The accompanying notes are an integral part of these condensed consolidated financial statements.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| 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, 2008 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.
Black Nickel Acquisition Corp. I was incorporated in Delaware on May 26, 2005, and was formed as a vehicle to pursue a business combination. From inception through October 24, 2006, Black Nickel Acquisition Corp. I, was engaged in organizational efforts and obtaining initial financing.
On May 17, 2006, Black Nickel Acquisition Corp. I entered into a letter of intent with InferX Corporation, a privately-held Virginia corporation (“InferX Virginia”), with respect to entering into a merger transaction relating to bridge financing for InferX Virginia and the acquisition of and merger with InferX Virginia. The transaction closed on October 24, 2006. Following the merger, Black Nickel Acquisition Corp. I effected a short-form merger of InferX Virginia with and into Black Nickel Acquisition Corp. I, pursuant to which the separate existence of InferX Virginia terminated and Black Nickel Acquisition Corp. I changed its name to InferX Corporation (“InferX” or the “Company”).
The transaction was recorded as a recapitalization under the purchase method of accounting, as InferX became the accounting acquirer. The reported amounts and disclosures contained in the consolidated financial statements are those of InferX Corporation, the operating company.
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 currently provides services and software to the United States government, and is in process of formalizing business plans that will enable them to provide software and services 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. under which it intends to effect a reverse triangular merger between The Irus Group, Inc. 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 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 will be automatically converted into the right to receive 56% of the issued and outstanding shares of the Company’s common stock.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 1- | ORGANIZATION AND BASIS OF PRESENTATION (COINTINUED) |
The Merger Agreement also provides that, at the effective time of the Merger, the Company’s Board of Directors agrees 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, Inc. 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. 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.
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 loss of $547,876 and $2,429,390 for the nine months ended September 30, 2009 and 2008, respectively, and has a working capital deficiency of $2,165,710 as of September 30, 2009. The principal reasons for the recurring losses and working capital deficiency relates to the Company’s continued focus on refining its products and search for profitable government contracts. The Company expects the negative cash flow from operations to continue its trend through the next twelve months, however continues to expand their pipeline of contracts. These factors raise significant doubt about the ability of the Company to continue as a going concern.
Management’s plans to address these conditions include continued efforts to obtain government contracts as well as commercial contracts through expanding sources and new technology, and the raising of additional capital through the sale of the Company’s stock. Additionally, the Company has commenced plan’s to reduce their liabilities by conversion of the notes payable and underlying warrants into shares of common stock. The Company has only had discussions up to this point other than the $169,500 they have converted in 2008.
The Company’s long-term success is dependent upon the obtaining 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.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 1- | ORGANIZATION AND BASIS OF PRESENTATION (COINTINUED) |
Going Concern (Continued)
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.
| 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.
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 September 30, 2009, an allowance of $2,364 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.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Computer Software Development Costs
During 2008, the Company capitalized certain software development costs. The Company capitalizes the cost of software in accordance with SFAS 86 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 (1) the ratio of current gross revenues to the sum of current and anticipated gross revenues, or (2) 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 commencing January 1, 2008, placed an additional $226,084 of software development from prior years into service, which is being amortized over a three year period.
For the nine months ended September 30, 2009 and 2008, the Company recognized $56,521 and $189.273 of amortization expense on its capitalized software costs, respectively.
Recoverability of Long-Lived Assets
The Company reviews 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
The Company generates revenue from professional services rendered to customers as well as from application management support contracts with governmental units. The Company’s revenue is generated under time-and-material contracts and fixed-price contracts.
Time-and-Material Contracts
Time-and-material contracts revenue is generated whereby costs are generally incurred in proportion with contracted billing schedules and revenue is recognized as services are performed, with the corresponding cost of providing those services reflected as direct costs. The customers are billed in accordance with the contracts entered into. Such method is expected to result in reasonably consistent profit margins over the contract term.
Fixed-Price Contracts
Revenue from firm-fixed-price contracts is recognized upon achievement of the milestones contained in the contracts. Revenue is not recognized until collectibility is assured, which does not take place until completion of the particular milestone. Costs are recognized as services are performed.
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.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Stock-Based Compensation
In 2006, the Company adopted the provisions of ASC 718-10 “Share Based Payments”. The adoption of this principle had no effect on the Company’s operations.
ASC 718-10 requires recognition of stock-based compensation expense for all share-based payments based on fair value. Prior to January 1, 2006, the Company measured compensation expense for all of its 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 its 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, the Company classifies these issuances as prepaid expenses and expenses the prepaid expenses over the service period. At no time has the Company issued common stock for a period that exceeds one year.
Concentrations
The Company has derived all of its revenue for the nine months ended September 30, 2008 from one customer.
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
The Company follows 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. The Company only operates in one reporting segment as of September 30, 2009 and for the nine months ended September 30, 2009 and 2008.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Fair Value of Financial Instruments (other than Derivative Financial Instruments)
The carrying amounts reported in the condensed 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
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.
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
Under ASC 740-10-25 recognition and measurement of uncertain income tax positions is required using a “more-likely-than-not” approach. Management evaluates their tax positions on an annual basis and has determined that as of September 30, 2009 no additional accrual for income taxes is necessary.
(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 includes 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.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
(Loss) Per Share of Common Stock (Continued)
The following is a reconciliation of the computation for basic and diluted EPS:
| | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Net (loss) | | $ | (547,876 | ) | | $ | (2,429,390 | ) |
| | | | | | | | | |
| Weighted-average common shares outstanding : | | | | | | | | |
| Basic | | | 886,926 | | | | 635,170 | |
| Convertible Notes | | | 945,000 | | | | 1,425,000 | |
| Warrants | | | 1,020,439 | | | | 766,220 | |
| Options | | | 100,750 | | | | 7,000 | |
| Diluted | | | 2,953,115 | | | | 2,833,389 | |
| | | | | | | | | |
| Basic net (loss) per share | | $ | (0.62 | ) | | $ | (3.82 | ) |
| | | | | | | | | |
| Diluted net (loss) per share | | $ | (0.62 | ) | | $ | (3.82 | ) |
Research and Development
Research and development costs are expensed as incurred. In addition, research and development costs have been included in the condensed consolidated statements of operations for the nine months ended September 30, 2009 and 2008, respectively.
Recent Issued Accounting Standards
In September 2006, ASC issued 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is encouraged. The adoption of ASC 820 is not expected to have a material impact on the financial statements.
In February 2007, ASC issued 825-10, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of ASC 320-10, (“ASC 825-10”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. ASC 825-10 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
In December 2007, the ASC issued ASC 810-10-65, Noncontrolling Interests in Consolidated Financial Statements. ASC 810-10-65 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Recent Issued Accounting Standards (Continued)
ASC 810-10-65 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Management is determining the impact that the adoption of ASC 810-10-65 will have on the Company’s financial position, results of operations or cash flows.
In December 2007, the Company adopted ASC 805, Business Combinations (“ASC 805”). ASC 805 retains the fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. ASC 805 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 will require an entity to record separately from the business combination the direct costs, where previously these costs were included in the total allocated cost of the acquisition. ASC 805 will require an entity to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date, at their fair values as of that date.
ASC 805 will require an entity to recognize as an asset or liability at fair value for certain contingencies, either contractual or non-contractual, if certain criteria are met. Finally, ASC 805 will require an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date. This will be effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted and the ASC is to be applied prospectively only. Upon adoption of this ASC, there would be no impact to the Company’s results of operations and financial condition for acquisitions previously completed. The adoption of ASC 805 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
In March 2008, ASC issued ASC 815, Disclosures about Derivative Instruments and Hedging Activities”, (“ASC 815”). ASC 815 requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not believe that ASC 815 will have an impact on their results of operations or financial position.
In April 2008, ASC issued ASC 350, “Determination of the Useful Life of Intangible Assets”. This amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350. The guidance is used for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company does not believe ASC 350 will materially impact their financial position, results of operations or cash flows.
ASC 470-20, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“ASC 470-20”) requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe that the adoption of ASC 470-20 will have a material effect on its financial position, results of operations or cash flows.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Recent Issued Accounting Standards (Continued)
ASC 815-40, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“ASC 815-40”), provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock and it applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative., ASC 815-40 also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock. The Company is determining what impact, if any, ASC 815-40 will have on its financial position, results of operations and cash flows.
ASC 470-20-65, “Transition Guidance for Conforming Changes to, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“ASC 470-20-65”). ASC 470-20-65 is effective for years ending after December 15, 2008. The overall objective of ASC 470-20-65 is to provide for consistency in application of the standard. The Company has computed and recorded a beneficial conversion feature in connection with certain of their prior financing arrangements and does not believe that ASC 470-20-65 will have a material effect on that accounting.
In accordance with ASC 855 “Subsequent Events”, the Company is required to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. ASC 855 is effective for financial periods ending after June 15, 2009. Management has evaluated subsequent events through November 18, 2009, the date the condensed consolidated financial statements were issued.
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurement and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted market price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required for Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.
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.
Fixed assets consist of the following as of September 30, 2009 (unaudited) and December 31, 2008, respectively:
| | | Estimated Useful | | | September 30, | | | December 31, | |
| | | Lives (Years) | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Computer equipment | | 5 | | | $ | 107,065 | | | $ | 107,065 | |
| Office machinery and equipment | | 3 | | | | 15,638 | | | | 15,638 | |
| Furniture and fixtures | | 5 | | | | 538 | | | | 538 | |
| Automobile | | 5 | | | | 58,476 | | | | 58,476 | |
| | | | | | | 181,717 | | | | 181,717 | |
| Less: Accumulated depreciation | | | | | | (157,319 | ) | | | (150,138 | ) |
| | | | | | | | | | | | |
| Total, net | | | | | $ | 24,398 | | | $ | 31,579 | |
Depreciation expense was $7,180 and $12,298 for the nine months ended September 30, 2009 and 2008, respectively.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 4- | COMPUTER SOFTWARE DEVELOPMENT COSTS |
Computer software development costs consist of the following as of September 30, 2009 (unaudited) and December 31, 2008, respectively:
| | | Estimated Useful | | | September 30, | | | December 31, | |
| | | Lives (Years) | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Computer software development costs | | 5 | | | $ | 986,724 | | | $ | 986,724 | |
| | | | | | | | | | | | |
| Less: Accumulated amortization | | | | | | (902,996 | ) | | | (846,475 | ) |
| | | | | | | | | | | | |
| Total, net | | | | | $ | 83,728 | | | $ | 140,249 | |
Amortization expense was $56,521 and $189,273 for the nine months ended September 30, 2009 and 2008, respectively.
Amortization expense anticipated through December 31, 2010 is as follows:
| Period ended December 31: | | | |
| 2009 | | $ | 51,284 | |
| 2010 | | | 32,444 | |
| | | | | |
| | | $ | 83,728 | |
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 SBA has granted the Company an extension until September 22, 2009 on their payments. The Company is not in default. The Company has accrued interest at a rate of $38.90 per day.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 5- | NOTES PAYABLE (CONTINUED) |
SBA Loan (Continued)
As of September 30, 2009, the Company has an outstanding principal balance of $354,936. Interest expense on the SBA loan for the nine months ended September 30, 2009 and 2008 were $1,866 and $9,704, respectively.
Automobile Loan
The Company has a note payable with an automotive finance company in the original amount of $44,990 (the “Auto Note”). The Auto Note commenced in November 2003, and requires payments of $750 per month for a period of 60 months. The Auto Note is secured by the automobile.
As of March 31, 2009, the note has matured.
Convertible Notes
The Company has entered into the following convertible notes:
| | · | Convertible note dated March 6, 2008 in the amount of $75,000, with a term of 2 years, with interest calculated at 9.9% per annum. The note is convertible at 50% of the closing bid price of the common stock on the date of conversion. The Company has accrued interest as of September 30, 2009 in the amount of $11,009. The Company recorded a beneficial conversion feature of $75,000 based on the difference in the intrinsic value of the conversion option. As of September 30, 2009, $7,000 was converted for 210,381 shares of common stock; |
| | · | Convertible note dated March 7, 2008 in the amount of $62,500, with a term of 2 years, with interest calculated at 9.9% per annum. The note was convertible at 50% of the closing bid price of the common stock on the date of conversion, and was converted the same day the note was executed for a conversion price of $.135 or 23,148 shares. This note was converted immediately and the shares were issued in April 2008, and there was no beneficial conversion feature associated with this note; |
| | · | Convertible note dated March 10, 2008 in the amount of $100,000, with a term of 2 years, with interest calculated at 9.9% per annum. The note was convertible at 50% of the closing bid price of the common stock on the date of conversion, and was converted the same day the note was executed for a conversion price of $2.70 or 37,037 shares. This note was converted immediately and shares were issued in April 2008 and there was no beneficial conversion feature associated to this note. |
| | · | Convertible note dated June 1, 2008 in the amount of $25,000, with a term of 1 year, with interest calculated at 9.9% per annum. The note is convertible into a fixed price of $0.40 per share of common stock on the outstanding principal and accrued interest on the date of conversion. The note holder also received a warrant agreement exercisable over five years to purchase common stock at $0.40 per share for 62,500 warrants. There will also be warrants issued for accrued interest should the interest be converted. The Company has accrued interest as of September 30, 2009 in the amount of $1,451; |
| | · | Convertible note dated June 21, 2008 in the amount of $10,000, with a term of 1 year, with interest calculated at 9.9% per annum. The note is convertible into a fixed price of $0.40 per share of common stock on the outstanding principal and accrued interest on the date of conversion. The note holder also received a warrant agreement exercisable over five years to purchase common stock at $0.40 per share for 25,000 warrants. There will also be warrants issued for accrued interest should the interest be converted. The Company has accrued interest as of September 30, 2009 in the amount of $1,267; |
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 5- | NOTE PAYABLE (CONTINUED) |
Convertible Notes (continued)
| | · | Convertible note dated June 21, 2008 in the amount of $10,000, with a term of 1 year, with interest calculated at 9.9% per annum. The note is convertible into a fixed price of $0.40 per share of common stock on the outstanding principal and accrued interest on the date of conversion. The note holder also received a warrant agreement exercisable over five years to purchase common stock at $0.40 per share for 25,000 warrants. There will also be warrants issued for accrued interest should the interest be converted. The Company has accrued interest as of September 30, 2009 in the amount of $1,267; |
| | · | Convertible note dated July 2, 2008 in the amount of $5,000, with a term of 1 year, with interest calculated at 9.9% per annum. The note is convertible into a fixed price of $.40 per share of common stock on the outstanding principal and accrued interest on the date of conversion. The note holder also received a warrant agreement exercisable over five years to purchase common stock at $.40 per share for 12,500 warrants. There will also be warrants issued for accrued interest should the interest be converted. The Company has accrued interest as of September 30, 2009 in the amount of $618; |
| | · | Convertible notes dated between July 23, 2008 and August 6, 2008 in the amount of $250,000, with a term of 2 years, with interest calculated at 10% per annum. The notes are convertible into a fixed price of $.40 per share of common stock on the outstanding principal and accrued interest on the date of conversion. The note holder also received a warrant agreement exercisable over five years to purchase common stock at $.40 per share for 625,000 warrants. There will also be warrants issued for accrued interest should the interest be converted. The Company has accrued interest as of September 30, 2009 in the amount of $29,434; and |
| | · | Convertible note dated November 16, 2008 in the amount of $10,000, with a term of 2 years, with interest calculated at 10% per annum. The note is convertible into a fixed price of $.40 per share of common stock on the outstanding principal and accrued interest on the date of conversion. The note holder also received a warrant agreement exercisable over five years to purchase common stock at $.40 per share for 25,000 warrants. There will also be warrants issued for accrued interest should the interest be converted. The Company has accrued interest as of September 30, 2009 in the amount of $868. |
The convertible notes issued in June, July, August and November 2008, were issued with warrants. The value of the warrants are reflected as additional paid in capital with a value of $230,079, with a corresponding debt discount in the same amount. The discount is being amortized over the life of the convertible notes of 1 to 2 years. Amortization of the discount for the nine months ended September 30, 2009 and 2008 is $87,131 and $24,462, respectively, with a remaining debt discount as of September 30, 2009 of $86,987. In addition, the Company calculated a beneficial conversion feature of $1,091,253 on the $385,000 in convertible notes.
As of September 30, 2009, the repayment schedule of the Notes Payable for the next two years and in the aggregate is:
| 2010 (net of discount of $85,928) | | $ | 304,488 | |
| 2011 (net of discount of $1,059) | | | 31,357 | |
| 2012 | | | 22,416 | |
| 2013 | | | 22,416 | |
| 2014 | | | 22,416 | |
| Thereafter | | | 242,856 | |
| | | | 645,949 | |
| Less: current portion | | | (304,488 | ) |
| | | | | |
| Long-term portion | | $ | 341,461 | |
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 6- | 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 has not issued any shares of preferred stock since inception.
Common Stock
The Company was incorporated on May 26, 2005, and the Board of Directors authorized 75,000,000 shares of common stock with a par value of $0.0001.
The Company as of September 30, 2009 has 886,926 shares of common stock issued and outstanding.
During the nine months ended September 30, 2009 the Company issued no shares of common stock. The Company also raised $123,000 and incurred $4,000 for services rendered during the nine months ended September 30, 2009, for shares of common stock, but these shares have not been issued as of September 30, 2009. During the year ended December 31, 2008 the Company issued 23,148 and 37,037 shares of common stock in convertible note transactions of $62,500 and $100,000, respectively (see Note 5). These shares of stock were issued in April 2008. Additionally, 210,381 shares of common stock were issued to convert $7,000 of a convertible note payable.
The Company issued 23,750 shares of common stock to three convertible note holders valued at $64,125 for entering into the March 6, 7 and 10 convertible note agreements. The Company also issued 17,500 shares of common stock for services rendered valued at $52,500. The combined $116,625 is reflected as stock issued for services in the consolidated statements of operations for the year ended December 31, 2007. These shares of stock were issued in April 2008.
The Company has also recorded a $15,000 consulting fee in 2007 for the issuance of 1,500 shares of stock. The fees were earned in 2007 and the shares of stock were issued in April 2008.
Warrants
The Company in the private placement granted 116,470 Class A and 116,470 Class B warrants. In April 2007, 81,476 of the Class A warrants were exercised into common shares. In November 2007, an additional 22,244 of the Class A warrants were exercised into common shares. The Company granted additional Class A warrants to the warrant holders that exercised during April and November 2007. The additional Class A warrants of 103,720 were issued in November 2007 and are reflected herein. The Company also issued 12,500 warrants in September 2007 for investor relation services and 112,500 warrants in connection with the convertible notes issued in June 2008, 12,500 warrants in connection with the notes issued in July 2008, 625,000 warrants in connection with the notes issued in July and August 2008, and 25,000 warrants in connection with the note issued in November 2008. The following is a breakdown of the warrants:
| | | Exercise | | Date | | | |
| Warrants | | Price | | Issued | | Term | |
| 12,750 | | $ | 10.00 | | 4/1/2007 | | 5 years | |
| 116,470 | | $ | 10.00 | | 4/1/2007 | | 5 years | |
| 12,500 | | $ | 10.00 | | 9/1/2007 | | 5 years | |
| 103,720 | | $ | 10.00 | | 11/30/2007 | | 3.9 years | |
| 112,500 | | $ | 0.40 | | 6/1/2008 | | 5 years | |
| 12,500 | | $ | 0.40 | | 7/2/2008 | | 5 years | |
| 625,000 | | $ | 0.40 | | 7/31/08-8/6/08 | | 5 years | |
| 25,000 | | $ | 0.40 | | 11/16/2008 | | 5 years | |
| 1,020,439 | | | | | | | | |
The warrants have a weighted average price of $2.40.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 6- | STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED) |
The Class A Warrants and Class B Warrants in the private placement as well as the consultant warrants were valued utilizing the Black – Scholes method as follows:
| | | Class A | | | Class B | | | Consultant | | | Conv Notes | |
| Stock Price | | $ | .50 | | | $ | .50 | | | $ | .50 | | | $ | .10 | |
| Strike Price | | $ | .50 | | | $ | .62 | | | $ | .50 | | | $ | .02 | |
| Expected Life of Warrant | | 5 yrs. | | | 5 yrs. | | | 5 yrs. | | | 5 yrs. | |
| Annualized Volatility | | | 50 | % | | | 50 | % | | | 50 | % | | | 100 | % |
| Discount Rate | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | 3.00 | % |
| Annual Rate of Quarterly Dividends | | None | | | None | | | None | | | None | |
| Call Option Value | | $ | .237 | | | $ | .206 | | | $ | .378 | | | $ | .0834/$.0908 | |
Options
Prior to October 2007, there were no options outstanding, or granted. In October 2007, the Company’s Board of Directors and Shareholders approved the adoption of an option plan for a total of 110,000 shares and issued 22,000 options in October 2007 and 100,000 in December 2008 that vest over a three-year period of time with a strike price of $10.00 per share (October 2007/January 2008) and $.20 (December 2008). 21,250 of these options were forfeited during 2008. The Company has 100,750 options remaining at September 30, 2009, all of which are fully vested.
These options were valued as follows:
| | | January 2008 | |
| Stock Price | | $ | 0.60/$11.00 | |
| Strike Price | | $ | 10.00 | |
| Expected Life of Option | | 1 yr. | |
| Annualized Volatility | | | 100 | % |
| Discount Rate | | | 3.00 | % |
| Annual Rate of Quarterly Dividends | | None | |
| Call Option Value | | $ | 2.48/$4.34 | |
| | | December 2008 | |
| Stock Price | | $ | 0.20 | |
| Strike Price | | $ | 0.20 | |
| Expected Life of Option | | 5 yr. | |
| Annualized Volatility | | | 100 | % |
| Discount Rate | | | 3.00 | % |
| Annual Rate of Quarterly Dividends | | None | |
| Call Option Value | | $ | .16 | |
The value attributable to these options for the nine months ended September 30, 2009 and 2008 is $0 and $33,231 respectively and is reflected in the condensed consolidated statements of operations as stock based compensation.
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
Rental
The Company leased office space under an operating lease that expired in November 2008. The Company currently leases space on a month-to-month basis.
Rent expense for the nine months ended September 30, 2009 and 2008 was $500 and $112,601, respectively.
Consulting Agreements
During the nine months ended September 30, 2009 and 2008, the Company did not enter into any consulting agreements. In 2007, the Company 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 nine months ended September 30, 2008.
| NOTE 8- | PROVISION FOR 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 September 30, 2009, deferred tax assets consist of the following:
| Net operating losses | | $ | 2,054,400 | |
| | | | | |
| Valuation allowance | | | (2,054,400 | ) |
| | | | | |
| | | $ | - | |
At September 30, 2009, the Company had net operating loss carryforward in the approximate amount of $6,042,354, available to offset future taxable income through 2029. 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.
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 September 30, 2009 and 2008 is summarized below.
| | | 2009 | | | 2008 | |
| 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 | % |
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 9- | DEFINED CONTRIBUTION PLAN |
The Company has a retirement plan which satisfies the requirements of Section 401(k) of the Internal Revenue Code. This defined contribution retirement plan covers substantially all employees. Participants can elect to have up to the maximum percentage allowable of their salaries reduced and contributed to the plan. The Company may make matching contributions equal to a discretionary percentage of the participants’ elective deferrals. The Company made no such contributions for the nine months ended September 30, 2009 and 2008, respectively.
The Company’s contracts with agencies of the federal government accounted for 100% of its revenue and accounts receivable as of and for the nine months ended September 30, 2009 and 2008, respectively.
| NOTE 11- | 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.
The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Cash | | | 13,829 | | | | - | | | | - | | | | 13,829 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | | 13,829 | | | | - | | | | - | | | | 13,829 | |
| | | | | | | | | | | | | | | | | |
| Notes payable, net of discount | | | - | | | | - | | | | 291,013 | | | | 291,013 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities | | | - | | | | - | | | | 291,013 | | | | 291,013 | |
INFERX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
| NOTE 12- | PENDING ACQUISITION |
On March 16, 2009, the Company entered into an agreement and plan of reorganization (the “Merger Agreement”) with the Irus Group, Inc. under which it intends to effect a reverse triangular merger between The Irus Group, Inc. 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 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 will be 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 agrees 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, Inc. 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. The Merger was completed in the fourth quarter of 2009.
