected federal income tax rate		15.0	%			15.0	%
Expected income tax expense (benefit) at statutory rate	$	(64,407	)		$	(19,428	)
Tax effect of:
Meals and entertainment		1,493				70
Change in valuation allowance		62,914				19,358
Net income tax expense (benefit)	$	-			$	-

 

The Company’s deferred tax assets, deferred tax liabilities, and valuation allowance are as follows:

 

		June 30, 2011
Deferred tax assets:
Organization costs		$	60
Contribution carryover			23
Net operating loss carryovers			33,220
Total deferred tax assets		$	33,303
Deferred tax liabilities:
Book basis of patent application		$	(5,246	)
Tax depreciation in excess of book			(498	)
Total deferred tax liabilities		$	(5,744	)
Total deferred tax assets		$	33,303
Total deferred tax liabilities			(5,744	)
Valuation allowance			(27,559	)
Net deferred tax asset (liability)		$	—

 

These amounts have been presented in the financial statements as follows:

 

		June 30, 2011
Current deferred tax asset (liability)		$	-
Non-current deferred tax asset (liability)			-
		$	-

 

NOTE 9 – RESTATEMENT OF FINANCIAL STATEMENTS

 

On December 1, 2011, our management concluded that our audited financial statements for the quarter ended June 30, 2011 no longer should be relied upon.  The following changes were noted:

 

Balance Sheets

 

The balance sheet for the quarter ending June 30, 2011 was restated to account for the noncontrolling interest in AquaLiv, Inc. The adjustment accounted for net equity in the noncontrolling interest portion of AquaLiv, Inc. in the amount of $7,960.

 

Statement of Operations

 

Statement of operations for the three and nine months ending June 30, 2011 was restated to account for the noncontrolling interest in AquaLiv, Inc. The adjustment accounted for net loss in the nononcontrolling interest portion of AquaLiv, Inc. in the amount of $8,074 for the three months ended June 30, 2011 and $15,680 for the nine months ended March 31, 2011.

 

Statement of Cash Flows

 

Statement of cash flows for the quarter ending June 30, 2011 was restated to account for the noncontrolling interest in AquaLiv, Inc., and to properly account for the acquisition of AquaLiv, Inc. and the subsequent loss on goodwill impairment as detailed in Note 5 above. Additionally, statement of cash flows for the quarter ending June 30, 2010 was restated to account for the restatement of those quarterly finanicals made on January 5, 2012.

 

NOTE 10 - SUBSEQUENT EVENTS

 

On August 1, 2011, the Company filed a Form 8-K/A indicating that they had completed the previously arranged distribution of the Infrared Applications, Inc. (IAI) assets on June 22, 2011. Under the terms of the agreement, the assets of IAI were to be distributed within 15 months of the date of the original agreement.

 

On August 4, 2011, the Company obtained $50,000 in financing from a creditor. The note accrues interest at a rate of 8% per annum, is due 9 months after issuance, and may be converted into common stock after 6 months at a 45% discount to the market. A derivative liability will be included in the Company’s financial statements for the year ended September 30, 2011.

 

 

  

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The management discussions contain certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "expect," "intend," "will," "plan," "should," "seek," and similar expressions, are intended to identify forward-looking statements. Such statements reflect the current view of management regarding future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual actions or results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.  The following discussion and analysis should be read in conjunction with the company's consolidated financial statements and related footnotes for the year ended September 30, 2010. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

 

Overview

 

Infrared Systems International (ISI) was formed under the laws of the State of Nevada on April 11, 2006 as a wholly-owned subsidiary of CSBI (then known as Advance Technologies, Inc.) to pursue a narrowly defined business objective called infrared security systems.

 

On July 11, 2007, CSBI acquired American SXAN Biotech, Inc. a Delaware Corporation doing business exclusively in the People's Republic of China under a registered capital corporation, Tieli XiaoXingAnling Forest Frog Breeding Co, Ltd. As a result of the acquisition, the stockholders of American SXAN Biotech, Inc. acquired control of CSBI.

 

Pursuant to one of the terms of the acquisition, all of the assets and liabilities of CSBI as of the date of the acquisition were transferred into ISI. Since that time, ISI had conducted not only the infrared security systems development for which it was formed but also the other prior activities of CSBI.

 

In March 2010, ISI transferred all of the assets and liabilities of ISI into a newly created wholly-owned subsidiary, Infrared Applications, Inc. (IAI).  Since that time, IAI continues to operate the previous business of ISI under this newly created company.

 

On April 12, 2010, ISI sold a majority interest in its common stock to Take Flight Equities, Inc (TFE). As part of the agreement, a change in control took place and William Wright was appointed CEO of ISI.  Also included in the agreement were provisions for the future distribution of the IAI assets to the ISI shareholders of record on March 23, 2010 within 15 months of the agreement.

 

On April 19, 2010, the Company acquired 100% of the outstanding common stock of Focus Systems, Inc. (Focus) from Propalms, Inc. (Propalms) in exchange for 3,000,000 Common shares and 250,000 Preferred Series A shares of the Company. Additionally, the Company issued 500,000 shares of Preferred A stock to Propalms and Propalms was to invest up to $250,000 into the company over a period of 120 days. Propalms subsequently invested $17,809 and returned 464,382 Preferred Series A shares to the Company.  The primary purpose of the acquisition is to provide the Company with an operating business in the cloud computing, remote desktop, and Voice over IP telecommunications space. Included in the acquisition, the Company recognized the fair market value of property, plant and equipment at $5,000 based on as search of age comparable equipment available in the local market.  Liabilities acquired in the acquisition totaled $305,595. Focus is held and operated as a wholly-owned subsidiary of ISI.

 

IAI, and prior to its formation in 2010, its parents, has been engaged in the development of infrared products for commercial applications. Since 2006, IAI has focused its activities on the development of infrared security systems for the automatic detection of intruders. No other material products have been developed by IAI (or prior to its formation its parents) for more than four years, although IAI has various proprietary technology developed by its parent prior to that time.  One June 15, 2010, a patent was issued by the US Patent Office to Infrared Applications Inc. PN: 7,738,008 B1, Ball, “Infrared Security System & Method”.

 

Focus was formed in August of 2007 as a technology company providing remote desktop – cloud computing – services and Voice over Internet Protocol (VoIP) phone services to small and mid-sized businesses.  For the calendar year 2008, Focus operated a regional Internet Service Provider (ISP) business under a management agreement with a third party.

 

ISI's revenues during the past three years have been derived from only two sources: a 1997 license agreement relating to proprietary technology utilized by Kollsman Instruments for its Enhanced Visions System for commercial aviation; and acting on behalf of a Taiwanese company in connection with the acquisition and modification of infrared camera systems in the U.S. for thermal imaging of the human body for medical purposes and exporting the modified products to the Taiwanese company. The services rendered for the Taiwanese corporation are commercial labor and transportation, and no technology of ISI is involved.

 

On July 26, 2010, TFE defaulted in its payment obligations under the note and voting control of the stock was subsequently transferred to Gary Ball.  On January 27, 2011, TFE began making payments on the promissory note.

 

On December 16, 2010 the company purchased a 50% interest in AquaLiv, Inc. from Craig Hoffman for $400,000 paid in the form of 400,000 shares of the Company’s Series A Preferred stock valued at $1.00 per share. We have concluded, pursuant to the guidance in FASB ASC 810-10-25-38 (previously FIN 46R) that AquaLiv, Inc. is a Variable Interest Entity, that we are the primary beneficiary with a controlling financial interest in AquaLiv, Inc. and we are required to consolidate its financials accordingly. The remaining 50% non-controlling interest is owned by Craig Hoffman, AquaLiv, Inc’s President and CEO. AquaLiv, Inc. is a life sciences research and development company creating novel products for numerous industries. The company's technology alters the behavior of organisms, including plants and humans, without chemical interaction. From increased crop yields to drug-free medicine, AquaLiv is providing innovative, ingredient-free solutions to the world's largest problems.

.

 

On June 22, 2011, the Company completed the distribution of the IAI assets in accordance with a previously executed agreement. Under the agreement, all of the outstanding stock of IAI has been transferred to Gary Ball (“Ball”) in accordance with the Agreement. Subsequent to this event, Ball shall be responsible to make, if any, a Subsidiary Stock Distribution to the Company’s shareholders of record as of March 23, 2010, upon the earlier of the foregoing occurrence: (i) the net proceeds from the sale of substantially all of the assets of IAI or (ii) Ball elects to make a Subsidiary Stock Distribution. Any cost incurred in connection with a Subsidiary Distribution shall be the responsibility of Ball. There is no certainty as to when or if a Subsidiary Stock Distribution will occur.

 

 

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Con’t

 

 AquaLiv, Inc.

 

Our research has revealed that all substances have an inherent information signature. Biological systems naturally understand this information and respond to it. While science has not previously detected this powerful aspect of our natural world, AquaLiv's technology can already record, catalog, and mix this bioinformation into unique composites. These composites are designed for specific applications and then programmed into water for delivery to biological systems.

 

With direct applications in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine, AquaLiv is poised to provide innovative ingredient-free solutions to the world's problems.

 

AquaLiv Water System – The AquaLiv water system addresses every aspect of water to make it whole and full of vital nutrients. The system requires no electicity, is eco-friendly, removes most impurities (including harmful sodium fluoride), and creates a healthful and stable alkaline pH.  Users of the AquaLiv Water System have reported stabilized blood sugar, improvements in both high and low blood pressure, reduced allergy symptoms, less headaches, better digestion, and healthy glowing skin. Some diabetics have even reported that AquaLiv helped them decrease their insulin requirements.

 

AquaLiv Water Stick - AquaLiv Water Stick is a non-toxic and 100% natural mineral clay ceramic stick that features AquaLiv’s BioT™ Bioinformation Technology. While a bit complex and scientific to explain in detail, simply put, the BioT™ Ceramic enhances water with the qualities of several vitamins and herbs.  This revolutionary technology turns regular water into a powerful tonic that boosts immunity and encourages wellness. Researchers observed reduced inflammation and common colds in addition to improved hydration, digestion, strength and stamina. AquaLiv has selected several hundred of the world's most renowned medicinal herbs and compounds and blended them in perfect combinations to maximize the potential of the human body.  Available in early 2011 will be the  Wellness water stick, which has proven to boost the immunity and wellbeing of over 300 test participants. Additional initiatives include an  Athletic Performance  water stick, and more to follow.

 

Infotone Face Mist - Infotone Face Mist contains a non-toxic and 100% natural mineral clay ceramic ball that features AquaLiv’s BioT™ Bioinformation Technology.   This revolutionary technology turns regular water into a powerful tonic that when misted over the face encourages optimal hydration and clear, youthful, glowing skin. Researchers observed improved hydration, suppleness, firmness, and texture and reduced dryness, oxidation, wrinkles, skin pigmentation, and blemishes.  Infotone Face Mist stands apart from other facial water misters because it isn’t just a typical water mister.  In fact, no other water mister on the market today utilizes AquaLiv’s BioT™ Bioinformation Technology. Infotone is the first cosmetic of its kind.

 

AgSmart™ Rice – AgSmart™ Rice has demonstrated over 100% crop yield increase over test control yield (same seeds, same practices, adjacent parcel) while decreasing duration before harvest by one month. It is also more resistant to pests, disease, and storms. All AgSmart™ products are 100% natural and organic standards compliant. Based on our experience, we do not expect all farms to achieve a 100% yield increase, but rather a 30-60% increase will be average.

 

Focus Systems, Inc.

 

Remote Desktop and Cloud Computing – A remote device runs the client software that implements the chosen protocol(s) and allows the user to access an entire desktop environment that is being projected from a remote server or group of servers. Although the remote device may be a personal computer running an agent, the remote device, sometimes called a “Thin Client,” does not need to have a large amount of memory or storage. In fact, it may offer no local storage at all. The remote device does not need to be based upon the same hardware architecture or operating system as used by the remote servers. It is quite possible for a small, hand held device based upon an X-scale processor running some embedded operating system to display Linux, Windows, UNIX or even Z/OS applications.

 

The Company believes that there are inherent benefits of operating in a completely portable desktop office environment. Remote desktop users can access their same computer desktop from the office, at home, a mobile device, or virtually anywhere in the world. Access to central data and shared recourses will increase productivity and reduce cost for businesses.  The remote environment is controlled, managed and updated by the Company from a centralized location, further reducing operating costs for its customers.

 

VoIP Phone Service - VoIP phone service is a method for taking analog audio signals (similar to the kind you hear when you talk on the phone) and turning them into digital data that can be transmitted over the Internet. This allows VoIP service to replace traditional landline service for business and residential customers.  Since VoIP phone service is digital, companies can run both data and voice over the same network infrastructure greatly reducing costs.  This reduction in cost is experienced in both the initial start up phase, as well as the ongoing maintenance and services fees associated with phone service.  Company management believes that the trend away from traditional phone service to digital VoIP services will continue to grow.

 

 

 

 

 

 

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Con’t

 

Infrared Applications, Inc.

 

Enhanced Vision System - Our revenue primarily comes from royalties derived through licensing our technology to a single customer, Kollsman.  The licensing agreement with Kollsman grants to Kollsman a worldwide, exclusive license under ISI proprietary data to make, sell, maintain and repair products utilizing such data or patents for use on any aircraft licensed to operate by the Federal Aviation Administration or by equivalent foreign regulatory agencies.  Royalty payments are required for each Enhanced Vision System (EVS) unit sold utilizing a licensed product, based upon the number of units sold.  Pursuant to the license agreement, the royalty currently is $800 per unit.  We recognize our royalty revenues when Kollsman sells aircraft systems.  In accordance with the license agreement, the royalty fee has been earned by us.  The collection of the royalty is reasonably assured because the customer has timely made all payments required under the license agreement since it was signed in July 1997.

   

Infrared Applications, Inc. became a discontinued operation on June 22, 2011 following the distribution of those assets as outlined in a previously executed agreement. Revenue and expenses have been reported through June 22, 2011.

 

Overview of Operations

 

The serious crash of the world’s financial markets and credit institutions are of a major concern to us.  The technology industry, especially as it applies to the small business sector, has slowed drastically during the recession.  New service orders for both remote desktop and VoIP products have been slow since acquisition.  Management is working on increasing exposure for its remote desktop product and is working to expand its VoIP phone service from the small business market into the residential market as well.  Additionally, management is investigating possible acquisitions that would be accretive to the core business and enable the growth of its revenues both locally and abroad.

 

Recent advancements in AquaLiv's technology uncovered a new field of biological information science. With direct applications in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine, AquaLiv is ready to expand its innovative product offering. While the economy has slowed in recent years, recent sales campaigns have produced positive results for AquaLiv.

 

Liquidity and Capital Resources

 

National and global economic conditions have continued to be challenging and unprecedented, particularly in the investment, credit and financial markets. Concerns continue about the impact and the effect the Federal government’s stimulus packages, inflation, volatile energy costs, availability and expenses of credit, stock market swings and the national unemployment will play a role in our future. Businesses today are at risk due to limited credit, illiquid credit markets, and an increasingly cautious finance community, all of which leads many institutional investors and private investors to reduce and/or cease funding to borrowers. If the current economic and credit market conditions continue in this manner, more businesses will close and consumer’s confidence will wane even further. Our company is experiencing a direct impact of the above mentioned economic conditions because certain private investors, although optimistic of our industry’s long-term outlook and our business model/plan, are not willing at this time to commit funds until they see an upward trend in the national economy. In addition, many individuals across the nation are facing uncertainties with their continued employment, coupled with higher living costs, are curtailing or eliminating their spending habits and refraining from making changes in their operations.

 

Results of Operations for the Three and Nine Months Ended June 30, 2011 compared with the Three and Nine Months Ended June 30, 2010.  

 

Revenues

 

The revenues for the three months ending June 30, 2011 were $168,850 as compared to $71,297 in the quarter ending June 30, 2010. Revenues were $471,478 for the nine months ended June 30, 2011, as compared to $102,497 for the nine months ended June 30, 2010.  Sales revenue was added in the first quarter of 2011 as a direct result of the AquaLiv acquisition and comprised of 61.4% and 71.7% of our revenue for the three and nine months ending June 30, 2011, respectively, compared to the same three and nine month periods in 2010, where zero sales revenue was recorded. Likewise, as a result of the Focus Systems acquisition in the third quarter of 2010, service revenue accounted for 6.8% and 7.1% of our revenues for the three and nine months ending June 30, 2011, respectively, compared to the same three and nine month periods in 2010, where zero service revenue was recorded.  The Company’s royalty revenue has remained relatively consistent in terms of gross dollars, but has accounted for less of our overall revenue compared to prior years.  Royalty revenue accounted for 31.7.1% and 21.2% during the three and nine months ending June 30, 2011, respectively, compared to the same three and nine month periods in 2010, where 78.4% and 84.7%, respectively, of our revenue was derived from royalty revenue. Royalty revenue was discontinued on June 22, 2011. Revenue recognition is accounted for as follow: Sales revenue is billed, paid, and shipped in the same period each month; Royalty revenue is recorded as earned in the month it is received; and service revenue is bill in advance on the first day of the month that service is rendered.

 

Cost of Goods Sold

 

Cost of goods sold for the three and nine months ending June 30, 2011 were $45,756 (27.1% of total revenues) and $151,802 (32.2% of total revenues), respectively, compared to $4,273 (6% of total revenues) and $4,273 (4.2% of total revenues), respectively, for the same three and nine month periods ending June 30, 2010.  

 

Operating Expenses

 

Operating expenses for the three months ending June 30, 2011 were $176,724 as compared to $457,643 for the quarter ending June 30, 2010.  The increase of $34,910 in consulting fees, decrease of $2,624 in management fees, increase of $32,904 in payroll expense, decrease of $7,117 in professional fees, decrease of $1,609 in research and development, increase of $3,115 in travel expense, decrease of $529 in general and administrative fees, and the decreases of $305,000 and $34,970, respectively, for the one-time losses on goodwill impairment of Focus and IAI, is due in part to the decreased costs of running additional businesses compared to the quarter ending June 30, 2010. The operating expenses for the nine months ending June 30, 2011 were $831,916 as compared to $526,867 for the nine months ending June 30, 2010.  The increase of $57,038 in consulting fees, increase of $38,204 in management fees, increase of $86,407 in payroll expense, increase of $5,001 in professional fees, increase of $4,893 in research and development, increase of $4,987 in travel expense, increase of $133,004 in general and administrative fees, the one-time increase of $315,484 in loss on goodwill impairment, AquaLiv (due to the one time write down of goodwill attributed to the acquisition of that business), and the decreases of $305,000 and $34,970, respectively, for the one-time losses on goodwill impairment of Focus and IAI, is due in part to the increased costs of running additional businesses compared to the nine months ending June 30, 2010.  The Company expects operating expenses to decrease due to the distribution of the IAI assets in one respect, however, the Company also anticipates increases in certain operating expenses if the Company is successful in expanding its current services and operations.

 

Other Income and Expense

 

Interest expense for the three months ended June 30, 2011 was $4,551 as compared to $4,050 for the three months ended June 31, 2010, and was $10,895 for the nine months ended June 30, 2011 as compared to $5,879 for the nine months ended June 30, 2010.   The increase in interest expense is due to an increase in credit card debt and net borrowing.

 

Net (Loss) Before Provision for Income Taxes

 

The net gain for the three months ended June 30, 2011 was $16,172 as compared to a net loss of $394,670 for the three months ended June 31, 2010.  The net gain is attributed to the one-time gain on distribution of IAI in our other income, which off-set increases in reoccurring operating expenses due to the subsidiary changes and business additions to the Company. The net loss for the nine months ended June 30, 2011 was $429,381 as compared to $434,523 for the nine months ended June 30, 2010.  The decrease in net loss is attributed to the increase in our operating expenses due to the subsidiary changes and business additions to the Company, as well as the one time write off of goodwill attributed to the AquaLiv acquisition, and the off-set from the one-time gain on distribution of IAI in our other income.

 

Cash Flows

 

The June 30, 2010 Cash Flow Statement was restated to present cash flows in the proper classification, operating, investing and financing. The net increase in cash for the period did not change.

 

Cash flows from operating activities were ($170,637) for the nine months ended June 30, 2011 as compared to ($214,411) for the nine months ended June 30, 2010 due to a lower net loss and less cash paid for operating activities during the period.

Cash flows for investing activities were ($15,870) for the nine months ended June 30, 2011as compared to ($1,000) for the nine months ended June 30, 2010 due to an increase investment in long term inventory.

Cash flows provided by financing activities were $189,000 for the nine months ended June 30, 2011, which were related to proceeds from capital stock issuance, compared to $220,781 for the nine months ended June 30, 2010, which were related to proceeds from capital stock issuance and note payable issuance.

 

Going Concern

 

We have limited working capital and limited revenues from sales of products, services, or licenses.  During 2011, a majority of our revenues were generated from a single licensee and our operating expenses are greater than our revenues. These factors have caused our accountants to express substantial doubt about our ability to continue as a going concern.  The accompanying financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.

 

Our ability to continue as a going concern has caused the Board of Directors to continue to look for sources of investment capital, and investigate merger and acquisition opportunities.  We will look to further diversify our holdings and sources of cash flow.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements.

 

 

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined in Item 10 of Regulation S-K and are not required to report the quantitative and qualitative measures of market risk specified in Item 305 of Regulation S-K.  

 

ITEM 4.  CONTROLS AND PROCEDURES

 

 As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our Company's disclosure controls and procedures as of the end of the period covered by this quarterly report, ending June 30, 2011.  This evaluation was carried out under the supervision and with the participation of our Company's management, including our Company's president and chief executive officer.  Based upon that evaluation, our Company's president and chief executive officer concluded that our Company's disclosure controls and procedures were ineffective as of the end of the period covered by this report.  Subsequent to the date we carried out our evaluation, the Company has retained outside professional services to assist with identifying and ensuring that the information required to be disclosed in our Company’s reports are done so in compliance under the rules of the Exchange Act. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures  designed to ensure that information required to be disclosed in our Company's reports filed under the Exchange Act is accumulated and communicated to management, including our Company's president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.

The Company has made changes in our internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting in a positive manner.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that material weaknesses exist due to a lack of segregation of duties, resulting from the Company's limited resources. The Company has retained outside professional services to assist in overcoming these deficiencies.

 

 

 

 

 

PART II - OTHER INFORMATION 

 

ITEM 1.  LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.  RISK FACTORS

 

As a smaller reporting company, the Company is not required to provide disclosure under this Part II, Item 1A.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. (REMOVED AND RESERVED)

 

 

ITEM 5. OTHER INFORMATION

 

None

 

 

 

 

ITEM 6. EXHIBITS

 

Exhibit List

 

3.1

Articles of Incorporation. - filed as an exhibit to the Company’s Registration Statement on Form SB-2 (33-147367)     and incorporated herein by reference.

 

3.2.

By-laws. - filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on September 2, 2008, and incorporated herein by reference.

 

31.1

Rule 13a-14(a) Certification

 

32.1

Section 906 Certification

  

 

  

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date:	February 10, 2012		INFRARED SYSTEMS INTERNATIONAL
			(Registrant)
		By:	/s/ William M. Wr ight
			William M. Wright, President, Principal Financial Officer and Director