Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - INFERX CORPFinancial_Report.xls
EX-32 - CERTIFICATION - INFERX CORPv340499_ex32.htm
EX-31 - CERTIFICATION - INFERX CORPv340499_ex31.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2012

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number 000-51720

 

InferX Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   54-1614664
(State or other jurisdiction of incorporation or
organization)
  (I.R.S. Employer Identification No.)

 

1934 Old Gallows Road    
Tysons Corner, VA   22182
(Address of principal executive offices)   (Zip Code)

 

(703) 444-6030

(Registrant’s telephone number, including area code)

 

46950 Jennings Farm Drive, Suite 290, Sterling, VA 20164-8679

(Former Name, Former Address and Former Fiscal Year, if Changes Since Last Report). 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ¨   No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨ Smaller reporting company x
   
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

 

As of May 15, 2012, there were 20,669,453 outstanding shares of the registrant’s common stock, $.0001 par value.

 

 
 

 

TABLE OF CONTENTS

 

Item   Description   Page
         
PART I - FINANCIAL INFORMATION    
         
ITEM 1.   FINANCIAL STATEMENTS.   3
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION.   34
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   40
ITEM 4.   CONTROLS AND PROCEDURES.   40
         
PART II - OTHER INFORMATION    
         
ITEM 1.   LEGAL PROCEEDINGS.   41
ITEM 1A.   RISK FACTORS   41
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   46
ITEM 3.   DEFAULT UPON SENIOR SECURITIES.   46
ITEM 4.   MINE SAFETY DISCLOSURES.   46
ITEM 5.   OTHER INFORMATION.   46
ITEM 6.   EXHIBITS.   46

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

INFERX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2012 (UNAUDITED) AND DECEMBER 31, 2011

 

   March 31,   December 31, 
   2012   2011 
   (UNAUDITED)     
ASSETS          
           
CURRENT ASSETS          
Cash  $12,043   $152,874 
Accounts receivable   326,050    231,822 
Advance   -    - 
Prepaid expenses   17,639    2,639 
Total current assets   355,732    387,335 
           
Fixed assets, net of depreciation   5,986    7,884 
           
Other Assets          
Other assets   6,000    6,000 
Computer software development costs, net of amortization   175,282    129,674 
Total other asset   181,282    135,674 
           
TOTAL ASSETS  $543,000   $530,893 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $3,231,359   $3,093,299 
Term loan   341,587    341,587 
Related party payable   725,000    725,000 
Notes payable, related party   59,350    50,600 
Convertible debenture   199,500    199,500 
Derivative liability   29,950,837    40,042,463 
Liability for stock to be issued - common stock   224,900    18,620 
Current portion of notes payable   93,657    65,687 
Total current liabilities   34,826,190    44,536,756 
           
Long-term Liabilities          
Notes payable, net of current portion   339,082    347,052 
Total Long-term liabilities   339,082    347,052 
           
TOTAL LIABILITIES   35,165,272    44,883,808 
           
MEZZANINE (TEMPORARY) EQUITY          
Convertible redeemable preferred stock, series B, par value $.0001 per share; 1,500,000 shares authorized; 1,156,250 and 906,250 shares issued, respectively   462,500    362,500 
Discount on preferred stock, series B   (147,142)   (131,192)
Total Mezzanine (Temporary) Equity   315,358    231,308 
           
TOTAL MEZZANINE (TEMPORARY) EQUITY   315,358    231,308 
           
STOCKHOLDERS' EQUITY (DEFICIT)          
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized and no shares issued and outstanding   -    - 
Common stock, par value $0.0001 per share, 400,000,000 shares authorized and 20,006,203  and 19,998, 203 shares issued and outstanding, respectively   2,000    1,999 
Additional paid-in capital   1,839,816    1,658,198 
Retained earnings (defict)   (36,779,446)   (46,244,420)
Total stockholders' equity (deficit)   (34,937,630)   (44,584,223)
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)  $543,000   $530,893 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3
 

 

INFERX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)

 

   Three Months Ended 
   March 31, 
   2012   2011 
         
REVENUE  $509,729   $1,031,336 
           
COST OF REVENUES          
Direct labor and other fringes   51,232    147,709 
Subcontractor   317,913    510,534 
Other direct costs   4,315    16,684 
Total costs of revenues   373,460    674,927 
           
GROSS PROFIT   136,269    356,409 
           
OPERATING EXPENSES          
Indirect and overhead labor and fringes   312,252    367,311 
Professional fees   219,219    73,954 
Business development costs   385    1,409 
Rent   19,500    22,446 
Advertising and promotion   1,484    6,776 
General and administrative   23,103    28,239 
Stock based compensation   140,550    99,641 
Depreciation   1,899    5,514 
Total operating expenses   718,392    605,290 
           
NET INCOME (LOSS) FROM OPERATIONS BEFORE OTHER EXPENSE AND PROVISION FOR INCOME TAXES   (582,123)   (248,881)
           
OTHER INCOME (EXPENSE)          
Amortization of debt discount   (22,800)   - 
Loss on extinguishment of debt   -      
Fair value adjustment on derivative liability   10,091,626    294,000 
Interest expense, net of interest income   (21,729)   (15,599)
           
Total other income (expense)   10,047,097    278,401 
           
NET INCOME (LOSS) FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES   9,464,974    29,520 
           
Provision for income taxes   -    - 
           
NET INCOME (LOSS) APPLICABLE TO SHARES  $9,464,974   $29,520 
           
NET INCOME (LOSS) PER BASIC SHARES  $0.47   $0.00 
NET INCOME (LOSS) PER DILUTED SHARES  $0.07   $0.00 
           
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC   20,001,191    17,496,831 
           
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED   135,622,191    31,263,664 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
 

 

INFERX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)

 

   Three Months Ended 
   March 31, 
   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $9,464,974   $29,520 
           
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
           
Stock based compensation   140,550    99,641 
Amortization of debt discount   22,800    - 
Services rendered for liability for stock to be issued   208,600    - 
Fair value adjustment for derivative liability   (10,091,626)   (294,000)
Amortization of computer software development costs   -    - 
Depreciation   1,899    5,514 
Change in assets and liabilities   -    - 
(Increase) decrease in accounts receivable   (94,228)   (70,724)
(Increase) decrease in advances   -    - 
(Increase) decrease in other current assets   (15,000)   - 
Increase in accounts payable and accrued expenses   138,058    212,237 
Total adjustments   (9,688,947)   (47,332)
Net cash provided by (used in) operating activities   (223,973)   (17,812)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Increase in computer software costs   (45,608)   - 
Purchase of Fixed Assets   -    - 
Net cash (used in) financing activities   (45,608)   - 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
(Repayment) of term loan, net   -    - 
Proceeds received for shares of common stock   -    68,000 
Proceeds from (repayment of) note payable, net   20,000    (21,868)
Proceeds from notes payable - related parties   8,750    - 
Proceeds received from convertible debentures   -    - 
Proceeds received from convertible preferred   100,000    - 
Net cash provided by (used in) financing activities   128,750    46,132 
           
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (140,831)   28,320 
           
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD   152,874    32,828 
           
CASH AND CASH EQUIVALENTS - END OF PERIOD  $12,043   $61,148 
           
SUPPLEMENTAL INFORMATION OF CASH FLOW ACTIVITY          
Cash paid during the period for interest  $6,337   $6,167 
Cash paid during the period for income taxes  $1,050   $- 
           
SUPPLEMENTAL INFORMATION OF NONCASH ACTIVITY          
Conversion of accounts payable and accrued expenses for common stock and additional-paid-in-capital or stock liability  $2,320   $5,600 
Conversion of convertible debentures, notes and accrued interest for common stock and additional-paid-in-capital or stock liability  $-   $32,855 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  

5
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION

 

The unaudited condensed consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2011 audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

 

These unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the consolidated operations and cash flows for the periods presented.

 

InferX was incorporated under the laws of Delaware in 1999. On December 31, 2005, InferX and Datamat Systems Research, Inc. (“Datamat”), a company incorporated in 1992 under the corporate laws of the Commonwealth of Virginia executed an Agreement and Plan of Merger (the “Merger”). InferX and Datamat had common majority directors. The financial statements herein reflect the combined entity, and all intercompany transactions and accounts have been eliminated. As a result of the Merger, InferX merged with and into Datamat, the surviving entity. Upon completion, Datamat changed its name to InferX Corporation.

 

InferX was formed to develop and commercially market computer applications software systems that were initially developed by Datamat with grants from the Missile Defense Agency. Datamat was formed as a professional services research and development firm, specializing in the Department of Defense. The Company provided services and software to the United States government and to commercial entities as well.

 

On March 16, 2009, the Company entered into an agreement and plan of reorganization (the “Merger Agreement”) with the Irus Group, Inc. (“Irus”) under which it effected a reverse triangular merger between Irus and the Company’s wholly-owned subsidiary, Irus Acquisition Corp. (formed for the purse of completing this transaction). The Merger Agreement was then amended on June 15, 2009 (the “First Amended and Restated Agreement”) to reflect the change in the amount of the shares issued to Irus in the transaction.

 

Under the terms of the First Amended and Restated Agreement, the issued and outstanding shares of Irus common stock was automatically converted into the right to receive 56% of the issued and outstanding shares of the Company’s common stock.

 

The Merger Agreement also provides that, at the effective time of the Merger, the Company’s Board of Directors agreed to appoint Vijay Suri, President and CEO of the Company and have Vijay Suri fill a vacancy on its Board of Directors. In addition, effectiveness of the Merger Agreement is conditional upon (i) the Company restructuring existing debt by converting the existing debt and warrants to common stock with the intention of having no more than 57-60 million shares of its common stock outstanding prior to a reverse split of not less than 1:10; (ii) the Company using its best efforts to reduce its accounts payable by 70%, (iii) Vijay Suri, President and CEO of The Irus Group executing an employment agreement with the Company, and (iv) additional customary closing conditions relating to delivery of financial statements, closing certificates as to representations and warranties, and the delivery of any required consents or government approvals.

 

6
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

 

In accordance with the merger, the Company on July 27, 2009 filed a Schedule 14C with the Securities and Exchange Commission. The Schedule 14C, contained 2 proposals; to increase the authorized common shares from 75,000,000 to 400,000,000 and to reverse split the common stock on a 1:20 basis. All share and per share amounts have been presented on a post-split basis.

 

On October 27, 2009, the Company and Irus completed the Merger. As consideration for the Merger, the Company issued 9,089,768 shares of common stock to Vijay Suri, the sole stockholder of Irus. As part of their employment agreements signed on 27 October 2009, both Vijay Suri and B.K. Gogia, each were issued 1,000,000 shares of preferred stock. On June 2, 2010, the Board rescinded the 1,000,000 shares of preferred stock and issued Vijay Suri and B.K. Gogia 1,000,000 shares of common stock in recognition of their personal guarantee of certain corporate debt of the Company.

 

Irus was a consulting firm advising on the planning, implementation and development of complex business intelligence and corporate performance management systems. Irus has successfully implemented projects across a broad cross-section of clients in the government, financial services, retail, manufacturing, and telecommunications markets. Irus has provided business solutions for many large clients, including MasterCard, JP Morgan Chase, ConAgra, and the US Navy, and collaborated with a wide range of technology partners including Oracle, IBM/Cognos and Microsoft.

 

The Merger with Irus was accounted for as a recapitalization under the purchase method of accounting, as Irus became the accounting acquirer. The reported amounts and disclosures contained in the consolidated financial statements are those of Irus, the operating company. In the transaction, Irus did assume the technology of the Company as well as the liabilities.

 

Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Positions or Emerging Issue Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”).

 

The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.

 

Going Concern

 

As shown in the accompanying condensed consolidated financial statements the Company has incurred a net loss from operations of $582,123 and $248,881 for the three months ended March 31, 2012 and 2011, respectively, and net income of $9,464,974 and $29,520, respecitively due in large part to the fair value adjustment on the derivative liability of $10,091,626 and $294,000, respectively. The Company has an accumulated deficit of $36,779,446 as of March 31, 2012.

 

7
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

 

Additonally, our overall recurring losses and working capital deficiencies include the move by the federal government to convert contract support spaces to employees. This is negatively impacting our labor rates, hours billed, and ability to expand current contracts. Further, the federal government’s inability to negotiate and implement a comprehensive federal budget has directly impacted our success in acquiring new profitable government contracts. Combined with the continued uncertainty in the commercial market due to the sustained national down-turn in business and associated flat recovery has increased sales cycles and reduced sales opportunities. Additionally, the Company continues to be constrained by its availability of investment capital to the firm. The Company expects the negative cash flow from operations to continue its trend through the next six months, however the Company continues to expand current contract revenue backlog and build its pipeline of contracts. These factors continue to raise significant doubt about the ability of the Company to continue as a going concern.

 

Management’s plans to address these conditions include continued aggressive efforts to expand the firm’s current business backlog, by obtaining new government and commercial contracts, as well as expanding integrator partnerships and new technology. Commensurate with Management’s aggressive sales development plan; the Company has instituted a comprehensive communications and marketing plan; the hiring of another sales representative, the hire of a Practice Manager for Cyber Security, and the engagement of an external business development organization. Management believes that these combined efforts will significantly improve the success rate of sales closure within the Company’s robust opportunity pipeline. The Company continues to seek additional capital through the sale of the Company’s stock. Additionally, the executive management team has put into place an aggressive cost and expense savings spending plan to identify and eliminate costs which are directly impacting profitability.

 

The Company’s long-term success is dependent upon the obtainment of sufficient capital to fund its operations; development of its products; and launching its products to the worldwide market. These factors will contribute to the Company’s obtaining sufficient sales volume to be profitable. To achieve these objectives, the Company may be required to raise additional capital through public or private financings or other arrangements. It cannot be assured that such financings will be available on terms attractive to the Company, if at all. Such financings may be dilutive to existing stockholders and may contain restrictive covenants.

 

The Company is subject to certain risks common to technology-based companies in similar stages of development. Principal risks to the Company include uncertainty of growth in market acceptance for its products; history of losses in recent years; ability to remain competitive in response to new technologies; costs to defend, as well as risks of losing patent and intellectual property rights; reliance on limited number of suppliers; reliance on outsourced manufacture of its products for quality control and product availability; uncertainty of demand for its products in certain markets; ability to manage growth effectively; dependence on key members of its management; and its ability to obtain adequate capital to fund future operations.

 

The condensed consolidated financial statements do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amounts and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.

 

8
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The condensed consolidated financial statements include those of the Company and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments and other short-term investments with a maturity of three months or less, when purchased, to be cash equivalents.

 

The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation up to $250,000.

 

Allowance for Doubtful Accounts

 

The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables as well as historical collection information. Credit is granted to substantially all customers on an unsecured basis. In determining the amount of the allowance, management is required to make certain estimates and assumptions. Management has determined that as of March 31, 2012, no allowance for doubtful accounts is required.

 

Fixed Assets

 

Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets (primarily three to five years). Costs of maintenance and repairs are charged to expense as incurred.

 

Computer Software Development Costs

 

During 2012 and 2011, the Company capitalized certain software development costs. The Company capitalizes the cost of software in accordance with ASC 985-20 once technological feasibility has been demonstrated, as the Company has in the past sold, leased or otherwise marketed their software, and plans on doing so in the future. The Company capitalizes costs incurred to develop and market their privacy preserving software during the development process, including payroll costs for employees who are directly associated with the development process and services performed by consultants. Amortization of such costs is based on the greater of (i) the ratio of current gross revenues to the sum of current and anticipated gross revenues, or (ii) the straight-line method over the remaining economic life of the software, typically five years. It is possible that those anticipated gross revenues, the remaining economic life of the products, or both, may be reduced as a result of future events. The Company has not developed any software for internal use.

 

The Company’s CTO administered major modifications to the Company’s core products (i.e. InferAgent, InferText). At the same time he developed an industry specific interface to make the product more end user friendly and more marketable to the general public. These modifications were in response to specific potential customer needs.

 

For the three months ended March 31, 2012, the Company capitalized $45,608 in computer software costs.

 

Recoverability of Long-Lived Assets

 

The Company reviews the recoverability of our long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on our ability to recover the carrying value of long-lived assets from expected future cash flows from operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale are carried at the lower of the then current carrying value or fair value less estimated costs to sell.

 

9
 

 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue Recognition

  

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. We enter into certain arrangements where we are obligated to deliver multiple products and / or services (multiple elements). In these transactions, we allocate the total revenue among the elements based on the sales price of each element when sold separately (vendor-specific objective evidence).

 

The Company generates revenue from application license sales, application maintenance and support, professional services rendered to customers as well as from application management support contracts with commercial and governmental units. The Company’s revenue is generated under time-and-material contracts and fixed-price contracts.

 

The Company’s business is not seasonal in nature. The timing of contract awards, the availability of funding from the customer, the incurrence of contract costs and unit deliveries are the primary drivers of our revenue recognition. These factors are influenced by the federal government’s October-to-September fiscal year. This process has historically resulted in higher revenues in the latter half of the government fiscal year. Many of our government customers schedule deliveries toward the end of the calendar year, resulting in increasing revenues and earnings over the course of the year.

 

The Company does not derive revenue from projects involving multiple revenue-generating activities. If a contract would involve the provision of multiple service elements, total estimated contract revenue would be allocated to each element based on the fair value of each element. The amount of revenue allocated to each element would then be limited to the amount that is not contingent upon the delivery of another element in the future. Revenue for each element would then be recognized depending upon whether the contract is a time-and-materials contract or a fixed-price, fixed-time contract.

 

Stock-Based Compensation

 

In 2006, the Company adopted the provisions of ASC 718-10 “Share-Based Payments” (“ASC 718-10”) which requires recognition of stock-based compensation expense for all share-based payments based on fair value. Share-based payment transactions within the scope of ASC 718-10 include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. This adoption had no effect on the Company’s operations. Prior to January 1, 2006, the Company measured compensation expense for all of the share-based compensation using the intrinsic value method.

 

The Company has elected to use the modified–prospective approach method. Under that transition method, the calculated expense in 2006 is equivalent to compensation expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.

 

The Company measures compensation expense for non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.

 

10
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Concentrations

 

For the three months ended March 31, 2012 and 2011, the Company derived 100% and 82% of its revenue from five and two customers, respectively. These customers are considered major customers as they represent 10% or more of total revenue. The Company does not believe that there is any customer concentration risk associated with these customers.

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. To date, accounts receivable have been derived from contracts with agencies of the federal government. Accounts receivable are generally due within 30 days and no collateral is required.

 

Fair Value of Financial Instruments (other than Derivative Financial Instruments)

 

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. For the notes payable, the carrying amount reported is based upon the incremental borrowing rates otherwise available to us for similar borrowings. For the warrants that are classified as derivatives, fair values were calculated at net present value using our weighted average borrowing rate for debt instruments without conversion features applied to total future cash flows of the instruments.

 

Convertible Instruments

 

The Company reviews the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features, where the ability to physical or net-share settle the conversion option is not within the control of the Company, are bifurcated and accounted for as a derivative financial instrument. Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to interest expense using the Effective Interest Method. The Company values derivative liability only when convertible debt is in default or has matured.

 

Income Taxes

 

Under ASC 740 the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

Uncertainty in Income Taxes

 

The Company follows ASC 740-10, Accounting for Uncertainty in Income Taxes. This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 for 2008, and they evaluate their tax positions on an annual basis. The Company’s policy is to recognize both interest and penalties related to unrecognized tax benefits expected to result in payment of cash within one year are classified as accrued liabilities, while those expected beyond one year are classified as other liabilities. The Company has not recorded any interest or penalties since its inception.

 

The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. Certain tax years remain open for examination by federal and/or state tax jurisdictions. The Company is currently not under examination by any other tax jurisdictions for any tax year.

 

11
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Earnings (Loss) Per Share of Common Stock

 

Basic net earnings (loss) per common share (“EPS”) is computed using the weighted average number of common shares outstanding for the period. Diluted earnings per share include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for the periods presented.

 

The following is a reconciliation of the computation for basic and diluted EPS:

  

   Three Months Ended 
   March 31,   March 31, 
   2012   2011 
         
Net income (loss)  $9,464,974   $29,520 
           
Weighted-average common shares outstanding:          
Basic   20,001,191    17,496,831 
Convertible debentures/notes   100,250,000    2,083,333 
Warrants   8,275,250    6,004,000 
Options   5,939,500    5,679,500 
Diluted   135,622,191    31,263,664 
           
Basic net income (loss) per share  $0.47   $0.00 
           
Diluted net income (loss) per share  $0.07   $0.00 

 

Research and Development

 

Research and development expenses, included in the financial statements, consist of payroll, employee benefits, equity compensation, third party payments, and other headcount-related costs associated with product development. The Company has determined that technological feasibility was established for the software products in 2002 by a study done in 2006 by the independent valuation consultant. Costs incurred after technological feasibility was established are not material, and accordingly, the Company capitalizes all research and development costs when incurred and amortizes those costs over a 5 year period starting on the date the product is available to the market.

 

12
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Issued Accounting Standards

 

In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. FASB ASU 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820 resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements are effective for fiscal years beginning after December 15, 2011. The Company has adopted this amended guidance on October 1, 2012. It does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.

 

In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company has adopted this amended guidance on October 1, 2012. It does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.

  

In September 2011, FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Company’s results of operations, cash flows or financial position.

 

In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, on testing for indefinite-lived intangible assets for impairment. The new guidance provides an entity to simplify the testing for a drop in value of intangible assets such as trademarks, patents, and distribution rights. The amended standard reduces the cost of accounting for indefinite-lived intangible assets, especially in cases where the likelihood of impairment is low. The changes permit businesses and other organizations to first use subjective criteria to determine if an intangible asset has lost value. The amendments to U.S. GAAP will be effective for fiscal years starting after September 15, 2012. The Company’s adoption of this accounting guidance does not have a material impact on the consolidated financial statements and related disclosures.

 

13
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Issued Accounting Standards (continued)

 

Other ASU’s that have been issued or proposed by the FASB ASC that do not require adoption until a future date and are not expected to have a material impact on the financial statements upon adoption.

 

  NOTE 3- FIXED ASSETS

 

Fixed assets consist of the following as of March 31, 2012 (unaudited) and December 31, 2011, respectively:

 

   Estimated Useful   March 31,   December 31 
   Lives (Years)   2012   2011 
       (unaudited)     
Computer equipment  5   $303,853   $303,853 
Office machinery and equipment  5    15,099    15,099 
Furniture and fixtures  5    86,934    86,934 
Computer software  3    14,895    14,895 
Automobile  5    50,914    50,914 
         471,695    471,695 
Less: Accumulated depreciation        (465,709)   (463,812 
                
Total, net       $5,986   $7,884 

 

Depreciation expense was $1,899 and $5,514 for the three months ended March 31, 2012 and 2011, respectively.

 

14
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 4- COMPUTER SOFTWARE DEVELOPMENT COSTS

 

Computer software development costs consist of the following as of March 31, 2012 and December 31, 2011, respectively:

 

   Estimated Useful  March 31,   December 31, 
   Lives (Years)  2012   2011 
            
Computer software development costs  5  $1,162,006   $1,116,398 
              
Less: Accumulated amortization      (986,724)   (986,724 
              
Total, net     $175,282   $129,674 

  

Amortization expense was $0 for the three months ended March 31, 2012 and 2011, respectively.

 

  NOTE 5- NOTES PAYABLE

 

SBA Loan

 

On July 22, 2003, the Company and the U.S. Small Business Administration (“SBA”) entered into a Note (the “Note”) under the SBA’s Secured Disaster Loan program in the amount of $377,100. Under the Note, the Company agreed to pay principal and interest at an annual rate of 4% per annum, of $1,868 every month commencing twenty-five (25) months from the date of the Note (commencing August 2005). The Note matures July 2034.

 

The Company must comply with the default provisions contained in the Note. The Company is in default under the Note if it does not make a payment under the Note, or if it: a) fails to comply with any provision of the Note, the Loan Authorization and Agreement, or other Loan documents; b) defaults on any other SBA loan; c) sells or otherwise transfers, or does not preserve or account to SBA’s satisfaction for, any of the collateral (as defined therein) or its proceeds; d) does not disclose, or anyone acting on their behalf does not disclose, any material fact to the SBA; e) makes, or anyone acting on their behalf makes, a materially false or misleading representation to the SBA; f) defaults on any loan or agreement with another creditor, if the SBA believes the default may materially affect the Company’s ability to pay this Note; g) fails to pay any taxes when due; h) becomes the subject of a proceeding under any bankruptcy or insolvency law; i) has a receiver or liquidator appointed for any part of their business or property; j) makes an assignment for the benefit of creditors; k) has any adverse change in financial condition or business operation that the SBA believes may materially affect the Company’s ability to pay this Note; l) dies; m) reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the SBA’s prior written consent; or n) becomes the subject of a civil or criminal action that the SBA believes may materially affect the Company’s ability to pay this Note. The Company is not in default and current on its obligation.

 

As of March 31, 2012, the Company has an outstanding principal balance of $347,739.

 

15
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 5- NOTES PAYABLE (CONTINUED)

 

Other

 

The Company had four notes payables totaling $65,000 at June 30, 2011. Of those four notes payable, three were convertible into shares of common stock at $0.06 per share and accrue interest at the rate of 8% per year and one note payable is not convertible and accrues interest at the rate of 5% per year. In July 2011 two convertible notes, totaling $20,000, and all their accrued interest were converted into shares. the total outstanding note payable balance as of March 31, 2012 of $45,000 ($30,000 of which is convertible and $15,000 non-convertible).

 

Due to the Company’s need for additional financing, the Board of Directors on February 24, 2012, approved the receipt of investment funds from two new investors in the amount of $20,000 each. The investments are in the form of 8% promissory notes due in six months, on June 22 and July 22, 2012, respectfully. Additionally, the note holders received upon issuance of the Note, 20,000 shares of the Company’s common stock, par value $0.0001 per share. The Company also agreed that should the Company fail to pay interest and principal due at the maturity date, the Note Holder shall receive an additional 40,000 shares of Common Stock. The Company received on December 22, 2011, $20,000 under a promissory note from an individual; then the Company received another $20,000 on January 22, 2012, under a promissory note similar to the one received on December 22, 2011.

 

The total outstanding note payable balance as of March 31, 2012 is $85,000 ($30,000 of which is convertible and $55,000 non-convertible).

 

The following represent the maturities of the notes payable for the next five years: $93,657 in 2013, $9,010 in 2014, $9,377 in 2015, $9,759 in 2016, $10,157 in 2017 and $300,778 thereafter.

   

16
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 5 NOTES PAYABLE (CONTINUED)

 

In April 2010, the Company entered into two separate promissory notes with the Company’s President who loaned the Company a total of $26,000 on April 16, 2010 and $24,600 on April 30, 2010. Payments of $1,000 per month commenced July 1, 2010 for five months and the balance due on December 1, 2010. Interest is calculated at 1.5% per month; escalating to 2.5% per month should the monthly $1,000 payments not be made timely. The Company has not made the required $1,000 payments, thus the interest, effective July 1, 2010 on these notes has been accrued at 2.5% per month in accordance with the note agreements. These notes originally due on December 1, 2010 were extended; and the Company agreed to increase the interest rate to 5% per annum. The company has negotiated an extension with the note holder to extend the note at the same 5% interest rate until September 30, 2012.

 

On February 24, 2012, the Board of Directors approved the loan of a related party, Vijay Suri, President & CEO, in the amount of $8,750 for the specific purposes of financing critical payroll and other payment obligations. The Board authorized the Company to issue a third Promissory note with a principal amount of $8,750 with interest to accrue at 5% per annum; and payable in six months. Further, since the Company has been unable to repay any amounts toward principal related to Mr. Suri’s promissory notes, the Company was forced to reset the interest rate to the penalty rate of 5%.

 

The total outstanding note payable – related party balance as of March 31, 2012 is $59,350.

 

  NOTE 7- TERM LOAN

 

The Company had a line of credit in the amount of $850,000 as of December 31, 2011 with Citibank, N.A. with an outstanding balance of $341,587.

 

Effective March 9, 2012, the Line-of-Credit with Citibank, N.A. was sold to Entrepreneur Growth Capital, LLC. Through this action, the line of credit was terminated and is now a term loan secured by the Company’s assets, accounts receivables, and the personal guarantee by the Company’s President & CEO, per the terms of the original agreement and stipulated by Entrepreneur Growth Capital, LLC through the acquisition of the note from Citibank.

 

Further, the Company was notified by EGC that it is in material default of the loan for failure to remit the required payments to EGC in a timely fashion and, as such, the loan is immediately due and payable to EGC. Accordingly, the Company has reflected the entire balance as a current liability as of March 31, 2012.

 

The loan accrues interest at annual interest rates of prime plus ¼ %.

 

17
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 8- CONVERTIBLE DEBENTURES

 

On December 23, 2009, the Company entered into a Debenture and Warrant Purchase Agreement pursuant to which Street Capital, LLC, the placement agent, agreed to use its best efforts to provide bridge financing through unnamed prospective purchasers in return for an 8% secured convertible debenture (“Debenture”) in the principal amount of $300,000 at a conversion price of $0.20 per share of the Company’s common stock and equity participation in the form of a class A common stock purchase warrant to purchase an aggregate of up to 450,000 shares of the Company’s common stock with an exercise price of $0.20, and a class B common stock purchase warrant to purchase an aggregate of up to 120,000 shares of the Company’s common stock, with an exercise price per share equal to $0.50. On July 9, 2010, the exercise price was changed to $0.20 as the Company failed to convert or repay the instrument by the due date of June 23, 2010. The Company received $150,000 of the $300,000 total principal on December 23, 2009 and entered into two additional debentures for $100,000 and $10,000 for a total of $110,000 in April 2010 with two private investors.

 

The Company also entered into a Security Agreement pursuant to which it granted to the Debenture holders a first lien against all of its assets, including its software, as security for repayment of the Debenture. As a result of the Company raising $260,000 of the $300,000 in proceeds, they issued a total of 390,000 class A and 104,000 class B warrants to the respective parties. In accordance with ASC 470-20, the Company separately accounted for the conversion feature and recognized each component of the transaction separately. As a result, the Company recognized a discount on the convertible debenture in the amount of $170,125 that was amortized over the life of the convertible debentures which was six-months on each debenture.

 

The Company recognized the discount as a derivative liability, and in accordance with the ASC, values the derivative liability each reporting period to market. The Company has recognized a gain of $10,091,626 and $294,000 for the three months ended March 31, 2012 and 2011 due to the beneficial conversion of the various instruments. The convertible debentures were to mature from June 2010 to October 2010. The Company entered into an Amendment to Debenture and Warrants which extended the due date of the original $150,000 debenture from June 2010 to August 31, 2010, and then amended the exercise price of the Class B warrants from $0.50 to $0.20 on July 9, 2010.

 

There were a total of three entities that invested money in the Company and received convertible debentures.

 

The original debenture holder investment was in the amount of $150,000, which subsequently was forced to be amended a total of four times from its original expiration date due to the company’s inability to repay the entire principal. The first amendment extended the debenture to August 31, 2010 and in exchange the company gave to the holder 200,000 shares of common stock and reduced the Series B warrant exercise price from $.50 cents to $.20 cents/share. The second amendment extended the debenture to October 31, 2010 and in return the Company gave to the holder a total of 150,000 shares of common stock and 150,000 series C warrants that had an exercise price of $.40 cents/share. The Company entered into a Third Amendment on November 1, 2010, that further extended the repayment date of the $150,000 Convertible Debenture to April 30, 2011 and issued 150,000 shares of common stock as a penalty. The Company failed to comply with the new maturity date of April 30, 2011 and as a result agreed to issue 300,000 shares of common stock and reduce the Class C warrants exercise price from $0.40 to $0.20; further the Debenture holder agreed that the penalty payment would include all accrued and unpaid interest through the new due date of April 30, 2012. The fourth and latest amendment extends the debenture until April 30, 2012 and in return the Company has given to the holder 300,000 shares of common stock and lowered the exercise price of the Class A and C warrants to $.20/share as well has provided to the holder a provision that allowed for cashless exercise of those warrants. The payment of the 300,000 shares also includes all interest that will be expensed from May 19, 2011 until April 30, 2012. The anticipated amount of interest that will be expense to the holder until April 30, 2012 is shown on the balance sheet as ‘Prepaid expenses’. As of today this particular note holder who originally invested $150,000 has received a total of 800,000 shares of common stock (excluding all accrued interest paid in common stock) and 150,000 warrants as payments for extending the debenture agreement from its original expiration date until April 30, 2012. The debenture holder has currently converted all A, B, & C warrants and $100,000 in principal leaving a total of $50,000 that the Company still owes to the holder.

 

18
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 8- CONVERTIBLE DEBENTURES (CONTINUED)

 

The second debenture has been amended from its original maturity date to September 30, 2011. The Company extended the debenture from its original date of October 31, 2010 to April 1, 2011 by issuing the holder 10,000 Class C warrants and issuing 10,000 penalty shares. The Company was forced to issue the Class C warrants in addition to the shares of common stock, due to the non-compliance of the agreements. The modifications made to the debt instruments, constituted a material modification and as a result, the original debt instrument was extinguished and the new debt instrument was recorded, with the resulting value of the penalty shares and warrants reflected as a loss on extinguishment. In exchange for the debenture holder extending the debenture from April 1, 2011 to September 30, 2011 the Company issued 10,000 shares of common stock. In July 2011, this debenture holder converted all $10,000 worth of principal into shares of common stock.

 

The third and final debenture holder invested $100,000 and received 150,000 Series A warrants and 40,000 Series B warrants. The entire debenture agreement originally expired on October 31, 2010, but due to the Company’s inability to repay the entire principal by that date, the Company had to amend the expiration of the agreement a total of two times. The first amendment extended the debenture to April 1, 2011 and in return the Company paid to the holder 100,000 shares of common stock and 100,000 Class C warrants that have an exercise price of $.40 cents/share. The Company has entered into its second amendment, which is reflected in the financial statements, which extends the debenture to April 2, 2012 and in return the Company paid to the holder 100,000 shares of common stock. As of this filing date the holder has not converted any principal or warrants and has not been paid any interest. This debenture holder notified the Company on April 2, 2012, that he would not extend his note and thus made notice to the company for the full payment of principal and accrued and unpaid interest. The Company was unable to repay the principal. On April 13, 2012 the Company filed an 8K to announce that Rahul Argade, the debenture holder, notified InferX that it was in default under the terms of the Debenture for failure to repay the principal amount of $100,000 plus interest due.

 

Street Capital LLC, notified the Company on April 30, 2011 that it had assigned all rights of the Debenture to Fourth Street Fund LP. Subsequently, on May 19, 2011 Fourth Street Fund LP exercised its right under the terms of the Debenture to convert $30,000 of principal for 150,000 shares of common stock and receive payment for accrued and unpaid interest in the amount of $3,466 in exchange for 17,333 shares of common stock. Fourth Street Fund LP, notified the Company on December 5, 2011 that it was exercising its right under the terms of the Debenture to convert $50,000 of principal for 250,000 shares of common stock. Street Capital LLC, one of the original Debenture Holders, notified the Company on January 1, 2012 that it was exercising its right under the terms of the Debenture to convert $20,000 of principal for 100,000 shares of common stock and receive payment for accrued and unpaid interest in the amount of $12,855 in exchange for 64,274 shares of common stock. The remaining principal associated with Debenture Holder Fourth Street Fund LP is $50,000, and interest is prepaid through the maturity date of April 30, 2012.

 

As a result of a dilutive issuance of shares on December 1, 2010 that was not disclosed to the holders of debentures issued by the Company, the sale of 1,000,000 shares of common stock in December 2010 to an investor for $0.002 per share triggered rights under the debentures to convert debt into common stock at the same price. The Debentures were convertible into shares of common stock at a conversion price equal to $0.20 per share (the "Initial Conversion Price"). The Debentures also provided that, in the event the Company sold any common stock or other equity securities at an effective price per share that was lower than the Initial Conversion Price (a "Dilutive Issuance"), the Initial Conversion Price for the Debenture holders would be reduced to the lower price per share charged in connection with the Dilutive Issuance.

 

19
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 8- CONVERTIBLE DEBENTURES (CONTINUED)

 

Without knowledge of the Dilutive Issuance, one of the debenture holders (Street Capital) sent notices of conversion on January 19, 2011, May 19, 2011 and December 5, 2011. On each occasion, the Company honored the holder’s conversion request but utilized the Initial Conversion Price of $0.20 instead of the Base Conversion price of $0.002 per share. As a result of the Company's failure to apply the Base Conversion Price listed in the debenture, conversions on January 19, 2011, May 19, 2011 and December 5, 2011, the Company failed to issue 57,737,870 shares of common stock due to Street Capital. Fourth Street Fund whom was assigned this debenture from Street Capital, waived any claim to any shares of the Company's common stock over the number of shares that were actually delivered, and agrees that the amount of debt due under the debenture was converted as a consequence of those conversions was as stated on the conversion notices. With respect to the December 2011 conversion, the amount actually converted was $500 rather than the original $50,000 as stipulated on the conversion notice as a result of the conversion price being adjusted from $0.20 to $0.002 per share. The balance due as of March 31, 2012 to Fourth Street Fund is $99,500.

 

Additionally, with the change in conversion price to $0.002, and the fact that at December 31, 2011, the Company has a closing stock price of $0.40, this resulted in a significant beneficial conversion feature in these instruments that has been recorded as a derivative liability by the Company in the amount of $38,703,000 of the total $39,628,463 change in the fair value of the derivative liability during 2011. In 2012, as the common stock price has dropped considerably, the fair value adjustment of $10,091,626 has been recorded as other income and the derivative liability has decreased to $29,950,837.

 

The modifications made to all three debt instruments, constituted a material modification and as a result, the original debt instrument was extinguished and the new debt instrument was recorded, with the resulting value of the penalty shares and warrants are reflected as a loss on extinguishment.

 

As of March 31, 2012, the Company has $199,500 outstanding in convertible debentures with two debenture holders.

 

  NOTE 9- CONVERTIBLE PREFERRED STOCK AND WARRANTS – SERIES B

 

In June 2011, the Board of Directors authorized the issuance of up to 1,100,000 shares of Series B 10% convertible voting preferred stock (“Series B Shares”) having a stated value of $.50 per share. The Series B shares are valid for 24 months from the date of issuance and are convertible at any time, at the option of the holder, into common shares at a rate of 1:1. Interest will be paid annually, either in cash or in common stock at the Company’s discretion based on the 30 day bid-price moving average. At the end of the 24 month term the Company will convert all outstanding Series B Shares and pay all outstanding interest in cash or in common stock based on the 30 day bid-price moving average.

 

In addition to the convertible preferred shares, each purchaser of the Series B Preferred Stock was issued an equal number of warrants (“Series B Warrants”) to purchase common stock at a price of $.75 per share that expire 2 years from the issued date.

 

On September 27, 2011 the Board of Directors reduced the purchase price per share of convertible preferred stock from $.50 to $.40 cents per share, thereby increasing the authorized number of Series B Shares from 1,100,000 to 1,500,000. All Series B investors as of September 27, 2011 were issued both convertible preferred shares and associated warrants equal to the difference between the number of shares they received at the purchase price of $.50 per share and the new $.40 per share price.

 

Upon any liquidation or dissolution of the Company, the Series B shareholders shall be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to 100% of the stated value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages owing thereon, for each Series B share before any distribution or payment shall be made to the holders of any other securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Series B shareholders shall be ratably distributed among the Series B shareholders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.

 

20
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 9- CONVERTIBLE PREFERRED STOCK AND WARRANTS – SERIES B (CONTINUED)

 

As a result of the mandatorily redeemable nature of the Series B shares after 24 months and the fact that redemption of the Series B shares is completely outside of the Company’s control, aside from its liquidation or termination, the Company has classified the Series B shares outside of shareholders’ equity and in mezzanine (temporary) equity in accordance with ASC 480-25-4 regarding distinguishing liabilities from equity for mandatorily redeemable financial instruments. The Company accounted for the Series B Warrants as embedded derivatives that are required to be bifurcated from the carrying value of the equity instrument (Series B Shares). The relative fair value of all the Series B Warrants at their relative issue dates totaled $210,713 (of which $38,750 was from the March 6, 2012 invetment) is shown as a discount to the Series B Shares and will be amortized evenly over the 24-month life of the shares. In event that the holder converts any portion of their shares prior to the deadline, the appropriate remaining discount will be expensed immediately.

 

The Company accounted for the beneficial conversion feature (“BCF”) of the Series B Shares at fair value and is shown as part of the derivative liability. The value of the BCF now that the per share purchase price was reduced from $.50 to $.40 cents is $289,963 and will be adjusted quarterly. The initial step of the calculation was the determination of the Black-Scholes value assuming no dividends, a risk-free interest rate of 1.25%, annualized volatility between 260% and 316%, and expected warrant life of two years. The next step was apportioning the percent of the fair value of the Series B Shares to the fair value of the Series B Shares and Warrants (52.9%) to the proceeds received ($462,500 of which $100,000 was from the March 6, 2012 invetment). This then provided enough information to determine the effective BCF of the Series B Shares. The relative fair value of all the proceeds received at their specific inception dates is as follows: Series B Preferred: $251,787; Series B Warrants: $210,713.

 

  NOTE 10- STOCKHOLDERS’ EQUITY (DEFICIT)

 

Preferred Stock

 

The Company was incorporated on May 26, 2005, and the Board of Directors authorized 10,000,000 shares of preferred stock with a par value of $0.0001. The Company as of December 31, 2009 has authorized the issuance of 2,000,000 shares of preferred stock. 1,000,000 of the shares were authorized to be issued to Vijay Suri in connection with the Merger Agreement, and 1,000,000 shares of preferred stock were authorized to be issued to B.K. Gogia the former CEO upon his resignation as CEO. The Company and Vijay Suri and B.K. Gogia on June 2, 2010, agreed to rescind the issuance of the preferred stock. As a result of the recession, the Company and its officers agreed to issue them each 1,000,000 shares of common stock for their personal guarantees of certain debt of the Company.

 

Common Stock

 

The Company was incorporated on May 26, 2005, and since then the Board of Directors authorized 75,000,000 shares of common stock with a par value of $0.0001. On March 13, 2009, the Company’s Board of Directors approved the increase of the authorized shares of common stock to 400,000,000.

 

As of March 31, 2012, the Company had 20,006,203 shares of common stock issued and outstanding. During the three months ended March 31, 2012, the Company has issued 8,000 shares of common stock for services rendered which had been accrued for during 2011 for $2,320.. The Company also recognized $140,550 for the fair value of warrants and options vested during the three months ended March 31, 2012.The Company has an outstanding liability for stock to be issued of $224,900 at March 31, 2012.

 

21
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 10- STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

 

During the year ended December 31, 2011 the Company issued 2,705,207 shares of common stock as follows: 245,000 as a conversion of outstanding liability for stock to be issued in the amount of $44,750; 302,220 in exchange for $68,000 dollars; 81,092 shares were issued for the conversion of two accounts payable balances totaling $21,082; 300,000 shares were issued for legal services and 8,000 were issued to the Company’s Chief Technology Advisor for a total value of $62,560; 510,000 shares were issued to extend the maturity dates of the convertible debentures valued at $206,000; 983,002 shares were issued when the principal of convertible debentures and convertible note payables were converted to shares along with their outstanding interest valued at $98,581; 250,893 shares were issued when 435,000 warrants were converted to common stock valued at $8,998; and 25,000 shares were issued to two employees valued at $7,500. The Company also recognized $606,809 for the fair value of warrants and options vested in 2011.

 

Warrants

 

The Company prior to the reverse merger with Irus Group converted all of their previous issued and outstanding warrants from the private placement completed in 2007 as well as the warrants issued with the convertible notes.

 

The Company issued 225,000 Class A warrants and 60,000 Class B warrants in connection with the convertible debenture on December 23, 2009. The Class A warrants have an exercise price of $0.20 per share and the Class B warrants have an exercise price of $0.50 per share. All warrants have a term of 5 years. The value of the warrants at inception was $98,130 which represented the debt discount. The Class B warrants exercise price was amended on July 9, 2010 to a price of $0.20 due to the Company’s failure to convert or repay the instrument by June 23, 2010.

 

The Company issued 15,000 Class A warrants and 4,000 Class B warrants to an individual investor in connection with the convertible debenture first entered into on April 1, 2010. The Class A warrants have an exercise price of $0.20 per share and the Class B warrants have an exercise price of $0.50 per share. All warrants have a term of 5 years. The value of the warrants at inception was $8,855 which represented the debt discount.

 

The Company issued 150,000 Class A warrants and 40,000 Class B warrants to an individual investor in connection with the convertible debenture first entered into on April 19, 2010. The Class A warrants have an exercise price of $0.20 per share and the Class B warrants have an exercise price of $0.50 per share. All warrants have a term of 5 years. The value of the warrants at inception was $63,140 which represented the debt discount.

 

The Company issued 150,000 warrants to an investment banker as part of their overall compensation package to raise funds for the Company. The warrants have an exercise price of $0.20 per share and expire in 5 years. These warrants have vested as of December 31, 2010, and have recorded $28,402 as of December 31, 2010 in stock-based compensation.

 

The Company issued 900,000 warrants to an investment consultant as part of their overall compensation package to raise funds for the Company. These warrants have an exercise price of $0.20 per share and expire in five years. These warrants vest with 400,000 over one year beginning in July 2010, and the balance of 500,000 warrants vest based upon achievement of performance objectives mutually agreed between the Company and the Consultant. The Company incurred $26,933 in stock-based compensation expense to record the first two scheduled vestings of 100,000 warrants in July 2010 and October 2010. The third scheduled vesting occurred in January 2011 and the $18,997 was recorded as stock based compensation in the nine months ended September 30, 2011. The contract was terminated on February 25, 2011 and 300,000 warrants are vested and the remaining 600,000 warrants are forfeited.

 

The Company issued 4,500,000 warrants to B.K. Gogia as part of his overall compensation package. These warrants have an exercise price of $0.20 per share and expire in five years. These warrants vest based upon

 

22
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 10- STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

 

Warrants (continued)

 

The Company issued a total of 906,250 warrants as part of the transaction associated with the sale of the Convertible Preferred Series B shares at a price of $.75 per share that expire two years from the issued date (see Note 9).

 

In September 2011 one convertible debenture holder exercised all their A, B, & C warrants via cashless exercision, thus decreasing the total warrants outstanding amount by 435,000.

 

On May 6, 2011, the Board of Directors authorized that the Company issue 33,750 shares of the Company's common stock to a vendor, Anshul Mohaan who is willing to convert $6,750 of accounts payable owed to him. The stock was authorized but not issued by March 31, 2012. The shares are reflected as a component of “Liability for stock to be issued - common stock.”

 

On December 15, 2011, the Company entered into a “Sales Outsourcing Agreement” with Stanley Altschuler to provide direct sales support and closure to pre-determined list of clients. Pursuant to the agreement, Stanley Altschuler, would receive compensation that includes a Common Stock Purchase Warrant to purchase 500,000 shares of Common Stock exercisable for five years at $0.45 per share and vest immediately. Additionally, the Agreement provides for “Success Fee” paid to Agent calculated as 10% of gross license revenue and 3.5% of gross services / professional services revenue on sales contracts resulting directly from actions of the Agent. Stanley Altschuler is also a member of Strategic Universal Advisors, LLC, a firm which has a contract with the company to provide investment and public relations consulting services to the Company. The term of the Sales Outsourcing Agreement is one-year. The Company recorded a prepaid expense in the amount of $170,000 during the year ended December 31, 2011 in connection with this agreement. No amount of the success fee was paid.

 

The Board of Directors, on March 13, 2012 authorized the Company grant to Dr. Jerzy Bala, the Chief Technology Officer, a Common Stock Purchase Warrant to purchase 1,000,000 shares of the Company's common stock, such shares of the warrant to vest immediately upon grant at an exercise price of $.30 per share that are exercisable for a period of five years from the date of grant. The Board of Directors also authorized that the Company grant a Common Stock Purchase Warrant to purchase 50,000 shares of its common stock to another Company employee in recognition of his contributions to the Company. Such shares of the warrant are to vest 50,000 shares on March 13, 2012, and 50,000 shares on the first and second anniversary dates of issue, at an exercise price of $.30 per share that are exercisable for a period of five years from the date of grant. The Company recorded $63,000 as stock based compensation during the three month period ended March 31, 2012 in connection with these issuances.

 

23
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 10- STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

  

The following is a breakdown of the warrants at March 31, 2012:

 

    Exercise   Date     
Warrants   Price   Issued   Term 
 150,000   $0.20    1/26/2010    5 years 
 15,000   $0.20    4/1/2010    5 years 
 4,000   $0.50    4/1/2010    5 years 
 300,000   $0.20    4/6/2010    5 years 
 4,500,000   $0.20    4/6/2010    5 years 
 300,000   $0.20    4/6/2010    5 years 
 150,000   $0.20    4/19/2010    5 years 
 40,000   $0.50    4/19/2010    5 years 
 110,000   $0.40    12/29/2010    5 years 
 450,000   $0.75    6/15/2011    2 years 
 50,000   $0.75    7/5/2011    2 years 
 25,000   $0.75    7/28/2011    2 years 
 200,000   $0.75    8/10/2011    2 years 
 112,500   $0.75    10/28/2011    1.63 years 
 12,500   $0.75    10/28/2011    1.95 years 
 6,250   $0.75    10/28/2011    1.88 years 
 50,000   $0.75    10/28/2011    1.84 years 
 500,000   $0.45    12/15/2011    5 years 
 250,000   $0.75    3/6/2012    2 years 
 1,050,000   $0.30    3/13/2012    5 years 
 8,275,250                

 

The warrants were valued utilizing the same Black – Scholes criteria as the options described below.

 

Options

 

Since October 2007, the Company’s Board of Directors and Shareholders approved the adoption of an option plan for a total of 5,000,000. The Company prior to the reverse merger with Irus exercised all of the options that were outstanding at the time. Subsequent to the reverse merger, the Company issued stock options in connection with certain employment agreements. The Company granted 5,939,500 options, 5,399,500 are vested, and none of which have been exercised as of March 31, 2012. Of the 5,939,500 that were granted only 540,000 remain unvested, and these vest on a varying schedule with the last date being June 30, 2013.

 

24
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 10- STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

 

These options have exercise prices that range from $0.06 to $0.50 and were valued based on the black-scholes model with the following criteria:

 

     
Strike Price  $   0.06-0.50 
Expected Life of Option     3-5 yr. 
Annualized Volatility     154.93-340.19 
Discount Rate   1.25%
      
Annual Rate of Quarterly Dividends     None   

  

  NOTE 11- COMMITMENTS

 

Office Lease

 

The Company leases office space in Sterling, Virginia pursuant to a lease with a related party through common ownership related to the President & CEO, which is currently month to month. The lease provides for an annual rental of approximately $78,000.

 

Rent expense for the three months ended March 31, 2012 and 2011 was $19,500 and $22,446, respectively.

 

Board of Advisors Agreements

 

The Company’s board of directors approved the addition of two members to its Board of Advisors. Each of these members will provide assistance to the Company with respect to their healthcare solution and predictive technology to prospective banking, insurance and healthcare customers. As consideration for the placement on the Board of Advisors, the Company has, in addition to quarterly cash payments, granted those Advisors options under their 2007 Stock Incentive Plan that vest over a two-year period of time commencing in May 2010. Per agreement with one of the Board of Advisors members, the Company has not made the quarterly cash payments owing to that Advisor due to cash flow and liquidity issues. The Company has included these fees in their condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011.

 

Consulting Agreements

 

The Company has entered into consulting agreements with marketing and strategic consulting groups with terms that do not exceed one year. These companies are to be paid fees for the services they perform. The Company has included these fees in their condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011.

 

On January 26, 2010, the Company entered into an agreement with Coady Diemar Partners, LLC, an investment banker in connection with investment banking services. Pursuant to the agreement, Coady Diemar Partners, LLC received a retainer of $30,000 payable in two tranches of $15,000 and receive 150,000 warrants as well as receive an 8% fee on amounts raised. The term of the agreement was for one-year. The warrants did not vest until June 2010.

 

In June 2010, the Company entered into a consulting agreement with a company to provide financial services and locate potential investment opportunities. The term of the agreement was for one-year, and the consultant was to receive monthly payments of $7,500 as well as be issued 300,000 shares of restricted common stock, and 900,000 warrants that vest over the one-year period and upon certain financing criteria being met. 300,000 of the warrants have vested and the Company has included these fees in their condensed consolidated statements of operation. The agreement terminated in February 2011, and the remaining 600,000 unvested warrants have been cancelled.

 

25
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

  NOTE 11 COMMITMEMENTS (CONTINUED)

 

In December 2010, the Company entered into an agreement with Strategic Global Advisors, LLC, a firm that provides investment and public relations consulting firm services. Pursuant to the agreement, Strategic Global Advisors, LLC will receive a retainer of $30,000 payable in four monthly payments of $7,500 and receive 500,000 options to purchase the Company's common stock that vest on the date of grant. The options were valued at $34,994. The Company has included these fees in their condensed consolidated statements of operations.

 

On March 2, 2011, The Board of Directors entered into an agreement with Assured Value Advisors, Inc., a merchant and investment banking services consultant in connection with investment banking services. Pursuant to the agreement, Assured Value Advisors, Inc. will receive 500,000 options to purchase shares of the Company's common stock; of which 300,000 have vested ($122,082 in 2011 stock based compensation), and the remaining 200,000 have vested ($66,000 in 2012 stock based compensation) in the three months ended March 31, 2012.

 

On March 28, 2011, The Board of Directors granted two employees 45,000 options to purchase shares of the Company's common stock; all of which vested upon grant. Employees’ grant of options was based on achievement of performance milestones. The vested options were valued at $13,370. The Company has included these fees in their condensed consolidated statements of operations.

 

On May 2, 2011, the Board discussed and authorized the consulting agreement with a consultant to provide comprehensive technical strategy assessment. The consulting contract was executed for a two-month period and the Board authorized a consulting fee of $8,000 and that the Company should issue the consultant 8,000 shares under the consulting agreement.

 

On January 5, 2012, the Company entered in an agreement with Dave Stocking to convert $2,400 of interest owed on a convertible note issued by the Company to 40,000 shares of the Company's common stock and to extend the maturity date of of the convertible note to December 16, 2012.

 

On February 24, 2012, the Company entered into a consulting agreement with Manish Nandy to provide marketing assistance, primarily in the healthcare area, and proposal development services to support several Company customer initiatives. The term of the agreement is for three months, and the consultant will receive a payment of $6,500. As of March 31, 2012, the Company recorded 37,500 shares as a “Liability for stock to be issued - common stock” owed to the Consultant as part of the agreement and recorded a $15,000 charge to prepaid expense.

 

On February 24, 2012, the Company entered into Advisory Board agreement with Michael P. Harden under which Michael P. Harden received a total of 100,000 shares of the Company's common stock to vest as follows: 20,000 shares following the execution of the Advisory Board agreement, 20,000 shares of the Company's common stock 365 days after the date of the Agreement and 20,000 shares every 180 days thereafter in equal amounts.

 

On February 24, 2012, the Company entered into Forbearance Agreement with Prem K. Dadlani and extended the date of repayment of the unpaid principal and accrued interest of the Dadlani Note to June 30, 2012 and to issue 100,000 shares of its common stock to him as forbearance consideration.

 

On February 24, 2012, the Company entered into a promissory note agreement with Sanjeev Kohli and Pyush Kumar in the principal amount of $20,000 each pursuant to which Mr. Kohli shall receive 20,000 shares of the Company's common stock and an additional 40,000 shares of the Company's common stock in the event that the unpaid principal and accrued interest is not paid within six months of the date of the promissory note.

 

On February 24, 2012, the Company entered into a promissory note agreement with a consultant for various services, including assistance with financings, with a grant of 150,000 shares of the Company's common stock.

 

26
 

  

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

NOTE 11COMMITMEMENTS (CONTINUED)

 

On March 13, 2012, the Company entered into a Consulting Agreement with Amrit Chase to provide assistance with the timely filing of the Company's Form 10-K for the year ended December 31, 2011. Under the terms of the Consulting Agreement Amrit Chase is to receive 150,000 shares of the Company's common stock and a payment of $10,000.

 

On March 13, 2012, the Company entered into Consulting Agreement with Ray Piluso to provide assistance with the timely filing of the Company's Form 10-K for the year ended December 31, 2011. Under the terms of the Consulting Agreement Ray Piluso received 100,000 shares of the Company's common stock.

 

Employment Agreements

 

During the year ended December 31, 2009, the Company entered into four separate employment agreements with their key executives. The employment agreements range in years from three to five, and require the Company to compensate the key executives for a base salary, as well as provide for incentive compensation. In addition, the executives were granted in total 3,250,000 stock options that vest through December 2011. The Company also entered into another employment agreement in January 2010 which granted an additional 20,000 options to an employee. This agreement was for a period of two years. In August and September 2011 the Company hired two employees who were to receive 200,000 options that vest equally over the next eight quarters and 60,000 options that vest equally over the next four quarters, respectively. As of March 31, 2012 a total of 120,000 options from these two employment agreements have vested and were valued at a total of $37,238. The Company has included these fees in their condensed consolidated statements of operations.

 

NOTE 12 – PROVISION OF INCOME TAXES

 

Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. At March 31, 2012, deferred tax assets consist of the following:

 

Net operating losses  $1,632,475 
      
Valuation allowance  $(1,632,4750)
      
   $- 

 

At March 31, 2012, the Company had net operating loss carry forward in the approximate amount of $4,801,396 available to offset future taxable income through 2032. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

 

27
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

NOTE 12 – PROVISION OF INCOME TAXES (CONINUED)

 

A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the nine months ended March 31, 2012 and 2011 is summarized below.

 

   2012   2011 
Federal statutory rate   (34.0)%   (34.0)%
State income taxes, net of federal benefits   6.0    6.0 
Valuation allowance   28.0    28.0 
    0%   0%

 

NOTE 13-RELATED PARTY TRANSACTIONS

 

The Company has a rent expense in the amount for the three months ended March 31, 2012 and 2011 of $19,500 and $22,446, respectively to a company owned by a relative of an officer of the Company. . In addition, the Company has outstanding fees due the former President & CEO of $725,000 as of March 31, 2012 relating to past due distributions prior to the reverse merger.

 

NOTE 14-MAJOR CUSTOMERS

 

For the three months ended March 31, 2012 and 2011, the Company derived 100% and 82% of its revenue from five and two customers, respectively. These customers are considered major customers as they represent 10% or more of total revenue. The Company does not believe that there is any customer concentration risk associated with these customers.

 

NOTE 15-FAIR VALUE MEASUREMENTS

 

The Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

 

Level 1 inputs: Quoted prices for identical instruments in active markets.

 

Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3 inputs: Instruments with primarily unobservable value drivers.

 

28
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

NOTE 15FAIR VALUE INSTRUMENTS (CONTINUED)

 

The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012:

 

   Level 1   Level 2   Level 3   Total 
                 
Cash  $12,043   $-   $-   $12,043 
                     
Total assets  $12,043   $-   $-   $12,043 
                     
Convertible debentures, net of discount  $-   $-   $199,500   $199,500 
                     
Embedded conversion feature and derivative  $-   $-   $29,950,837   $29,950,837 
                     
Total liabilities  $-   $-   $30,150,337   $30,150,337 

 

29
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

NOTE 16-SUBSEQUENT EVENTS

 

In November 2008, the Company entered into a convertible note with Mr. Prem Dadlani, in the amount of $15,000, with a term of six months. The Company was unable to repay the note due to cash flow and liquidity issues. Efforts to obtain a forbearance agreement have not been successful. In November 2011, Mr. Dadlani through legal counsel has sought resolution and payment. In an effort of good faith negotiations with Mr. Dadlani, The Board of Directors authorized, on February 24, 2012, that the Company issue 100,000 shares of the Company's common stock in exchange for a forbearance agreement in which the unpaid principal and accrued interest be extended until June 30, 2012. Subsequently, since the shares authorized on February 24, 2012 were not issued, the Board of Directors authorized, on October 10, 2012, that the Company issue 400,000 shares of the Company’s common stock as consideration for a forbearance agreement and to extend the maturity date of his note to April 30, 2013.

 

On April 3, 2012, the company was notified of a Warrant In Debt had been filed in the General District Court of Fairfax County, Virginia, by PCT Law Group, PLLC, to appear in General District Court of Fairfax County, Virginia on April 30, 2012 in the matter to resolve unpaid debt in the amount of $12,156 plus attorney’s fees and court costs. The Company received a Garnishment Summons dated November 14, 2012 from the Court of Fairfax County, Virginia for the unpaid amount plus interest, judgment costs, and attorney fees for a total of $16,883.69. Although the Company disputes the amount outstanding, the Company is in negotiations with PCT Law Group, PLLC for settlement.

 

On April 13, 2012 the Company filed a Form 8-K with the Securities and Exchange Commission notifying shareholders that on April 6, 2012, as a result of a deadlocked Board of Directors the following employees submitted their letter of resignation as employees of the Company: B.K. Gogia, President, Technology Solutions Group, Raimondo Piluso, COO and Vice President of Business Development, Jerzy Bala, CTO, and Rahul Argade, Senior Director. B.K. Gogia maintained his position as Chairman of the Board of Directors. Subsequently, Jerzy Bala, CTO and Rahul Argade, Senior Director rescinded their resignations based on the strategy and direction presented by the former CEO, Vijay Suri.

 

Additionally, in the April 13, 2012 Form 8-K filing the Company informed shareholders that on April 12, 2012 Rahul Argade, the holder of an 8% secured convertible debenture, issued pursuant to a Debenture and Warrant Purchase Agreement dated December 23, 2009, notified the Company that it was in default under the terms of the Debenture for failure to repay the principal amount of $100,000 plus interest due, and that he would be exercising his default remedies under the Debenture, including the default interest rate of 22% on the unpaid principal balance effective as of April 7, 2012. The Debenture is secured by all assets of the Company, including its intellectual property.

 

On July 23, 2012, the Company filed a Form 8-K with the Securities and Exchange Commission notifying shareholders that Mr. Vijay Suri, President and CEO of InferX and a member of its Board of Directors, resigned as President and CEO and from the Board of the Company. Mr. B.K. Gogia, the founder of InferX, remained as Chairman of the Board and assumed the positions of Acting President and CEO of InferX while he started to form a new management team for the Company. Jerzy Bala, CTO, tendered his resignation on June 15, 2012, and Rahul Argade, Senior Director, also tendered his resignation.

 

30
 

 

INFERX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 AND 2010

 

NOTE 16-SUBSEQUENT EVENTS (CONTINUED)

 

As part of the July 23, 2012 filing of Form 8-K with the Securities and Exchange Commission, the Company notified shareholders that as a result of a dilutive issuance of shares on December 1, 2010 that was not disclosed to the two holders of debentures issued by the Company that it had sold 1,000,000 shares of common stock in December 2010 to an investor for $0.002 per share. This sale triggered rights under the debentures to convert debt into common stock at the same price. The Debentures were convertible into shares of common stock at a conversion price equal to $0.20 per share (the "Initial Conversion Price"). The Debentures also provided that, in the event InferX sold any common stock or other equity securities at an effective price per share that was lower than the Initial Conversion Price (a "Dilutive Issuance"), the Initial Conversion Price for the Debenture holders would be reduced to the lower price per share charged in connection with the Dilutive Issuance.

 

Without knowledge of the Dilutive Issuance, one of the debenture holders sent notices of conversion on January 19, 2011, May 19, 2011 and December 5, 2011. On each occasion, InferX honored the holder’s conversion request but utilized the Initial Conversion Price of $0.20 instead of the Base Conversion price of $0.002 per share. As a result of InferX's failure to apply the Base Conversion Price listed in the debenture, conversions on January 19, 2011, May 19, 2011 and December 5, 2011, InferX failed to issue 57,737,870 shares of common stock due to the debenture holder. On June 17, 2012, the other debenture holder notified InferX and Vijay Suri that he was converting $20,000 of principal and $21,397 in interest due into InferX common stock. Applying the Base Conversion Price that resulted from the Dilutive Issuance, the Company should have issued the second debenture holder 20,698,615 shares.

 

As a result of the Dilutive Issuance, the debenture holders were eligible to be issued 78,436,485 shares of common stock. Instead, the debenture holders elected to receive only 23,698,615 of the shares due the debenture holders and to release the Company from any financial damages incurred. The debenture holders have offered to place 57.48% or 44,737,870 of the shares due the debenture holders into escrow for the Company to use to secure the necessary financing, incentivize additional management talent and make acquisitions and forego being issued 10,000,000 shares. A percentage of the escrowed shares, to be mutually agreed to, will be cancelled upon the settlement of outstanding debt and past due salaries, certain intellectual property and patent enhancement of its current software products, and future financings.

 

Immediately prior to the issuance of the shares of InferX common stock under the Debentures, there are 20,669,453 shares issued and outstanding of which Vijay Suri owned 9,779,768 shares or 48.9% of the issued and outstanding shares of InferX. Following the conversion of the Debentures there would be 44,368,068 shares of InferX common stock issued and outstanding. The debenture holders owned 23,698,615 shares directly, excluding the 44,737,870 escrowed shares discussed above.

 

As a result of the resignation of Vijay Suri, President and CEO of InferX and a member of its Board of Directors; B.K. Gogia became the sole member of the Board of Directors of the Company. The Board on October 10, 2012 issued a warrant to a consultant to purchase up to 2,000,000 shares of the Company’s common stock at an exercise price of $0.04 per share for five years; all of which shares vested immediately. In light of dilutive issuance in December 2010, the Board reduced the Series B Preferred stock conversion price from $0.40 to $0.07 per share and repriced the warrants from $0.75 to $0.20 to the eight purchasers of the 1,156,250 Series B Preferred Shares.

 

31
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

NOTE 16-SUBSEQUENT EVENTS (CONTINUED)

 

The Board of Directors on October 10, 2012 authorized the voluntary release and conversion of past due salary of four employees in the amount of $1,240,303 into 20,730,390 shares of the Company’s common stock at a conversion price of $0.10. The Board of Directors also issued to a consultant 1,000,000 shares of common stock at a conversion price of $0.04, for advice and counsel with two separate complex investment financing initiatives the Company was undertaking.

 

On October 15, 2012, the Company was notified of a Summons to appear in the Superior Court of Washington, DC, on October 13, 2012, in a matter which Fairchild Consultants, LLC, d/b/a Global Services a marketing support consulting services firm is seeking unpaid general consulting services fees in the amount of $9,900. Although the Company disputes the amount outstanding, the Company is in negotiations with Fairchild Consultants, LLC to settle this matter.

 

On October 25, 2012, the Company filed a Certificate of Designation pursuant to Section 151 of the General Corporation Law of the State of Delaware to designate the rights and preferences of the 1,500,000 Series B Redeemable Convertible Preferred Stock that bear intterest at the rate of 10% per annum, such interest to be paid annually in cash or in kind based upon the 30 day bid price moving average, at the Company’s discretion.

 

The Board of Directors, on November 13, 2012, entered into a forbearance agreement with Fourth Street Fund to extentd the maturity date of the Debenture to July 24, 2013. The Company also agreed with Fourth Street Fund to correct the amount due under the Debenture, to convert certain interest due under the Debenture, and to issue additional shares of the Company’s common stock under the Class A, B, and C warrant conversions as a result of the dilutive issuance by the Company in December 2010 that reduced the share price of the Company’s common stock to $0.002 per share. Additionally, the Company agreed to allow Fourth Street Capital to gift certain principal amounts of the debenture to a number of persons, and to limit the amount of further reductions for $50,000 of unpaid principal under the Debenture to $0.20 per share in the event that the Company met a new investment financing deadline of December 31, 2012.

 

In an effort to obtain required equity or debt financing for technology development, market penetration and revenue growth, the Board of Directors sought additional financing on October 2, 2012, the Board of Directors authorized the sale of an aggregate 16,666,667 shares of the Company’s common stock for a maximum purchase price of $500,000 based upon a per share price of $0.03, or a pre-money valuation of approximately $3,000,000, and established an aggregate minimum purchase of $200,000, representing 6,666,666 shares of the Company’s common stock. These shares were to be issued to equity investores as a unit of the Company’s common stock and a warrant exercisable for five years to purchase 50% of the number of shares of common stock purchased by each investor, at an exercise price of $0.05 per share.

 

Under the terms of the above financing, the Company received on December 4, 2012 from one investor $6,000, representing the sale of 200,000 shares of the Company’s common stock and issued a warrant exercisable for five years to purchase 100,000 shares of common stock at an exercise price of $0.05 per share.

 

To meet critical short-term financial requirements the Company entered into a 5% Convertible Promissory Note, with an investor in the amount of $6,500. Under the terms of the Note, the entire principal amount, together with all accrued interest is due on January 2, 2013.

 

The Board of Directors on BDecember 14, 2012 approved the issuance of two warrants, one for 2,000,000 shares of the Company’s common stock to a consultant in connection with finding a new management team and additional financing for the Company, and a second warrant for 3,000,000 shares of the Company’s common stock to B.K. Gogia for his executive leadership and crisis management role that has allowed the Company to continue to operate, raise additional equity financing and complete the filing of the Company's Form 10-K. All warrants vest upon the closing of an initial equity investment of $200,000. In addition, Mr. Gogia was granted 1,500,000 shares of the Company's common stock in recognition of the assistance he has assumed role of Acting President and CEO without any salary and for recruiting a new management team.

 

32
 

 

INFERX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

 

NOTE 16SUBSEQUENT EVENTS (CONTINUED)

 

The Board of Directors on December 17, 2012, re-priced (i) from $0.30 to $0.05 per share the warrant issued to Jerzy Bala to purchase 1,000,000 shares of Common Stock and (ii) from $.20 to $.03 the option to purchase 1,750,000 shares of common stock issued to B.K. Gogia, in light of the assistance that each provided to the Company following the resignation of Vijay Suri and the inability of the Company to pay any cash compensation to them. The Company also issued 500,000 of shares of its common stock to Chris Manthorne one of the Company’s former employees for settlement of his past due salary.

 

The Board of Directors on December 20, 2012 appointed Paul B. Silverman as the new President and CEO and as a Director. The Company agreed to issue to Paul B. Silverman a total of 15.0 million warrants linked to Company’s growth, performance, and future financing under terms as defined below. The Company issued to Paul B. Silverman warrants to purchase shares of its common stock for a period of five years with an exercise price of $.03 per share or fair market value, whichever is lower, and a cashless exercise provision. Warrants are vested subject to revenue and market capitalization milestones.

 

The Board of Directors on December 20, 2012 appointed Carlyle D. Eckstein as a new member of the Board of Directors and issued a warrant to purchase 400,000 shares at $.03 per share. The Board of Directors also appointed Mr. Eckstein as Senior Advisor for the Company and issued a warrant to purchase 600,000 shares of the Company’s common stock at $.03 per share which will vest at 150,000 shares per quarter.

 

The Company could not meet the minimum new investment financing by December 31, 2012. As of January 3, 2013, total principal and interest due to Fourth Street Fund, LP was $82,214.52. Fourth Street Fund, LP gifted the following amounts: $10,500 on January 3, 2013, $26,000 on January 24, 2013 and $8,379.15 on February 12, 2013, reducing the total principal amount to $37,802.29 as of February 12, 2013.

 

The Company added two advisors to its Board of Advisors on December 17, 2012, Robert King and Manish Nandy, and two additional advisors on March 6, 2013, Dr. Oliver Alabaster and Lawerence Hoffman.

 

33
 

 

Item 2.Management’s Discussion and Analysis or Plan of Operation.

 

The information set forth and discussed in this Management’s Discussion and Analysis or Plan of Operation is derived from our financial statements and the related notes, which are included. The following information and discussion should be read in conjunction with those financial statements and notes, as well as the information provided in our Annual Report on Form 10-K for our fiscal year ended December 31, 2010.

 

Overview

 

InferX is a leading provider of next generation Predictive Analytics and Business Intelligence solutions for financial services, healthcare, and government enterprises. Our solutions include a wide variety of innovative technologies that provide critical results for challenges such as healthcare fraud mitigation, healthcare research, financial services risk management and complex intelligence analysis, to name a few. We have pioneered and commercialized a suite of powerful patented technologies for advanced analytical solutions that direct decision making and improve corporate performance across the entire enterprise. Our solutions are targeted towards select sub-subsectors within the healthcare, financial services and public sector markets to address significant ROI opportunities for our clients. Through broad, diversified market adoption of our predictive data analytical solutions, InferX plays a critical role in promoting the safety and security of our nation's assets and its citizens, while also empowering commercial enterprises with the knowledge and material insight necessary to make better business decisions and maximize profits.

 

Predictive analytics helps organizations make better decisions by providing empirical, objective and consistent methods of evaluating transactions, customers, or shippers in this context; and doing it at high volumes using disparate and geographically dispersed enterprise databases. These models are often "behavioral" because they may be used to predict future behavior of account or customer actions in regard to; e.g. likelihood of fraudulent behavior. By enabling organizations to instantly differentiate between desirable and undesirable business, predictive models allow them to control the level of risk they are willing to assume and actions to increase profitability. Our patented and patent-pending products simultaneously analyze data in multiple remote locations with disparate formats without the need to move the data to a central data warehouse, thereby preserving the privacy and security of the data.

 

Since inception, InferX has evolved from a leading technical, database research and development firm to its current position as a developer of the next generation predictive analytics technology. InferX and its predecessor Datamat Systems Research, Inc. have been in business since 1992, originally as a professional services research and development firm, specializing in technology for distributed analysis of sensory data relating to airborne missile threats under contracts with the Missile Defense Agency and other Department of Defense (DoD) contracts. InferX Delaware was formed in 1999 to commercialize Datamat's missile defense technology to build applications of real time predictive analytics. InferX and Datamat were merged together in August 2006. In October 2006 InferX became public by completing a "reverse merger" with Black Nickel Acquisition Corp. which was a fully reporting "shell company".

 

On March 16, 2009, InferX entered into an agreement and plan of reorganization (the “Merger Agreement”) with the Irus Group, Inc. to effect a reverse triangular merger between The Irus Group, Inc. and the Company’s wholly-owned subsidiary, Irus Acquisition Corp. (formed for the purpose of completing this transaction). The Merger Agreement was then amended on June 15, 2009 (the “First Amended and Restated Agreement”) to reflect the change in the amount of the issued shares to Irus in the transaction. Under the terms of the First Amended and Restated Agreement, the issued and outstanding shares of The Irus Group common stock was automatically converted into the right to receive 56% of the issued and outstanding shares of the Company’s common stock. On October 28, 2009 the merger was completed.

 

The Irus Group, Inc. (“Irus”), founded in 1996, specialized in bridging corporate performance management and business intelligence systems to help clients answer tough business questions. Irus’ specific domain expertise revolved around the planning, consulting, implementation and development of complex business intelligence solutions. Irus developed a deep understanding and breadth of knowledge in enterprise budgeting and planning systems, allowing Irus to provide their customers marry critical systems and processes for business intelligence into corporate performance management solutions.

 

34
 

 

Irus’ strategic approach, coupled with broad business understanding, and proven processes, tied to technical proficiency in major business intelligence, corporate performance management, and budgeting and planning applications, help improve client business performance. Notably, Irus provided clients comprehensive support for their financial and operational management processes, which included: capture of critical business functional requirements; strategic planning for future growth and expansion; systems development and implementation; and training. Irus successfully implemented projects across a broad cross-section of clients in the United States and Canada, which have included government, financial services, retail, manufacturing, and telecommunications.

 

Historically, we have derived nearly all of our sales revenues under federal government contracts. Under these contracts, we performed several critical tasks, including research and development and professional services consulting. Through terms of the contracts with our customers, we were able to retain ownership of the intellectual property associated with R&D efforts; which ultimately led to the creation of our current products. In fiscal 2002, faced with the prospect of continuing to receive relatively small and uncertain margins associated with fixed price government contracts, and the inherent limit of the market size, we began to further develop our software as a commercial product, concentrating on building specific applications that we believed would meet the growing needs of our potential new customers. In fiscal 2003, we sold our first commercial licenses and, since fiscal 2004, all of our revenues have derived from government contracts.

 

InferX’s services business consisted of professional IT consulting focused on business intelligence, corporate performance management and predictive analytics support. As a result of our merger with the Irus Group, we expanded and enhanced our customer base and services offerings, which we believe will increase our revenues and expenses in comparison to recent periods. Our services business, which represented over 99% of our total revenues in fiscal 2010, has significantly lower margins than our software business. The proportion of our services revenues relative to our total revenues in nine months ending September 30, 2011 was affected by our continued focus on the PA software side of the business and the continued uncertainty of the US Government budget.

 

Consulting: Our consulting line of business is comprised of two operating segments: (i) providing services to our customers in support of their corporate enterprise predictive and advanced analytics requirements; and (ii) providing services to BI customers in enterprise architecture design and implementation; business / IT strategy alignment; business process simplification; solution integration; and product implementation, enhancements, and upgrades. Our consulting revenues are dependent upon general economic conditions and the level of product revenues, including the new software license sales of our application products. To the extent we are able to grow our software products revenues; we would also generally expect to be able to grow our consulting revenues.

 

Software Business: Our software business is comprised of two operating segments: (i) new software licenses and (ii) software license updates and product support. The company made significant investment in developing new healthcare and financial services solutions working with partners as addressed in business section. We expect that our software business’ total revenues in 2012 will increase due to the continued demand for our PA software products and software license updates and product support offerings. InferX will continue to make further investments in research and development to meet customer demand and changing market conditions. Future software revenues will significantly increase, as we bring to market our software-as-a-service (SaaS) and platform-as-a-service (PaaS) delivery models.

 

During this fiscal quarter, the Company continued to place great emphasis on the enhancement and development of our core technology products and the adaptation into market-sector specific solutions. This concentration of effort resulted in higher overhead, on a year over year basis, consisting primarily of personnel related expenditures; as noted by the recent management hire for our Cyber Security solution. Key to our future, we intend to continue to invest significantly in our product research and development and market-driven technology solutions because they are essential to maintaining our competitive position.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We rely on historical experience and on other assumptions we believe to be reasonable under the circumstances in making our judgments and estimates. Actual results could differ from those estimates. We consider our critical accounting policies to be those that are complex and those that require significant judgments and estimates, including the following: recognition of revenue, capitalization of software development costs and income taxes.

 

35
 

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Allowance for Doubtful Accounts

 

We provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables as well as historical collection information. Credit is granted to substantially all customers on an unsecured basis. In determining the amount of the allowance, management is required to make certain estimates and assumptions.

 

Fixed Assets

 

Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets (primarily three to five years). Costs of maintenance and repairs are charged to expense as incurred.

 

Computer Software Development Costs

 

The Company capitalized certain software development costs. The Company capitalizes the cost of software in accordance with ASC 985-20 once technological feasibility has been demonstrated, as the Company has in the past sold, leased or otherwise marketed their software, and plans on doing so in the future. The Company capitalizes costs incurred to develop and market their privacy preserving software during the development process, including payroll costs for employees who are directly associated with the development process, services performed by consultants, and attributable overhead costs. Amortization of such costs is based on the greater of (i) the ratio of current gross revenues to the sum of current and anticipated gross revenues, or (ii) the straight-line method over the remaining economic life of the software, of five years, as specified in the technological feasibility study performed by an independent valuation consultant in 2006. It is possible that those anticipated gross revenues, the remaining economic life of the products, or both, may be reduced as a result of future events. The Company has not developed any software for internal use.

 

Recoverability of Long-Lived Assets

 

We review the recoverability of its long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale are carried at the lower of the then current carrying value or fair value less estimated costs to sell.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. We enter into certain arrangements where we are obligated to deliver multiple products and/or services (multiple elements). In these transactions, we allocate the total revenue among the elements based on the sales price of each element when sold separately (vendor-specific objective evidence). The Company generates revenue from application license sales, application maintenance and support, professional services rendered to customers as well as from application management support contracts. The Company’s revenue is generated under time-and-material contracts and fixed-price contracts.

 

36
 

 

Our business is not seasonal in nature. The timing of contract awards, the availability of funding from the customer, the incurrence of contract costs and unit deliveries are the primary drivers of our revenue recognition. These factors are influenced by the federal government’s October-to-September fiscal year. This process has historically resulted in higher revenues in the latter half of the year. Many of our government customers schedule deliveries toward the end of the calendar year, resulting in increasing revenues and earnings over the course of the year.

 

At this time we do not derive revenue from projects involving multiple revenue-generating activities. If a contract would involve the provision of multiple service elements, total estimated contract revenue would be allocated to each element based on the fair value of each element. The amount of revenue allocated to each element would then be limited to the amount that is not contingent upon the delivery of another element in the future. Revenue for each element would then be recognized depending upon whether the contract is a time-and-materials contract or a fixed-price, fixed-time contract.

 

Stock-Based Compensation

 

In 2006, we adopted the provisions of ASC 718-10 “Share-Based Payments” (“ASC 718-10”) which requires recognition of stock-based compensation expense for all share-based payments based on fair value. Share-based payment transactions within the scope of ASC 718-10 include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. This adoption had no effect on the Company’s operations. Prior to January 1, 2006, we measured compensation expense for all of our share-based compensation using the intrinsic value method.

 

We have elected to use the modified–prospective approach method. Under that transition method, the calculated expense in 2006 is equivalent to compensation expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values. We recognize these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. We consider voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.

 

We measure compensation expense for non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital. For common stock issuances to non-employees that are fully vested and are for future periods, we classify these issuances as prepaid expenses and expense the prepaid expenses over the service period. At no time have we issued common stock for a period that exceeds one year.

 

Concentrations

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. To date, accounts receivable have been derived from contracts with agencies of the federal government. Accounts receivable are generally due within 30 days and no collateral is required.

 

Segment Reporting

 

We follow the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information.” This standard requires that companies disclose operating segments based on the manner in which management disaggregates the company in making internal operating decisions. We believe that there is only one operating segment.

 

37
 

 

Fair Value of Financial Instruments (other than Derivative Financial Instruments)

 

The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. For the notes payable, the carrying amount reported is based upon the incremental borrowing rates otherwise available to the Company for similar borrowings.

 

Convertible Instruments

 

We review the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features, where the ability to physical or net-share settle the conversion option is not within our control, are bifurcated and accounted for as a derivative financial instrument. Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to interest expense using the Effective Interest Method.

 

Income Taxes

 

Under ASC 740 the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

(Loss) Per Share of Common Stock

 

Basic net (loss) per common share (“EPS”) is computed using the weighted average number of common shares outstanding for the period. Diluted earnings per share include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for the periods presented.

 

Research and Development

 

Research and development expenses include payroll, employee benefits, equity compensation, and other headcount-related costs associated with product development. The Company has determined that technological feasibility for the software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, the Company expenses all research and development costs when incurred.

 

Three Months Ended March 31, 2012 and 2011

 

Revenue

 

Revenue for the three months ended March 31, 2012 was $509,729, a decrease from $1,031,336 for the same period in 2011; an approximate 51% decrease, our revenues were directly impacted by the termination of a couple of US Government contracts, which directly impacted our revenue delivered government contracts and U SGovernments authoritiy to finalize new contract starts to coincide with the previous contract termination. This situation also reflects the continuing uncertain economic environment across all of our focus market areas and the slowness of the national economic recovery. From a customer market perspective, we did not see a significant improvement in the business environment for capital expenditures across our enterprise, commercial, and government markets, during the three months ending March 31, 2012. In the firstquarter of fiscal 2012, we had no revenue from core PA technology products; however we have significant PA Technology opportunities in our sales pipeline.

 

38
 

 

Cost of Revenues

 

Costs of revenues for the three months ended March 31, 2012 were $373,460, an approximate 25 % decrease from $674,927 for the same period in 2011. The decrease resulted primarily from lower revenue and the associated lower attributable subcontractor costs as well as benefits from our ongoing program to optimize efficiency and reduce delivery costs.

 

Gross Margin

 

In the three months ended March 31, 2012, our gross margin percentage decreased to 26% compared to approximately 35% from the corresponding period of fiscal 2011. This decrease in gross margin percentage for the three months ended March 31, 2012 was the result of a substantial reduction in cost of goods sold which was greater than the decrease in revenue attributable to lower subcontractor costs.

 

Operating Expenses

 

For the three months ended March 31, 2012 operating expenses increased by approximately 5% from the corresponding period of fiscal 2011. The increasee was attributable primarly to a 15% decrease in indirect and overhead labor, a 113% increase in professional fees associated with product and services sales and investor relations, and an approximate 20% increase in stock based compensation.

 

Other Income (Expense)

 

Other income increased primarily as a result in increase in the fair value of the derivative liability of $9,797,626. In addition the company incurred an increase in interest expense of $6,130 and an increase to the amortization of debt discount of $22,800.

 

Contract Backlog

 

At March 31, 2012 and December 31, 2011, our estimated backlog was $10,372,700 million and $5,790,000 million, respectively, of which $5,433,200 million and $4,752,000 million, respectively, was funded. We define backlog as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period and from the option periods of those contracts, assuming the exercise of all related options. We define funded backlog as the portion of backlog for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing agency, less the amount of revenue we have previously recognized. Our backlog does not include any estimate of future potential delivery orders that might be awarded under our Government Wide Acquisition Contracts (GWAC) or other multiple-award contract vehicles, or sales and services of our PA technology.

 

Factors That May Impact Net Sales and Gross Margin

 

Product sales may continue to be affected by multiple factors, including the continuing national economic downturn and related market uncertainty, which have resulted in reduced or cautious spending in our enterprise, commercial and government markets; changes in the national economic conditions; competition, including price-focused competitors; new product introductions; sales cycles and product implementation cycles; changes in the mix of our customers between government and commercial markets; changes in the mix of direct sales and indirect sales; variations in sales channels; and final acceptance criteria of the product, system, or solution as specified by the customer. For additional factors that may impact net product sales, see “Part II, Item 1A Risk Factors.” Product gross margin may be adversely affected in the future by changes in the mix of products sold, including further periods of increased growth of some of our lower margin products; introduction of new products, changes in distribution channels; price competition, the timing of revenue recognition; sales discounts; increases in material or labor costs; warranty costs; and the extent to which we successfully execute on our strategy and operating plans. Service gross margin may be impacted by various factors such as the change in mix between technical support services and advanced services, the timing of technical support service contract initiations and renewals, and the timing of our strategic investments in headcount and resources to support this business.

 

39
 

 

Liquidity and Capital Resources

 

We had cash of $12,043 of March 31, 2012. During the three months ended March 31, 2012, we used approximately $223,973 from our operating activities. Operations were funded primarily from consulting revenue generated in the three month period.

 

We will need to generate significant additional revenue to support our projected increases in staffing and other operating expenses in light of the requirements created by our business plan and enhancement of our core technology products and the adaptation of that technology into market-sector specific solutions. We are currently expending approximately $292,000 per month to support our operations, and under our current business plan we anticipate expenditures of approximately $262,000 per month through the 4th quarter of 2012. We expect to raise additional financing through the sale of our common stock during the second or third quarter of 2012 to supplement the cash generated from software license sales and the professional services that are provided through existing contracts that we believe will be sufficient to fund our operations until additional financing is procured If we are unable to generate sufficient cash through the sale of our stock it will be necessary for us to significantly reduce expenses to manage our business. Although we believe the additional capital required will be provided through one of these sources, we cannot assure you that we will be successful in these financing efforts or accepting financing at acceptable prices. Our failure to generate such revenue, reduce expenses or obtain necessary financing could impair our ability to continue business operations and raises substantial doubt about our ability to remain as a going concern.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable

 

Item 4.Controls and Procedures.

 

Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2012. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are not effective due to the existence of material weaknesses in our internal control over financial reporting, discussed below.

 

Management’s Report on Internal Control Over Financial Reporting.

 

Internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and in consultation with our board of directors, has established and maintained policies and procedures designed to maintain the adequacy of our internal control over financial reporting that it believes are appropriate in light of our limited activities, personnel and resources as a development stage company, and includes those policies and procedures that:

 

(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions of our assets;

 

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

40
 

 

Our management has evaluated the effectiveness of our internal control over financial reporting as of March 31, 2012 based on the criteria established in a report entitled Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

Based on our assessment, management has concluded that our internal controls over financial reporting were not effective as of March 31, 2012 due to the existence of several material weaknesses in our internal control over financial reporting. Our Board of Directors has reviewed the results of management’s assessment. In addition, on a quarterly basis we will evaluate any changes to our internal control over financial reporting to determine if material changes occurred.

 

PART II — OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

Arnold Worldwide, Inc., the landlord of InferX at its former premises at 1600 International Drive, Suite 110, McLean, Virginia 22102, commenced an action against InferX in the General District Court of Fairfax County, on August 25, 2008, seeking (i) damages, including rent due under the sublease between InferX and Arnold Worldwide, late fees due under the sublease, attorney’s fees due under the sublease, and interest, for a total amount claimed of $180,066.53; and (ii) an order for possession of the Premises. Though the Company disputes the amount outstanding, it has made a good faith gesture to resolve this matter by making a payment of $30,000 on September 12, 2008, and entered into good-faith discussions to resolve the issue with Arnold Worldwide. The Company agreed to the entry of a Consent Order of Possession that allowed Arnold Worldwide to take possession of the premises. The lease for the premises at 1600 International Drive terminated November 30, 2008.

 

We are involved in two current lawsuits. PCT Law Group, PLLC, a legal law firm that represented InferX Corporation in certain matters concerning intellectual property and patent application matters, commenced an action against us in the General District Court, Fairfax County, Virginia on March 26, 2012, seeking unpaid legal fees of $10,419.59. We received a Garnishment Summons dated November 14, 2012 from the Court of Fairfax County, Virginia for the unpaid amount plus interest, judgment costs, and attorney fees for a total of $16,883.69. Although we dispute the amount outstanding, we are in negotiations with PCT Law Group to settle this litigation.

 

Fairchild Consultants, LLC, d/b/a Global Services a marketing support consulting services firm which represented InferX Corporation in matters for government regulatory contract filing matters, commenced an action against us in the Superior Court of Washington, DC, on October 13, 2012, seeking unpaid general consulting services fees in the amount of $9,900. Although we dispute the amount outstanding, we are in negotiations with Fairchild Consultants, LLC to settle this litigation.

 

Item 1A.Risk Factors.

 

We face intense competition.

 

Our business is rapidly evolving and intensely competitive, and is subject to changing technology, shifting user needs, and frequent introductions of new products and services. We have many competitors from different industries, including providers of online products and services. Our current and potential competitors range from large and established companies to emerging start-ups. Established companies have longer operating histories and more established relationships with customers and end users, and they can use their experience and resources against us in a variety of competitive ways, including by making acquisitions, investing aggressively in research and development, and competing aggressively for customers and market share. Emerging start-ups may be able to innovate and provide products and services faster than we can. If our competitors are more successful than we are in developing compelling products or in attracting and retaining clients, our revenues and growth rates could decline.

 

41
 

 

The market for our products and services is new and evolving and a viable market may never develop or may take longer to develop than we anticipate.

 

Our software and services represent what we believe is a novel entry in an emerging market, and we do not know the extent to which our targeted customers will want to purchase them. The development of a viable market for our products may be impacted by many factors which are out of our control, including customer reluctance to try new products and services and the existence and emergence of products and services marketed by better-known competitors.

 

If a viable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our products and services and may be unable to achieve profitability.

 

If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our revenues and operating results could suffer.

 

Our success depends on providing products and services that make using our technology a more useful and business impactful experience for our customers. Our competitors are constantly developing innovations in technology embedded in their products and services. As a result, we must continue to invest significant resources in research and development in order to enhance our predictive analytics technology and our existing products and services and introduce new products and services solutions that people can easily and effectively use. If we are unable to provide quality products and services, then our users may become dissatisfied and move to a competitor’s products and services. In addition, these new products and services may present new and difficult technology challenges, and our operating results would also suffer if our innovations are not responsive to the needs of our users and or are not effectively brought to market. This may force us to compete in different ways and expend significant resources in order to remain competitive.

 

The industry in which we operate is characterized by rapid technological changes, and our continued success will depend upon our ability to react to such changes.

 

The markets for our products and services are characterized by rapidly changing technology. The introduction of products or services embodying new technology can render our existing products and services obsolete and unmarketable and can exert price pressures on existing products and services. It is critical to our success for us to be able to anticipate changes in technology and to successfully develop and introduce new, enhanced and competitive products and services on a timely basis. We cannot assure you that we will successfully develop new products or services or introduce new applications for existing products and services, that new products and applications will achieve market acceptance or that the introduction of new products, services or technological developments by others will not render our products and services obsolete. Our inability to develop products and services that are competitive in technology and price and meet customer needs could have a material adverse effect on our business, financial condition or results of operations.

 

Our management controls a substantial percentage of our stock and therefore has the ability to exercise substantial control over our affairs.

 

As of the May 15, 2012, our directors and executive officers beneficially owned 11,806,152 shares, or approximately 64.4%, of our outstanding common stock in the aggregate. Because of the large percentage of stock held by our directors and executive officers, these persons could influence the outcome of any matter submitted to a vote of our stockholders.

 

If we were to lose the services of Dr. Jerzy Bala, Ray Piluso, Vijay Suri , or B.K. Gogia, or other members of our senior management team, we may not be able to execute our business strategy.

 

Our future success depends in a large part upon the continued service of key members of our senior management team. In particular, our CEO, Vijay Suri; B.K. Gogia our Chairman; Dr. Jerzy Bala, our Chief Technology Officer; and Raimondo Piluso, Chief Operating Officer, are critical to the overall management of InferX Corporation as well as the development of our technology, our culture, and our strategic direction. The loss of or unavailability of the services of any one of these individuals would have a material adverse effect on our business prospects and/or potential earning capacity.

 

42
 

 

We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel, hire qualified personnel, or maintain our corporate culture, we may not be able to grow effectively.

 

Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense, and some of our competitors have directly targeted our employees. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

 

In addition, we believe that our corporate culture fosters innovation, creativity, and teamwork. As our organization grows, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our future success.

 

We may not be able to protect important intellectual property, and we could incur substantial costs defending against claims that our products infringe on the proprietary rights of others.

 

We currently have received two patents and have filed four provisional patents, awaiting determination. While we believe that we have a proprietary position in component technologies for our products, our ability to compete effectively will depend, in part, on our ability to protect our proprietary technologies, processes and designs, to secure patents for the applications we have pending and to protect those patents that we may secure. We do not know whether any of our pending patent applications will be issued or, if issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Even if all of our patent applications are issued and are sufficiently broad, our patents may be challenged or invalidated.

 

We could incur substantial costs in prosecuting or defending patent infringement suits or otherwise protecting our intellectual property rights. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so.

 

We may face liability claims from future customers if our software malfunctions or contains undetected defects.

 

Our products have in the past contained, and may in the future contain, undetected or unresolved errors when first introduced, as new versions are released, or otherwise. Despite extensive testing, errors, defects or failures may be found in our current or future products or enhancements after they have been installed by customers. If this happens, we may experience delay in or loss of market acceptance and sales, diversion of development resources, injury to our reputation or increased service costs, any of which could have a material adverse effect on our business, financial condition and results of operations. Moreover, because our products are designed to provide critical data analysis services, we may receive significant liability claims. Although we intend to obtain product liability insurance covering certain damages arising from implementation and use of our products, our insurance may not cover all claims sought against us. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not successful, could seriously damage our reputation and business.

 

We must ensure the protection and privacy of customer data.

 

We rely on complex encryption algorithms and technology to secure customer data. We believe our products protect the security and privacy of customer data by transmitting encrypted pointers to customer data, rather than the data itself, across the Internet and existing dedicated transmission lines. However, if customer data is misappropriated or unintentionally disclosed as a result of an actual or perceived failure of our software, our reputation, and ultimately our business, would be seriously harmed, and we could face liability claims.

 

43
 

 

We currently are dependent on contracts with the federal government for all of our revenues.

 

Revenues derived from federal government contracts accounted for 97.6% of our revenues in the first nine months of 2011. We expect that government contracts will continue to be a significant source of our revenues for the foreseeable future. Our business generated from government contracts may be adversely affected if:

 

·ability of the government to prepare, approve and execute a final federal fiscal budget;

 

·levels of government expenditures and authorizations for national and homeland security related programs decrease, remain constant or shift to programs in areas where we do not provide products and services;

 

·we are prevented from entering into new government contracts or extending existing government contracts based on violations or suspected violations of procurement laws or regulations;

 

·we are not granted security clearances that are required to sell our products or services or such security clearances are revoked; or

 

·our reputation or relationship with government agencies is impaired.

 

Most of our contracts with the government contain standard provisions that provide for termination at the convenience of the government pursuant to which we are entitled to recover costs incurred, settlement expenses, and profit on work completed prior to termination.

 

If we fail to comply with complex procurement laws and regulations, we may be subject to civil and criminal penalties and administrative sanctions.

 

We must comply with laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we do business with government agencies and may impose added costs on our business. For example, we are subject to the Federal Acquisition Regulations, which comprehensively regulate the formation, administration and performance of federal government contracts, and to the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations.

 

If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with government agencies, which could materially and adversely affect our business, financial condition and results of operations. In addition, a government may reform its procurement practices or adopt new contracting rules and regulations that could be costly to satisfy or that could impair our ability to obtain new contracts.

 

Risks Related to Our Common Stock

 

Currently, there is a limited trading market for our common stock, which may adversely impact your ability to sell your shares and the price you receive.

 

There is currently a limited trading market for our common stock and a more active trading market for our common stock may never develop or be sustained. The market price of our common stock may be significantly affected by factors such as actual or anticipated fluctuations in our operating results, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the shares of developmental stage companies, which may materially adversely affect the market price of our common stock without regard to our operating performance. These fluctuations may also cause short sellers to enter the market from time to time in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time. Furthermore, for companies such as us whose securities are quoted on the OTC Bulletin Board, it is more difficult (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (iii) to obtain needed capital. These factors may negatively impact your ability to sell shares of our common stock and the price you receive.

 

44
 

 

Our common stock is deemed to be a “penny stock,” which may make it more difficult for you to sell your shares.

 

Our common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or another national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. Remaining subject to the penny stock rules should be expected to have an adverse effect on the market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.

 

We need to raise additional capital, but that capital may not be available.

 

Our existing capital is insufficient to fund our operations beyond the fourth quarter of 2011. We believe the anticipated revenues from potential customer contracts along with the sale of a limited amount of equity will enable us to meet our financial obligations as they become due. However, we are not generating sufficient revenues to increase our working capital or to carry out our proposed business objectives and continue to operate as a going concern beyond the near term, and we need to obtain additional financing or reduce our expenses by curtailing our operations.

 

We cannot assure you that we will be successful or that our operations will generate sufficient revenues, if any, to meet the expenses of our operations. Although we are seeking additional financing, such financing may not be available or, if available, may not be available on satisfactory terms. Additionally, the nature of our business activities may require the availability of additional funds in the future due to more rapid growth than is forecast, and thus, we may need additional capital or credit lines to continue that rate of business growth. We may encounter difficulty in obtaining these funds and/or credit lines. Moreover, even if additional financing or credit lines were to become available, it is possible that the cost of such funds or credit would be high and possibly prohibitive.

 

If we were to decide to obtain such additional funds by equity financing in one or more private or public offerings, current stockholders would experience a corresponding decrease in their percentage ownership.

 

Our independent registered public accounting firm has expressed doubt regarding our ability to continue as a going concern.

 

Our audited financial statements for the years ended December 31, 2011 and 2010 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firms have issued their reports dated December 18, 2012 and April 13, 2011 in connection with the audits of our financial statements for the years ended December 31, 2011 and 2010 that included an explanatory paragraph describing the existence of conditions that raise doubt about our ability to continue as a going concern due to our having sustained operating losses and capital deficits from operations. The fact that we have received this “going concern opinion” from our independent registered public accounting firm will likely make it difficult for us to raise capital on favorable terms and could hinder, to some extent, our operations. Additionally, if we are not able to continue as a going concern, it is likely that stockholders will lose all of their investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

45
 

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.Default Upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

None.

 

Item 5.Other Information.

 

Except as otherwise noted, the securities described in this Item were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the Securities Act. Each such issuance was made pursuant to individual contracts that are discrete from one another and are made only with persons who were sophisticated in such transactions and who had knowledge of and access to sufficient information about the Company to make an informed investment decision. Among this information was the fact that the securities were restricted securities.

 

Item 6.Exhibits.

  

  31* Certification of the Principal Executive, Financial and Accounting Officer required by Rule 13a-14(a) or Rule 15d-14(a).  
     
  32* Certification of the Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
     
  101.INS** XBRL Instance Document
     
  101.SCH** XBRL Taxonomy Extension Schema
     
  101.CAL** XBRL Taxonomy Extension Calculation Linkbase
     
  101.DEF** XBRL Taxonomy Extension Definition Linkbase
     
  101.LAB** XBRL Taxonomy Extension Label Linkbase
     
  101.PRE** XBRL Taxonomy Extension Presentation Linkbase

*Filed herewith  

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

 

SIGNATURES

 

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

 

Dated:  May 23, 2013 InferX Corporation
     
  By: /s/ Paul B. Silverman
    President, CEO, and CFO
    (Principal Executive, Financial and
    Accounting Officer

 

46