UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended November 30, 2014

 

☐. TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission File Number: 000-53446

 

INFINITY AUGMENTED REALITY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		71-1013330
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
228  Park Ave. S #61130, New-York. NY		10003-1502
(Address of principal executive offices)		(Zip Code)

 

(917) 677-2084

(Registrant's telephone number, including area code)

 

 

(Former name or former address, if changed 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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ . No ☐.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ . No ☐.

 

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐. (Do not check if a smaller reporting company)	Smaller reporting company	☒ .

 

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

Yes ☐. No ☒ .

 

State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date. 94,960,687 shares of common stock as of January 7, 2015.

 

 

 

INFINITY AUGMENTED REALITY, INC.

Quarterly Report On Form 10-Q

For The Quarterly Period Ended

November 30, 2014

 

INDEX

 

			Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
	Item 4.	Controls and Procedures	18
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	19
	Item 1A.	Risk Factors	19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
	Item 3.	Defaults Upon Senior Securities	19
	Item 4.	Mine Safety Disclosures	19
	Item 5.	Other Information	19
	Item 6.	Exhibits	20

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The following unaudited interim financial statements of Infinity Augmented Reality, Inc. and its Subsidiary (sometimes referred to as "we", "us" or "our Company") are included in this quarterly report on Form 10-Q:

 

	Page
Condensed Consolidated Balance Sheets at November 30, 2014 (unaudited) and August 31, 2014	4
Condensed Consolidated Statements of Operations and Comprehensive loss for the three months ended November 30, 2014 and November 30, 2013 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2014 and November 30, 2013 (unaudited)	6
Notes to Condensed Consolidated Financial Statements	7

 

 

INFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		November 30,				August 31,
		2014 (Unaudited)				2014
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,163,005			$	875,438
Prepaid expenses and other receivables			54,838				178,394
Total current assets			1,217,843				1,053,832
Property and equipment, net			76,356				84,885
Investment in Meta Company			50,000				50,000
TOTAL ASSETS		$	1,344,199			$	1,188,717
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	51,342			$	191,046
Interest payable			77,165				54,871
Current liabilities of discontinued operations			-				27,835
Total current liabilities			128,507				273,752
Convertible debentures, net of debt discount			4,021,890				3,291,930
TOTAL LIABILITES			4,150,397				3,565,682
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS’ DEFICIT
Common stock ($ 0.00001 par value; 500,000,000 authorized; 95,316,155 issued and 94,960,687 outstanding at November 30, 2014 and at August 31, 2014			953				953
Additional paid in capital			64,944,798				63,866,965
Treasury stock, at cost 355,468 shares of common stock November 30, 2014 and August 31, 2014			(49,766	)			(49,766	)
Accumulated deficit			(67,648,485	)			(66,180,566	)
Accumulated other comprehensive loss			(53,698	)			(14,551	)
Total Stockholders' Deficit			(2,806,198	)			(2,376,965	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	1,344,199			$	1,188,717

 

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

 

 

INFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS UNAUDITED

 

 

		Three months ended November 30,
		2014				2013
Research and development		$	(182,075	)		$	(344,799	)
Marketing, general and administrative expenses			(1,034,063	)			(730,434	)
Total Operating expenses			(1,216,138	)			(1,075,233	)
Other expense
Foreign exchange gains			-				11,195
Interest expense			(251,780	)			(130,931	)
Net loss		$	(1,467,918	)		$	(1,194,969	)
Basic and diluted loss per common share
Net loss per common share			(0.01	)			(0.01	)
Basic weighted average shares outstanding			100,960,687				99,281,941
Diluted weighted average shares outstanding			100,960,687				99,281,941
Net loss		$	(1,467,918	)		$	(1,194,969	)
Foreign currency translation adjustments			(39,147	)			(5,801	)
Comprehensive loss		$	(1,507,065	)		$	(1,200,770	)

 

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

 

 

INFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

		Three months ended November 30,
		2014				2013
Operating activities:
Net loss		$	(1,467,918	)		$	(1,194,969	)
Adjustments to reconcile net loss to net cash (used in) provided by operations
Amortization of debt discount			229,106				117,228
Stock-based compensation			828,688				21,638
Foreign exchange gain on investment in subsidiary			-				(11,195	)
Loss on disposition of equipment			-				25,385
Depreciation			8,591				9,491
Changes in operating assets and liabilities
Prepaid expenses and other receivables and long-term receivables			116,272				(30,074	)
Accounts payable and accrued expenses			(138,084	)			(11,122	)
Interest payable			22,293				7,420
Net cash used in operating activities- continuing operations			(401,052	)			(1,066,198	)
Net cash used in operating activities- discontinued operations			(22,987	)			-
Net cash used in operating activities			(424,039	)			(1,066,198	)
Investing activities:
Purchase of property and equipment			(7,004	)			(59,039	)
Net cash used in investing activities			(7,004	)			(59,039	)
Financing activities:
Proceeds from convertible debentures			750,000				1,000,000
Proceeds from exercise of stock options							39,926
Net cash provided by financing activities			750,000				1,039,926
Effect of exchange rate on cash and cash equivalents			(31,390	)			2,941
Change in cash and cash equivalents			287,567				(82,370	)
Cash and cash equivalents, beginning			875,438				431,760
Cash and cash equivalents of continuing operations, ending		$	1,163,005			$	349,390
Warrants issued in connection with convertible debentures		$	249,145			$	370,153
Fair value of conversion option		$	-			$	554,240

 

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

 

 

INIFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1:

NATURE AND CONTINUANCE OF OPERATIONS

 

Infinity Augmented Reality, Inc. (formerly known as Absolute Life Solutions, Inc.) (the “Company”) was originally incorporated as Shimmer Gold, Inc. in the State of Nevada on September 7, 2006. The Company was in the business of the acquisition and exploration of mineral resources during the period from September 7, 2006 to May 21, 2010. Subsequently, a majority of our shareholders approved an amendment to our Articles of Incorporation changing our name to Absolute Life Solutions, Inc. During the fiscal year ended August 31, 2010, the Company commenced operations as a specialty financial services company engaged in the business of purchasing life settlement contracts for long-term investment purposes. Effective November 15, 2012, the Company is no longer engaged in its prior primary activity as a specialty financial services company primarily engaged in the purchase of life settlement contracts. In May 2012, we formed a wholly-owned subsidiary Infinity Augmented Reality, LLC, (“IAR Subsidiary”), and commenced activities to enable it to be actively engaged in the development of software applications which will utilize augmented reality. Effective March 7, 2013, the Company changed its name from Absolute Life Solutions, Inc. to Infinity Augmented Reality, Inc. On that same date, IAR Subsidiary was merged into the Company. Effective June 30, 2013, the Company formed a wholly owned Israeli subsidiary, Infinity Augmented Reality Israel Ltd. (“Infinity Israel”).

 

The Company is actively engaged in the development of an augmented reality software platform which will provide end users with a fully three dimensional (3D), interactive augmented reality experience with full hand controls and a completely natural user interface. Augmented reality, (”AR”), is a technology which allows the projection of visual content that the viewer perceives as a real life experience and allows the viewer to intuitively interact with augmented content in his or her physical surroundings. The Company’s technology platform is made up of computer vision algorithms which will interface with any hardware including mobile or wearable devices, that have two dimensional (2D) stereoscopic cameras. The Company’s technology will turn such hardware into a powerful content augmentation platform. The Company’s technology will be usable both outdoors and indoors and will feature a lower power consumption.

 

The Company is developing three software development kits, or SDKs, which will serve as the core platform for augmented reality software developers and wearable device manufacturers. The Company’s solution is designed to assist application developers in easily and efficiently developing advanced augmented reality applications, in a shorter time-to-market, while still providing a rich augmented reality experience.

 

The continued existence of the Company is dependent upon its ability to generate profit from its augmented reality business and to meet its obligations as they become due. If additional cash is needed, the Company intends to finance the future capital required for continued operations from a combination of traditional debt and equity markets. However, there is no assurance that (a) traditional debt and equity markets may be accessible as required, or if so, on acceptable terms and, or (b) the demand for and selling prices of the Company’s augmented reality products, may not be sufficient to meet cash flow expectations. The outcome of these matters cannot be predicted with certainty and therefore the Company may not be able to continue or expand operations as planned. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

 

 

INIFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements as of November 30, 2014 and for the three months ended November 30, 2014 and 2013 have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the annual audited financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions are eliminated in the consolidation process. The unaudited condensed consolidated Balance Sheet as of November 30, 2014, condensed consolidated Statements of Operations and Comprehensive loss for the three months ended November 30, 2014 and 2013, and condensed consolidated Statements of Cash Flows for the three months ended November 30, 2014 and 2013, are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the period presented. The results for the three months ended November 30, 2014 are not necessarily indicative of results to be expected for the year ending August 31, 2015 or for any future interim period. In addition, the balance sheet data at August 31, 2014 was derived from the audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on November 26, 2014.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these financial statements relate to the value of warrants and options and deferred income tax amounts and rates and timing of the reversal of income tax differences.

 

 

INIFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

Loss per Share

 

Basic loss per share is calculated using the weighted average number of shares of common stock outstanding during the period. Included in basic loss per share calculations for each period presented are the effects of 6,000,000 warrants exercisable at $0.01. Diluted earnings per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock. The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the "if converted" method. As of November 30, 2014, 88,148,344 shares of common stock, comprised of 31,174,172 convertible debentures with a conversion price of $0.25, 31,174,172 warrants with an exercise price of $0.50, and stock options exercisable into 25,800,000 common shares are not included in diluted loss per share since their effect would be anti-dilutive. As of November 30, 2013, 45,751,084 shares of common stock, comprised of 11,710,172 convertible debentures with a conversion price of $0.25, 11,710,172 warrants with an exercise price of $0.50, and stock options exercisable into 22,330,740 common shares are not included in diluted loss per share since their effect would be anti-dilutive.

 

Stock-Based Compensation

 

The Company records stock-based compensation expense in accordance with ASC 718, Compensation - Stock Compensation. The Company expenses stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards and forfeiture rates. For stock-based compensation awards to non-employees, the Company re-measures the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

 

Valuation Assumptions

 

The Company estimates the fair value of stock option grants using a Black-Scholes option pricing model. In applying this model, the Company uses the following assumptions: 

 

„

Risk-Free Interest Rate: The Company determined the risk-free interest rate equivalent to the expected term based on the U.S. Treasury constant maturity rate.

 

„

Expected Volatility: The Company determined its future stock price volatility based on the average historical stock price volatility of comparable peer companies.

 

„

Expected Term: Due to the limited exercise history of the Company’s stock options, the Company determined the expected term based on the stratification of employee groups and the expected effect of events that have indications on future exercise activity. Expected life for options granted to employees uses the Simplified Method, while options granted to non-employees uses an expected term equal to the life of the contract.

 

„

Expected Dividend Rate: The Company has not paid and does not anticipate paying any cash dividends in the near future.

 

 

INIFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

The fair value of each option award was estimated on the grant date using the Black Scholes option-pricing model and expensed under the straight line method. The following assumptions were used:

 

				Three Months ended November 30, 2014				Three Months ended November 30, 2013
	Exercise price			-				$0.29 - $0.35
	Expected stock price volatility			-				66.3% - 73.8%
	Risk-free rate of interest			-				1.31% - 1.72%
	Expected life of options			-				3-3.5 Years

 

Recent Accounting Pronouncements

 

In November 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-17, Pushdown Accounting. This ASU provides companies with the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The election to apply pushdown accounting can be made either in the period in which the change of control occurred, or in a subsequent period. This ASU is effective as of November 18, 2014. The adoption will not have a material impact on the Company’s results of operations, cash flows or financial position

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (ASC) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 (fiscal 2018) and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Company’s results of operations, cash flows or financial position.

 

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Under the new standard, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014 (fiscal 2016). Early adoption is permitted provided the disposal was not previously disclosed. This update will not have a material impact on the Company's reported results of operations and financial position. The impact is non-cash in nature and will not affect the Company's cash position

 

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the condensed financial statements of the Company.

 

 

INIFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3:

CONVERTIBLE DEBENTURES

 

During the three months ended November 30, 2014, the Company issued a (i) five-year Convertible Series A-14 Debentures (the “A-14 Debentures”) for an aggregate principal amount of $750,000, bearing interest at 1.2% per annum, convertible into shares of common stock, at a conversion price of $0.25, and (ii) a five-year Warrant (the “2014 Warrants”) to purchase 3,000,000 shares of common stock, to Credit Strategies, LLC (the “Lead Investor”), pursuant to Securities Purchase Agreements dated March 26, 2014 (the “2014 SPA”).

 

The Company accounts for the beneficial conversion feature (“BCF”) and warrant valuation in accordance with ASC 470-20, Debt with Conversion and Other Options. The Company records a BCF related to the issuance of convertible debt that has conversion features at fixed rates that are “in-the-money” when issued and the fair value of warrants issued in connection with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value, and as a reduction to the carrying amount of the convertible debt equal to the intrinsic value of the conversion feature. The discount recorded in connection with the BCF and warrant valuation is recognized as non-cash interest expense and is amortized over the terms of the convertible notes.

 

During the three months ended November 30, 2014, the Company recorded an aggregate of $249,145 for the calculated fair value of 2014 Warrants and BCF, in conjunction with A-14 Debentures issued on September 15 and November 7, 2014.

 

The Company valued the warrants at the date the warrants were issued, using the Black-Scholes valuation model and the following assumptions:

 

			September 15, 2014				November 7, 2014
	Contractual term (Years)			5.0				5.0
	Volatility			139.6	%			162.5	%
	Dividend yield			0.0	%			0.0	%
	Risk-free interest rate			1.80	%			1.60	%

 

			November 30, 2014				December 31, 2014
	1.2% convertible debentures			7,793,543				7,043,543
	Debt discount/ beneficial conversion feature			(3,771,653	)			(3,751,613	)
	Balance		$	4,021,890			$	3,291,930

 

 

INIFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 4:

COMMITMENTS AND CONTINGENT LIABILITIES

 

With respect to the Company’s prior activities in the life insurance settlement business, the Company recently joined as a defendant in a lawsuit captioned as CMS Life Ins. Opportunity Fund L.P., et al. v. Progressive Capital Solutions in the New York State Supreme Court, New York County. The intervening plaintiffs, Genesis Merchant Partners, LP and Genesis Merchant Partners II, LP (collectively, “Genesis”), claim that the Company owned certain unidentified "Life Settlement" insurance policies, that are subject to Genesis' rights.

 

Genesis is seeking declaratory and injunctive relief (but no money damages). The Company exited the life settlement insurance business in November 2012 and does not own or claim any rights in any such life settlement insurance policies. Accordingly, the Company believes that the claims are frivolous and intends to vigorously defend against the allegations. The Company has filed a motion to dismiss all of the claims against the Company and the Plaintiff has filed an opposition to the motion to dismiss. The Court is expected to rule on the motion to dismiss in the coming months.

 

On November 27, 2013, Infinity Israel received a pre lawsuit claim letter from the legal representative of a former employee. The compensation amount sought by the former employee as per his pre lawsuit claim letter was approximately 202,000 NIS (approximately $57,780). During the year ended August 31, 2014 Infinity Israel and the former employee agreed to the settlement of the Claim by a lump sum payment of 50,000 NIS (approximately $14,300) by Infinity Israel to the former employee and, on January 26, 2014 the board of directors approved the issuance to the former employee of options to purchase up to 218,750 shares of the Company’s Common Stock under the Company’s 2013 Equity Incentive Plan at an exercise price of $0.25 per share, which options were forfeited on June 23, 2014. The fair value of this grant was $31,311.

 

 

INIFINITY AUGMENTED REALITY, INC. AND ITS SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 5:

WARRANTS AND STOCK OPTIONS

 

Warrants

 

Warrant transactions are summarized as follows:

 

			Number of warrants				Weighted average exercise price				Weighted average life remaining (in years)
	Balance as at August 31, 2014 - Issued			34,174,172				0.41				3.97 years
	Additions as of November 30, 2014 - Issued			3,000,000				0.50				4.86 years
	Balance as at November 30, 2014			37,174,172				0.42				3.60 years

 

As of November 30, 2014, there were 37,174,172 warrants outstanding and exercisable with expiration dates from June 2015 through November 2019.

 

Stock options

 

The following table summarizes the stock-based compensation expense from stock option, employee stock purchase programs and restricted Common Stock awards for the Three months ended November 30, 2014 and 2013:

 

			Three months ended November 30,
			2014				2013
	Employee awards		$	828,688			$	4,644
	Non- employee awards, net of forfeitures			-				16,994
	Total stock options compensation expense		$	828,688			$	21,638

 

No options were granted during the three months ended November 30, 2014.

 

NOTE 6:

SUBSEQUENT EVENTS

 

On December 7, 2014, the Board of Directors granted to an Infinity Israel employee 50,000 Non-Qualified Stock Options with an exercise price of $0.07, vesting semiannually over the next 3 years and expiring on December 7, 2019.

 

The Company evaluates events that have occurred after the balance sheet date through the date the financial statements were publicly available. Based upon the evaluation, the Company did not identify any other recognized or non-recognized subsequent events that would have required adjustment to or disclosure in the financial statements.

 

- - - - - - - - - - - - - - - - - - -

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Special Note:  Certain statements in this quarterly report on Form 10-Q concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items, estimates as to size, growth in or projected revenues from the life settlement market, developments in industry regulations and the application of such regulations, expected outcomes of pending or potential litigation and regulatory actions, and our strategies, plans and objectives, together with other statements that are not historical facts, are “forward-looking statements” as that term is defined under the federal securities laws.  All of these forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.  You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission or the SEC, including our Annual Report on Form 10-K for the Company's fiscal year ended August 31, 2014, particularly in the sections entitled “Item 1A – Risk Factors” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  

 

Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Report or to reflect the occurrence of unanticipated events. Shareholders and potential shareholders should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Report. Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside of our control, and involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made, including, but not limited to, the following:

 

	·	Market Acceptance of our products;
	·	Market acceptance of Augmented Reality products;
	·	the risks associated with the adequacy of our existing cash resources and our ability to continue as a going concern;
	·	the risks associated with dependence upon key personnel;
	·	the cost, delays and uncertainties associated with our product development;
	·	regulatory announcements, proceedings or changes;
	·	competitive product developments and legal developments;
	·	our history of operating losses since our inception and since we began to develop augmented reality in 2012;
	·	risks associated with our ability to protect our intellectual property;
	·	risks associate with our ability to raise additional funds; and
	·	our liquidity.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.

 

Overview

 

In May, 2012, we formed a wholly-owned subsidiary Infinity Augmented Reality, LLC, or IAR Subsidiary, which was actively engaged in the development of software applications which were intended to utilize augmented reality.

 

Effective March 7, 2013, we changed our name from Absolute Life Solutions, Inc. to Infinity Augmented Reality, Inc. On that same date, we merged IAR Subsidiary into our Company. On June 30, 2013, we formed a wholly owned Israeli subsidiary, Infinity Augmented Reality Israel Ltd, or Infinity Israel.

 

We are currently actively engaged in the development of Augmented Reality software. Our objective is to establish ourselves firmly as a preeminent source for state-of-the-art augmented reality experiences, forging a strong association, early on, between the Infinity brand and the burgeoning medium.

 

We are a company engaged in the development of an augmented reality software platform which will provide end users with a fully three dimensional (3D), interactive augmented reality experience with full hand controls and a completely natural user interface. Augmented reality, or AR, is a technology which allows the projection of visual content that the viewers feel is a real life experience despite the fact that the visual content is not physically right in front of them, and allows them to intuitively interact with augmented content in their physical surroundings. Our technology platform is made up of computer vision algorithms which will interface with any hardware , including mobile or wearable devices, that have two small and light two dimensional (2D) stereoscopic cameras. Our technology will turn such hardware into a powerful content augmentation platform. Our technology will be usable both outdoors and indoors and will feature a lower power consumption that focuses mainly on the user’s point of view.

 

 

We are developing three software development kits, or SDKs, that will serve as the core platform for augmented reality software developers and wearable device manufacturers. Our solution is designed to assist application developers to easily and efficiently develop advanced augmented reality applications using our platform, in a shorter time-to-market, while still providing a rich augmented reality experience.

 

Currently, augmented reality technology is mainly used to provide mobile device users with an additional layer of visual content while looking at the world around them through the screen on their smart phones or tablets. New technologies are emerging to combine both wearable devices like AR glasses and mobile devices. Such a combination will enable the users to benefit from a many different augmented reality experiences that are not available today. However, such technologies rely on expensive cameras and sensors requiring vast energy consumption and are overall unsuitable for incorporation into everyday wearable and mobile devices because they require either connection to electricity or relatively heavy batteries.

 

Our platform will provide application developers and wearable device manufacturers with a light, simple platform utilizing only simple, passive 2D cameras, requiring only one tenth (1/10) the power consumption of current AR solutions thus can be operated by light batteries. Our technology enables the extraction, representation and digitization of the physical world and provides an intelligent understanding of the 3D scene. Furthermore, the technology is designed to provide a unique advanced “hand controlled” Natural User Interface, which enables, empowering the augmented reality application developers’ community to create a real life experience for application users that focuses mainly on the user’s point of view.

 

Results of Operations

 

Our results of operations for the three months ended November 30, 2014, consisted of operating and administrative expenses for personnel, leased office space and professional fees.

 

Three months ended November 30, 2014 compared to three months ended November 30, 2013

 

INFINITY AUGMENTED REALITY INC.

 

		Three months ended November 30,
		2014				2013
Research and development		$	(182,075	)		$	(344,799	)
Marketing, general and administrative expenses			(1,034,063	)			(730,434	)
Total operating expenses			(1,216,138	)			(1,075,233	)
Foreign exchange gain			-				11,195
Interest expense			(251,780	)			(130,931	)
Net loss		$	(1,467,918	)		$	(1,194,969	)

 

Research and development. Research and development expenses decreased from $344,799 for the three months ended November 30, 2013 to $182,075 for the three months ended November 30, 2014. The decrease of $162,724 is primarily attributable to a decrease in payroll expenses, mainly in Infinity Israel, due to a decrease of 10 employees in our R&D department.

 

Marketing, general and administrative expenses. Marketing, general and administrative expenses increased from $730,434 for the three months ended November 30, 2013 to $1,034,063 for the three months ended November 30, 2014. The increase of approximately $303,600 is primarily attributable to an increase of approximately $807,000 related to the fair value of stock options issued to employees and directors of our Company and of Infinity Israel, offset by a decrease of approximately $255,400 in professional fees and consulting expenses due to cost reduction efforts, a decrease of approximately $166,000 in payroll expenses, and a decrease of approximately $82,000 in travel, rent and other office expenses due to cost reduction efforts.

 

 

Interest Expense: Interest expense for the three months ended November 30, 2014 increased to $251,780 as compared to $130,931 in the three months ended November 30, 2013. Interest expenses include interest on Convertible Debts and amortization of debt discount related to convertible debts.

 

Net Income (Loss): We reported a net loss of $1,467,918 for the three months ended November 30, 2014 compared to a net loss of $1,194,969 for the three months ended November 30, 2013. The increase of approximately $272,950 is primarily attributable to an increase of approximately $303,600 in marketing, general and administrative expenses, an increase of approximately $11,200 in Foreign exchange gains and an increase of approximately $120,850 in interest expense offset by a decrease of approximately $162,700 in research and development expenses. Refer to preceding discussions for explanation of variances.

 

Liquidity and Capital Resources

 

Net cash used in operating activities for continuing operation for the three months ended November 30, 2014 was $401,052. Net cash used in investing activities was $7,004 due to the purchase of computers and other equipment. Net cash provided by financing activities was $750,000 arising from proceeds received from convertible debentures. This resulted in an increase in cash of $287,567.

 

Working Capital and Capital Availability: As of November 30, 2014, we had a positive working capital of $1,089,336. We anticipate, that barring unforeseen developments, the proceeds received from these subsequent debt financings will be sufficient to sustain our operations for approximately five months. To date, we issued a total of $7,793,543 of Convertible Debentures. We anticipate raising additional funds to continue our augmented reality operations through subsequent debt or equity offerings to one or more accredited investors. Such issuances may dilute the interests of our existing shareholders. During the next twelve months we anticipate that we will not generate significant cash from operations. We are unable to estimate our working capital requirements and capital availability for the next twelve months.

 

Going Concern Qualification

 

We will require additional funds to finance our augmented reality operations. We are dependent upon the expected demand for our software platform and our ability to generate sufficient cash from our augmented reality business to meet our obligations as they come due. However, there can be no assurance that we will be successful in implementing our business plan, and it is uncertain whether we will be able to achieve a profitable level of operations and there can be no assurance that we will be able to obtain additional financing or that any such additional financings will be available to us on satisfactory terms and conditions, if at all. These conditions raise substantial doubt about our ability to continue as a going concern.

 

 

Application of Critical Accounting Policies and Estimates

 

Our discussion and analysis of financial condition and results of operations are based on our financial statements that were prepared in accordance with accounting principles generally accepted in the United States of America. To guide our preparation, we follow accounting policies, some of which represent critical accounting policies as defined by the SEC. The SEC defines critical accounting policies as those that are both most important to the portrayal of a company’s financial condition and results and require management’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates involve significant judgments, assumptions and estimates by management that may have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent liabilities, and the reported amounts of income and expenses during the reporting period that management considers critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management’s experience, knowledge of the accounts and other factors that are believed to be reasonable. Because of the nature of the judgments and assumptions made by management, actual results may differ materially from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations. Areas affected by our estimates and assumptions are identified below.

 

We apply the principles of ASC 985-20, Software- Costs of Software to Be Sold, Leased, or Marketed, which requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product. We have adopted the “tested working model” approach to establishing technological feasibility for its products. Under this approach, a product in development is not considered to have passed the technological feasibility milestone until we have produced a model of the product that contains essentially all the functionality and features of the final product and have tested the model to ensure that it works as expected. We have expensed all software development costs when incurred since they have not reached technological feasibility.

 

We account for the BCF and warrant valuation in accordance with ASC 470-20, Debt with Conversion and Other Options. We record a BCF related to the issuance of convertible debt that has conversion features at fixed rates that are “in-the-money” when issued and the fair value of warrants issued in connection with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value, and as a reduction to the carrying amount of the convertible debt equal to the intrinsic value of the conversion feature. The discount recorded in connection with the BCF and warrant valuation is recognized as non-cash interest expense and is amortized over the terms of the convertible notes.

 

We record stock-based compensation expense in accordance with ASC 718, Compensation - Stock Compensation. We expense stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards and forfeiture rates. For stock-based compensation awards to non-employees, we re-measure the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

 

We review the carrying value of the property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment includes current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment during the three months ended November 30, 2014.

 

 

We evaluate the useful lives of our property and equipment to assure that an adequate amount of depreciation is being charged to operations. Useful lives are based generally on specific knowledge of an asset’s life.

 

We are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include a tax provision or reduce our tax benefit in the statements of operations. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

 

We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates or assumptions.

  

Off-Balance Sheet Arrangements

 

We did not engage in any off-balance sheet arrangements or transactions.

 

Outlook

 

We believe our Company and our industry are fundamentally sound and well positioned to deal with the current uncertainty in the financial and capital markets.  We carry no operational debt and do not rely on leverage in our capital structure. We do rely, however, upon the availability of investment capital. While it is conceivable that a financial crisis could diminish the supply of investment capital throughout the economy, we believe that greater investment capital will be placed in the augmented reality sector. We believe this is due to the fact that augmented reality is one of the technologies of the future.

  

We believe that domestic and international demand for augmented reality products will continue to grow as the industry continues to mature.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures. With the participation of our Chief Executive Officer and Chief Financial Officer, we have 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 or the Exchange Act, as of the end of the period covered by this report.  Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such periods, our disclosure controls and procedures were not effective due to the material weaknesses noted below, in ensuring that (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Due to the small size of our staff, we did not have sufficient segregation of duties to support our internal control over financial reporting.

 

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f)) during the fiscal quarter ended November 30, 2014, that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

 

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

With respect to our prior activities in the life insurance settlement business, we were recently joined as a defendant in a lawsuit captioned as CMS Life Ins. Opportunity Fund L.P., et al. v. Progressive Capital Solutions in the New York State Supreme Court, New York County. The intervening plaintiffs, Genesis Merchant Partners, LP and Genesis Merchant Partners II, LP, to which we collectively refer to herein as Genesis, claim that we owned certain unidentified "Life Settlement" insurance policies, that are subject to Genesis' rights.

 

Genesis is seeking declaratory and injunctive relief (but no money damages). We exited the life settlement insurance business in November 2012 and do not own or claim any rights in any such life settlement insurance policies. Accordingly, we believe that the claims are frivolous and intends to vigorously defend against the allegations. The Company has filed a motion to dismiss all of the claims against the Company and the Plaintiff has filed an opposition to the motion to dismiss. The Court is expected to rule on the motion to dismiss in the coming months.

 

On November 27, 2013, Infinity Israel received a pre lawsuit claim letter from the legal representative of a former employee. The compensation amount sought by the former employee as per his pre lawsuit claim letter was approximately 202,000 NIS (approximately $57,780). During the year ended August 31, 2014, Infinity Israel and the former employee agreed to settle the claim for a lump sum payment of 50,000 NIS (approximately $14,300) by Infinity Israel to the former employee and, on January 26, 2014, the board of directors approved the issuance to the former employee options to purchase up to 218,750 shares of our Common Stock under our 2013 Equity Incentive Plan at an exercise price of $0.25 per share, which options were forfeited on June 23, 2014.

 

Item 1A. Risk Factors.

 

There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended August 31, 2014.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

The Company currently does not have senior securities

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

 

Item 6. Exhibits.

 

Exhibit Number		Exhibit Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act .
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act .
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	INFINITY AUGMENTED REALITY, INC.
January 7, 2015	/s/ Motti Kushnir
	Motti Kushnir
	Chief Executive Officer
January 7, 2015	/s/ Ortal Zanzuri
	Ortal Zanzuri Chief Financial Officer

 

 

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