FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Quarterly Report Under Section 13 or 15(d)

Of the Securities Exchange Act of 1934

For Quarter Ended March 31, 2016

Commission File Number 33-16531-D

INTERNATIONAL AUTOMATED SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

UTAH                              87-0447580

(State or other jurisdiction of     (IRS Employer

incorporation or organization)     Identification No.)

2730 W 4000 S

Oasis, Utah 84624

(Address of principal executive offices)

Registrant's telephone number:

(including area code)   (801) 423-8132

55 North Merchant Street 608

American Fork, Utah 84003

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 preceding 12 months (or 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    

As of January 27, 2017, registrant had 79,156,344 shares of common stock, no par value per share, issued and outstanding; registrant also had 5,700,000 shares of preferred stock, no par value issued and outstanding.

FORWARD-LOOKING STATEMENTS

This report references to “International Automated Systems,”  the “Company,”  “we,” “us,”  and  “our”  refer to International Automated Systems, Inc.

In this report on Form 10-Q contains certain forward-looking statements and for this purpose any statements contained in this quarterly report that are statements of historical fact are intended to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Without limiting the foregoing words the meaning of the foregoing words such as “may”,  “will”, “expect”, “believe”, “anticipate”, ”estimate”, or “continue”,  or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and  uncertainties and actual results may differ materially depending on a variety of factors many of which are not within our control. These factors include but are not limited to economic conditions generally and in the markets in which we may participate, competition within our chosen industry, technological advances and failure by us to successfully develop business relationships.

We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, are based on certain assumptions and expectations which may or may not be valid or actually occur and which involve various risks and uncertainties.

Unless otherwise required by applicable law, we do not undertake and specifically disclaim any obligations to update any forward-looking statement to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

PART I

ITEM I - FINANCIAL STATEMENTS

The condensed financial statements included herein have been prepared by International Automated Systems, Inc. (the "Company" or the "Registrant"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles 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.

In the opinion of the Company, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2015, and the results of its operations from June 30, 2015, and from December 31, 2015 through March 31, 2016 have been made.  The results of its operations for such interim periods are not necessarily indicative of the results to be expected for the entire year.

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - International Automated Systems, Inc. (the “Company” or “IAS”) was incorporated in the State of Utah on September 26, 1986. The Company’s activities to date have consisted of developing a business plan, raising capital through the issuance of debt and equity instruments, developing power generation equipment and obtaining the rights to certain technology related to electronic security and communication equipment.

Use of Estimates - The preparation of the 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 disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Basis of Presentation / Liquidity - The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.   As of March 31, 2016, the Company had $3,733,003 of available cash and working capital of $496,369.  At June 30, 2015, the Company had available cash of $16,822 and a deficit in working capital deficit of $197,640.  For the three and nine months ended March 31, 2016 and 2015, the Company had no revenue and no operating income.  For the nine months ended March 31, 2016 and 2015, the Company used net cash in operating activities of $151,018 and $75,925, respectively.

As of March31, 2016 the Company’s total accumulated losses $40,140,985.

Concentration Risks - The Federal Deposit Insurance Corporation (FDIC) insures cash deposits in most general bank accounts for up to $250,000 per institution.  The Company had cash deposits that exceeded insured amounts of $3,233,000 and $-0- as of March 31, 2016 and June 30, 2015, respectively.

Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Fair Value of Financial Instruments - The Company’s financial instruments consist of cash and cash equivalents, and payables.  The carrying amount of cash and cash equivalents and payables approximates fair value because of the short-term nature of these items.  

Impairment - The Company records impairment losses on property, equipment and patents when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.  Furthermore, the Company makes periodic assessments about each patent and the related technology to determine if it plans to continue to pursue the technology and if the patent has value.  

As of March 31, 2016 the Company has no unimpaired patents and the equipment is fully depreciated.

Research and Development - Research and development has, historically, been the principal function of the Company. Research and development costs are expensed as incurred.  Expenses in the accompanying financial statements include certain costs which are directly associated with the Company’s research and development of the Solar Lens technology.  These costs, which consist primarily of monies paid for consulting expenses, materials and supplies and compensation costs amounted to $481 and $2,137 for the three and nine months ended March 31, 2016, respectively.  For the comparative three and nine month periods ended March 31, 2015, the research and development expenses were $2,618 and $5,242 respectively.  

Advertising Costs - Advertising costs are expensed when incurred. There were no advertising expenses for the three months and nine months ended March 31, 2016 and 2015, respectively.

Property and Equipment - Property and equipment are recorded at cost and are depreciated using the straight-line method based on the expected useful lives of the assets. Depreciation expense for the three months ended March 31, 2016 and 2015 was $-0- and $506, respectively.  For the comparative six month periods ended March 31, 2016 and 2015, depreciation expense was charged $-0- and $1,517.  The major classes of assets are as follows:

Income Taxes - The Company recognizes the amount of income taxes payable or refundable for the current year and recognizes deferred tax assets and liabilities for operating loss carryforwards and for the future tax consequences attributable to differences between the financial statement amounts of certain assets and liabilities and their respective tax basis. Deferred tax assets and deferred liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance to the extent that uncertainty exists as to whether the deferred tax assets will ultimately be realized.  The Company’s policy for recording interest and penalties associated with taxes is to recognize it as a component of income tax

As of March 31, 2016 and June 30, 2015, there were no deferred tax assets or liabilities.

Condensed Financial Statements - The accompanying financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 31, 2016 and June 30, 2015, results of operations, and cash flows at March 31, 2016 and 2015, have been made.

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.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s June 30, 2015 audited financial statements.  The results of operations for the periods ended March 31, 2016 and 2015 are not necessarily indicative of the operating results for the full year.

Recent Accounting Pronouncements – The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation,

financial position or cash flows.  Based on that review, the Company believes that none of these pronouncements will have a significant effect on these financial statements.

NOTE 2 – BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic earnings/loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing the net income or loss by the sum of the weighted average number of common shares plus the weighted average common stock equivalents which would arise from the exercise of outstanding stock options, issuance of stock held in trust and conversion of Series B Preferred Shares into options to purchase shares of common stock, using the treasury stock method and the average market price per share during the period.

NOTE 3 – RELATED PARTY TRANSACTIONS

The Company owes $152,998 and $163,668 to officers of the Company for expenses paid on the Company’s behalf as of March 31, 2016 and June 30, 2015, respectively.  The liability is non-interest bearing, unsecured and due upon demand.

NOTE 4 – STOCK BASED COMPENSATION

Options and Warrants

The Company’s board of directors authorized the Company to enter into an agreement dated May 14, 2004 and amended October 13, 2004, with the Company’s president, in which the Company acquired patents, patents pending, designs and contracts related to certain technology developed by the president.   No historical cost value has been assigned to these patents as they were acquired from the president (a related party).  

As consideration, the Company authorized and issued warrants to purchase 100,000,000 shares of common stock to the president and agreed to pay the president royalties in the future equal to 10% of future proceeds related to income from the technology.  The warrants, which were considered stock-based compensation for services to be rendered, had no intrinsic value on the grant date.  The fair value of the warrants was $37,136,781, calculated on the grant date using the Black-Scholes model. The following assumptions were used for this grant: Average risk-free interest rate of 4.79%; expected lives of 10 years; expected dividend yield of zero percent; and expected volatility of 138.76%. On July 1, 2006, the Company began recognizing stock-based compensation expense over the graded exercisability period of the options using the straight-line basis over the requisite service period for each separately exercisability portion of the award  as if the award was, in-substance, multiple awards.

The agreement contains a standard anti-dilution clause that gives the president the right to purchase the same number of shares of common stock, given reclassification, reorganization or change by a stockholder, as were purchasable prior to any such changes, at a total price equal to that payable upon the exercise of the options.  Appropriate adjustments shall be made to the exercise price so the aggregate purchase price of the shares will remain the same.  The warrants have an exercise price of $0.40 per share and are all exercisable as of March 31, 2016.

The following table summarizes the stock option and warrant activity as of and for the years ended March 31, 2016:

NOTE 5 – PREFERRED STOCK

Series A Preferred Stock

The Series A Preferred Stock has equal dividend rights to the common shares, is not convertible into common shares, has no cumulative dividend requirements and has liquidation preferences equivalent to the common shares. 3,400,000 of the Series A Preferred Stock are entitled to the voting rights of 10 common shares, and 2,000,000 of the Series A Preferred Stock are entitled to the voting rights of 100 common shares.  At March 31, 2016 and June 30, 2015, there were 5,400,000 Series A Preferred Stock issued and outstanding, respectively.

Series B Preferred Stock

The Series B Preferred Stock has equal dividend rights to the common shares, has no cumulative dividend requirements, has liquidation preferences equivalent to the common shares and each preferred share is entitled to the voting rights of 10 common shares.  Each share is convertible into options to purchase two shares of common stock at $3.00 per share, exercisable immediately and the options expire ten years from the date the preferred stock is exchanged.  At March 31, 2016 and June 30, 2015, there were 300,000, series B Preferred shares issued and outstanding.

NOTE 6 – SUBSEQUENT EVENTS

In accordance with ASC 855, the Company evaluated subsequent events through the date these financial statements were issued. The Company has received $3,077,838 from a related party as a prepayment for 11,762,038 shares of common stock that was subsequently  issued on June 24, 2016.  There were no additional material subsequent events that required recognition or additional disclosure in these financial

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources.  As of March 31, 2016, Registrant had cash of $3,733,003. Cash increased from the June 30, 2015 balance due to proceeds of $800,000 received from a private placement of 2,500,000 shares of restricted common stock on August 13, 2015 and proceeds received for stock which was issued during June, 2016.  Funds spent on the development of the technology and products of the Company continued to decline during the quarter as the Company continues efforts to finalize a non-exclusive royalty license for the Solar Lens system with two private companies.  

Registrant has total liabilities at March 31, 2016 of $3,236,634 compared to the liabilities at June 30, 2015 of $214,461.  The shareholders' equity at March 31, 2016 increased to $780,054 from $86,045 at June 30, 2015 (reflecting the increased common stock placed during August of 2015).  During the nine months ended March 31, 2016, the obligation to a related party dcreased from $163,668 at June 30, 2015, to $152,998 as of March 31, 2016.

Registrant had cash and total current assets of $3,733,003 and had current liabilities of $3,236,634 and shareholders' equity of $780,054 as of March 31, 2016, compared to cash of $16,822, current liabilities of $214,462 and stockholders’ equity of $86,045 as of June 30, 2015. As of March 31, 2016, the ratio of current assets to current liabilities (current ratio) was approximately 1.15.  

Results of Operation.  For the three and nine months ended March 31, 2016 and 2015, Registrant had no revenues..  For the three and nine months ended March 31, 2016, Registrant had expenses of $42,174 and $105,991; compared to expenses of $37,162 and $77,526 for the same periods a year earlier. The lack of revenues reflects management’s decision to focus on licensing the Solar Lens technology to prospective marketers with an expectation of generating royalty income.

The March 31, 2016 and 2015 basic and diluted loss per share was $(0.00) for each three and nine month period included in the attached profit and loss statements.  

The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Management is pursuing various sales agreements and is hopeful that these potential agreements will generate sufficient cash flow for the Company to remain a going concern.

Company’s Business.  

The products which the Company has under development are described in its report on Form 10-K.  Generally speaking the Company anticipates completing the license agreement allowing licensees to develop, manufacture and sell products based upon the Alternate Solar Lens technology.  Management and the board of directors plan to consider options for researching and developing products based upon the various technologies which the Company has experience in creating core technology design, including opportunities for products based upon:

1.

Alternate Solar Energy Thermal Lens Technology;

2.

Bladeless Propulsion Steam Turbine;

3.

Automated Fingerprint Identification Machine;

4.

Digital Wave Modulation;

5.

Automatic Self-Service Checkout System;

The Company is incorporating the report on Form 10-K filed on March 11, 2016, into this report by reference.

Summary of Current Basket of technologies available for development by the Company:

The Company has an Alternate Solar Energy Thermal Lens (“Lens”) which is the subject of licensing efforts with two private companies.  The lens may also be incorporated with the Company’s bladeless turbine as a system to generate power. The system would focus and efficiently capture the solar energy onto a receiver which could then be used to propel the bladeless turbine.  The System may use multiple concentrators to supply a single turbine.

The Company has an Automated Fingerprint Identification Machine (“AFIM”) which is designed to have the capability of verifying the identity of individuals. The AFIM will be able to identify a person utilizing information previously stored. The Company believes that it has the ability to connect a series of AFIM’s to a single personal computer.  The person whose identity will be verified has the AFIM read their fingerprint, which is then stored in a storage medium and is available for subsequent positive identification of individuals via testing the person’s fingerprint against the fingerprint description stored within the AFIM protocol.

The Company purports that it has developed a theoretical application that would transmit information and data using different wave patterns, configurations and timing in the electromagnetic spectrum.  The Company refers to this technology as Digital Wave Modulation (“DWM”). The Company believes that this technology may increase the amount of information which can be transmitted during discrete time periods (increased band-width density). The commercial feasibility of this technology has not been demonstrated. The Company may continue investigating commercial feasibility of the technology.  

There is great competition in communication data transfer and storage systems. There are risks both to development and eventual demand for commercially viable products.  The Company’s development is limited by funds available and approved by management for DWM

development.  To be successful the Company must have necessary skilled personnel, marketing capabilities and strategies for each product under development.

The Company has patented a bladeless propulsion steam turbine.  It uses the expansion of steam to create a rotational force.  The Company believes that its turbine is at least as effective as other turbines, is smaller in size, requires less maintenance, is less expensive to manufacture, is mass producible, and does not require cooling towers.  It is relatively more mobile and water conserving than other turbines. The Company believes that its turbine will be marketable to the utility power industry, hydrogen production, and transportation.  The Company may not be able to manufacture because of lack of sufficient funding, government interference and regulation, lack of acceptance in the industry, and many other conditions not under the Company’s control.

The Company has developed an Automatic Self-Service Check-Out System.   In retail operations the Self-Check-Out System would allow customers to personally check out and pay for the items to be purchased. A scanner reads the bar codes on the items being purchased and a scale weighs the scanned items that are placed in the receiving baskets.  The Self-Check-Out System is designed to replace or supplement clerk operated cashier registers.  When fully implemented a store manager is able to maintain an accurate inventory of items on a contemporary basis.

For the Self-Check-Out System to operate, at least 95% of the items must have bar codes. The retailer may have to purchase equipment to be able to put bar codes on items in the store.  The Company believes that the Self-Check-Out System may reduce thefts and employees will be unable to circumvent traditional Check-Out systems.  

Another market being tested is automatic ordering and payment in the food services industry.  Customers would use a touch screen to initiate an order and make payment using the Company’s AFIM technology.  The order would be sent automatically to the food preparers.  

Patents and Trade Secrets

The Company has been assigned or will be assigned the rights to several U.S. patents.  Four patents pertaining to the AFIM technology were granted in January 1997, February 2001, July 2001, and September 2002. Seven patents pertaining to the DWM technology were granted in May 1996, June 1997, November 1997, July 2000, September 2000, October 2000, and May 2001.  A patent relating to shelf tag was granted on September 2003. Four patents relating to the turbine were granted in March 2003, January 2004, February 2006, and November 2007.  A patent pertaining to the solar energy technology was granted in October 2007.  

The Company has not sought or received an opinion from an independent patent attorney regarding the strength of the patents or patents pending and the ability of the Company to withstand any challenge to the patent or any future efforts by the Company to enforce its rights under a patent or patents against others.  In 2008 a court held that one of the AFIM patents was invalid.  

The Company believes that it also owns trade secrets and it makes efforts to safeguard and secure its trade secrets.  There can be no assurance that these safeguards will enable the Company to prevent competitors from gaining knowledge of these trade secrets and using them to their advantage and to the detriment of the Company.

The Company relies to a great extent upon its proprietary technology for development of its products.  There can be no assurance that others may not develop technology which competes with the Company’s products and technology.

Part II.

Item 1. Legal Proceedings.

The Company has filed two lawsuits against Millard County and at least one of its employees seeking damages for incorrect disclosures and assertions regarding the Company and its activities. The lawsuits were filed in the Fourth District Court of the State of Utah. Millard County asserted that the Company did not have the necessary and proper permits for its activities. The Company believes it has the necessary permits and the statements of Millard County are incorrect.

Litigation to enforce patents, to protect proprietary information or to defend the Company against alleged infringement of the rights of others may occur. Such litigation could be costly, could divert our resources from other activities, and could have an adverse effect on our operations and financial condition.

The Company and its president have been named as a defendant in a complaint by the United States Justice Department (DOJ), dated November 23, 2015, alleging participation in the marketing of a non-compliant tax deferral, tax deduction and a tax credit program.  The Company feels it has done its due diligence in receiving the exclusive rights to patents,  obtaining reviews of the technologies by third party experts in their fields of study, obtained two tax opinion letters to ascertain that a business structure with specific tax benefits is available and legal under the law, developed working prototypes, and finally produced lenses with a manufacturing partner who is a global leader in the design, development and manufacture of acrylic based products.  

Even with the two opinion letters, the Company contractually requires persons, planning to claim tax benefits arising from Company products, to seek independent legal and tax advice. The Company does not provide legal or tax advice and is not a law firm, nor does it hold itself out as such. The Company firmly and unequivocally denies the allegations made by the DOJ. The Company has obtained Legal Counsel and intends to pursue every legal means possible to protect its rights, the rights of potential customers and its shareholders in this matter. The final outcome and the effect of this case on the Company is yet to be determined but such litigation could be costly, could divert our resources from other activities, and could have an adverse effect on our operations and financial condition.

Item 2. Changes in Securities.

On August 13, 2015, the Company sold 2,500,000 restricted shares of unissued common stock and received $800,000.  The Company has received $3,077,868 as prepayment for common stock that was issued on June 24, 2016.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Matters Submitted to a Vote of the Company's Shareholders.

None.

Item 5. Other Information.

     Our shares of common stock are quoted on the over-the-counter electronic bulletin board under the symbol “IAUS.”.

Item 6. Exhibits, Financial Statements, Schedules and Reports on Form 10-Q.

A. Exhibits.

No.

Description

31.1

Certification pursuant to Section 302

31.2

Certification pursuant to Section 302

32.1

Certification

32.2

Certification

.

B. Reports on Form 8-K.

  None

Item 9A CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report.  Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

Because of inherent limitations, (chiefly the limited number of available personnel) internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s internal control over financial reporting as of March 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission (COSO) in Internal Control -- Integrated Framework.  Based on this evaluation, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that as of March 31, 2016 our internal control over financial reporting was not effective.

Evaluation of Internal Control Over Financial Reporting by Outside Auditor

This report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this report.   

Changes in Internal Control Over Financial Reporting

During the most recent quarter ended March 31, 2016, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected or is reasonably likely to materially affect, our internal

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

Date: March 1, 2017

International Automated Systems, Inc.

By s/Neldon Johnson

President and Chief Operating Officer