ITEM 1. BUSINESS
BUSINESS
BACKGROUND Infrared Systems International (ISI) was formed under the laws of the State of Nevada on April 11, 2006 as a wholly-owned subsidiary of CSBI (then known as Advance Technologies, Inc.) to pursue a narrowly defined business objective called infrared security systems.
On July 11, 2007, CSBI acquired American SXAN Biotech, Inc. a Delaware Corporation doing business exclusively in the People's Republic of China under a registered capital corporation, Tieli XiaoXingAnling Forest Frog Breeding Co, Ltd. As a result of the acquisition, the stockholders of American SXAN Biotech, Inc. acquired control of CSBI.
Pursuant to one of the terms of the acquisition, all of the assets and liabilities of CSBI as of the date of the acquisition were transferred into ISI. Since that time, ISI had conducted not only the infrared security systems development for which it was formed but also the other prior activities of CSBI.
ISI, and prior to its formation in 2006 its parent, has been engaged in the development of infrared products for commercial applications. Since 2006, ISI has focused its activities on the development of infrared security systems for the automatic detection of intruders. No other material products have been developed by ISI (or prior to its formation its parent) for more than three years, although ISI has various proprietary technology developed by its parent prior to that time.
ISI's revenues during the past three years have been derived from only two sources: a 1997 license agreement relating to proprietary technology utilized by Kollsman Instruments for its Enhanced Visions System for commercial aviation; and acting on behalf of a Taiwanese company in connection with the acquisition and modification of infrared camera systems in the U.S. for thermal imaging of the human body for medical purposes and exporting the modified products to the Taiwanese company. The services rendered for the Taiwanese corporation are commercial labor and transportation, and no technology of ISI is involved.
ENHANCED VISION SYSTEM
We previously were engaged in the development of an infrared imaging camera system for commercial aircraft to allow civilian pilots to land their aircraft under conditions of low or reduced visibility. The infrared camera system is especially designed to enhance the performance of the imager by proprietary techniques of selective wavelength enhancement. An exclusive license for this system was granted to Kollsman Instruments in 1997. The licensing agreement with Kollsman grants to Kollsman a worldwide, exclusive license under ISI proprietary data to make, sell, maintain and repair products utilizing such data for use on any aircraft licensed to operate by the Federal Aviation Administration or by equivalent foreign regulatory agencies. Royalty payments are required for each EVS system sold utilizing a licensed product, based upon the number of units sold. Pursuant to the license agreement, the royalty is $800 per unit for units 201 through 2,000 (the first 20 units were prepaid and no payment was required for units 21 through 200), $1,400 per unit for units 2,001 through 5,000, $3,800 per unit for units 5,001 through 10,000, and $200 per unit thereafter. Through September 30, 2009, a total of 638 units have been sold. The license continues until terminated by the mutual consent of the parties, or at the written election of a party in the event of an uncured default by the other party, or by us if Kollsman fails to sell an EVS system containing our licensed rights for 24 months.
The royalties paid by Kollsman were $51,200 in the fiscal year ended September 30, 2008 and were $114,400 in fiscal 2009. A total of 64 units were sold during fiscal year 2008, and 143 units in 2009. The increase from 64 units to 143 units was the result of additional Gulfstream sales and the addition of FedEx sales. The licensee, Kollsman, does not provide public information on individual customer sales, but reliable sources believe the FedEx sales were between 40-45 units.
CONTRACTING
ISI has acted as an export agent and service contractor for a Taiwanese corporation from time to time since 2000. That corporation, among other things, has developed and markets a digital infrared medical diagnosis system known as the SPECTRUM9000 System. We currently have been engaged by the corporation to purchase 40 infrared detectors from a U.S. supplier, install them into a camera shell provided by the corporation with a test circuit board, and ship them in the camera shell to the corporation in Taiwan. The Taiwanese corporation then completes the NV-2000 IR camera which is part of the SPECTRUM9000 System. The system conforms to the applicable directives and standards for medical thermal imaging radiometer systems, and is registered with the U.S. Food and Drug Administration.
As part of obtaining the detector systems for the Taiwanese corporation, we secured the necessary export license from the U.S. Department of Commerce for the export of the detector systems. This is the fourth time that we have performed these services for the Taiwanese corporation since 2000. None of our proprietary technology is utilized in these systems. Although the amount paid to us by the Taiwan Corporation for the current engagement was nearly $120,000, approximately $112,000 of this amount will be used to purchase the infrared camera detectors from a Dallas based manufacturer.
Since the initial contract was signed, difficulties with switching from the previous detector (a U3000) to a new detector (U3500) have led to several problems. ISI has filed for a new export license for the U3500 (D 396180, July 19, 2008) and ISI needed to be re-qualified with the Department of Commerce reflecting the change in ownership. To accomplish this additional effort UIS has contracted with Gary Ball, who is also the President of ISI, to perform this work. This has resulted in a cost of $ 53,556.87. In addition, UIS instructed ISI to purchase two IR Cameras from FLIR Inc. for $8,875. The purchase was made with a direct shipment of the cameras to UIS by FLIR Inc.
We continue to work with DRS to secure a Technical Data License from the Department of State for the U3500 detectors. The need to secure such a license is broader and more inclusive than the exporting for the SPECTRUM 9000. UIS has indicated they will be introducing a new medical product, called a Dry Eye Tester. The new system will use the U3500 as the detector. As a result securing of the requisite Data Release is important.
Costs incurred by ISI in pursuing the out of scope tasks for UIS have been accepted and billed against the original advanced funds account. The obligation of ISI has been correspondingly reduced reflecting the expenditure of authorized expenses. Once the necessary Technical Data has been secured and all applicable expenses applied, the balance of the funds will be applied to the purchasing of the U3500 detectors for export. This will result in the number of units exported falling to between 10 and 15 units. UIS at their option may remit additional funds to secure the full 40 units authorized under the DOC export license or set for a lesser number of systems..
INFRARED SECURITY SYSTEM
The infrared security system (ISS) product is based upon a unique and proprietary concept. The ISS utilizes two or more infrared cameras directed at a common surveillance area. The locations of the cameras and their optical fields of view are pre-established and stored in a central computer database. Computer programs harmonize the information into a three dimensional grid, and camera processors perform image processing on the surveillance area to detect moving objects. Information is transmitted to the central computer, and compared to information in the database for pre-defined threats. Alarm criteria can be based on object size, location, and movement over time. We believe this system has a powerful threat detection capability that inherently rejects false alarms and which will separate our ISS from those of our competitors. A provisional patent was filed on November 7, 2005 (60/597,048), a full patent was filed on November 3, 2006, (11/592,639) preserving the original filing date, and a petition for an expedited patent application review was filed on August 2007. In September 2007, our request for an accelerated review was granted, and we are currently in discussions with the US patent office. The activity with the US customs office requiring our patent attorney has been estimated to cost between $15,000 and $20,000 in 2009. We have no patents at this time.
COMPETITION
We are engaged in two principal markets, enhanced vision systems for commercial aviation and surveillance systems for physical security. There are numerous companies providing such services in the United States and in other countries. Our competitors have greater financial resources and more expertise in this business. Our ability to develop our business will depend on our ability to successfully market our products in this highly competitive environment. We cannot guarantee that we will be able to do so successfully.
In the enhanced vision systems market, we have an exclusive agreement with Kollsman Inc. whereby our intellectual property and information was used to create an enhanced vision system being produced and marketed by Kollsman. We believe that the principal competitors of Kollsman are CMC Marconi and Max-Viz. Both corporations have announced that they have developed an enhanced vision system similar to that of Kollsman, and CMC has received certification by the FAA to operate in the low visibility conditions.
The market for infrared surveillance is extremely competitive. We believe that competition in these areas is principally based on the quality of the product in terms of performance, reliability, service, deliverability, and price. The demand for infrared sensing devices has produced a wide variety of competitors and competitive systems. For most commercial applications, the principal competitive factor is cost, although we believe that for the applications we seek to pursue the principal competitive factor will be performance.
EFFECT OF GOVERNMENTAL REGULATIONS
Infrared imaging has been given a commodity jurisdiction by the US Department of State. As a controlled "dual use" technology, the "dual use" being military and commercial, the technology is subject to US government oversight. In certain defined instances our "commercial product" could be applied and used in a non-commercial application, such as military or US government agency applications. In such a case, our commercial product would be monitored and controlled by the US Arms Export Control Act, and the technical data must be in compliance with the Internal Traffic in Arms Regulation. We do not expect such government regulation to materially impede our proposed business.
Although the EVS system incorporating our proprietary technology requires FAA approval, such approval is the obligation of Kollsman and its customers. The export by ISI of infrared detectors purchased in the U.S. to our Taiwanese customer requires an export license from the U.S. Department of Commerce, which we have obtained. We believe that our activities on behalf of the Taiwanese customer, since we are not involved in manufacturing a medical device, do not require FDA approval.
RESEARCH AND DEVELOPMENT
During fiscal 2009 we spent approximately $13,666 in research and development concerning the Infrared Security System project. An initial test of the proposed system was completed. In 2009, our research and development expenses declined to approximately $2,596, due to the completion of the initial test phase and our decision to halt further research and development pending the outcome of our pending patent application.
EMPLOYEES
We have no employees other than Gary Ball, our President and Secretary-Treasurer. Mr. Ball does not have a written employment agreement with us.
PLAN OF OPERATION IN THE NEXT TWELVE MONTHS
If our ISS patent application is granted, we will then seek partners for our infrared security system over the coming months. Such potential partners include infrared camera suppliers, suppliers of radio frequency identification technology, commercial wireless providers, and cellular handset suppliers. We have identified numerous potential applications for our infrared security system, and will engage in discussions with various corporations in search of partners who desire to utilize our system for one or more of the potential applications for our system.
The EVS project continues with ongoing sales by Kollsman to Gulfstream. These sales closely track the new aircraft deliveries by Gulfstream. The retrofit market for Gulfstream continues at a slow rate, but is projected to improve now that a modified form of the EVS, designated by Kollsman as the Enhanced Vision System II (EVS II), has been certified by the FAA and is in production. Gulfstream is heavily engaged in the introduction of their new G-650 luxury model, and their G-150/G-250 lower end economy models. The phasing out of older "G" series models, normal delays in the introduction of new models we believe will adversely affect sales of EVS to Gulfstream over the next two quarters. The slow down in the US economy has caused some number of business jet users to postpone, cancel, or push out deliveries of new aircraft. This will similarly affect sales in 2010, causing us great concern over future sales and income.
EXPENSES
We estimate that we will require between $75,000 and $95,000 over the next twelve months in order to maintain operations. ISS has postponed and deferred all discretionary expenditures until we obtain a better handle on future sales.
ITEM 1A.
ITEM 1A. RISK FACTORS
IF WE DO NOT GENERATE ADEQUATE REVENUES TO FINANCE OUR OPERATIONS, OUR BUSINESS MAY FAIL.
We were incorporated on April 11, 2006. Our business primarily involves marketing activities. As of September 30, 2009, we had a retained deficit of $1,015,851. During the years ended September 30, 2009 and 2008, respectively, we had net losses of $ 23,278 and $130,011. We expect our revenues during the next twelve months from our existing licensee to remain flat depending upon the US economic recovery. Our expected revenue generation and expenses are difficult to predict, and there can be no assurance that revenues will be sufficient to cover operating costs for the foreseeable future. We anticipate that our Infrared Security System project will move forward in 2010. Consequently, it may be necessary to raise additional funds. If we are unable to raise funds to cover any operating deficit and our royalty sales decrease in 2010 our business may fail.
BECAUSE WE HAD INCURRED A LOSS AND HAVE NOT COMMENCED OUR PLANNED PRINCIPAL OPERATIONS, OUR ACCOUNTANTS HAVE EXPRESSED DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
For the fiscal year ended September 30, 2009, our accountants have expressed doubt about our ability to continue as a going concern as a result of operating losses since inception, the failure to yet commence planned principal operations, and current liabilities in excess of current assets. Our ability to achieve and maintain profitability and positive cash flow is dependent on such factors as our ability to enter into license agreements and our licensees' ability to sell products utilizing our technology. Based upon current plans, we expect our operating costs to range between $75,000 and $95,000 for the fiscal year ending September 30, 2010. We cannot guarantee that we will be successful in generating sufficient revenues or other funds in the future to cover these operating costs. Failure to generate sufficient revenues will cause us to go out of business or take draconian actions.
TRADING IN OUR SHARES IS SUBJECT TO RULES GOVERNING "PENNY STOCKS," WHICH WILL IMPAIR TRADING ACTIVITY IN OUR SHARES.
We have been listed on the OTC:BB since August 11, 2009, our symbol is IFRS. The IFRS common stock has been trading at very low volumes. Penny stocks trading at low volumes are extremely volatile and investors should exercise care in any trading activities.
Our stock is subject to rules adopted by the Securities and Exchange Commission regulating broker dealer practices in connection with transactions in "penny stocks." Those disclosure rules applicable to "penny stocks" require a broker dealer, prior to a transaction in a "penny stock" not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Commission. That disclosure document advises an investor that investment in "penny stocks" can be very risky and that the investor's salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in "penny stocks," to independently investigate the security, as well as the salesperson with which the investor is working and to understand the risky nature of an investment in this security. The broker dealer must also provide the customer with certain other information and must make a special written determination that the "penny stock" is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.
Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares. You will also find it difficult to obtain accurate information about, and/or quotations as to the price of, our common stock.
ISSUANCES OF OUR STOCK COULD DILUTE CURRENT STOCKHOLDERS AND ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK, IF A PUBLIC TRADING MARKET DEVELOPS.
We have the authority to issue up to 50,000,000 shares of common stock, 50,000,000 shares of preferred stock, and to issue options and warrants to purchase shares of our common stock without stockholder approval. Although no financing is planned currently, we may need to raise additional capital to fund operations. If we raise funds by issuing equity securities, our existing stockholders who receive shares in the spin-off may experience substantial dilution. In addition, we could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval, or in connection with one or more acquisitions. No such transactions currently are planned.
The issuance of preferred stock by our board of directors could adversely affect the rights of the holders of our common stock. An issuance of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over the common stock and could, upon conversion or otherwise, have all of the rights of our common stock. Our board of directors' authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.
OUR ARTICLES OF INCORPORATION PROTECT OUR DIRECTORS FROM CERTAIN TYPES OF LAWSUITS, WHICH COULD MAKE IT DIFFICULT FOR US TO RECOVER DAMAGES FROM THEM IN THE EVENT OF A LAWSUIT.
Our Articles of Incorporation eliminate the liability of our directors for monetary damages to the fullest extent permissible under Nevada law. Nevada law permits the elimination of the personal liability of a director or officer for damages for breach of fiduciary duty as a director or officer, although such a provision must not eliminate the liability of a director or officer for (a) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, or (b) the payment of distributions in violation of Nevada Revised Statutes Section 78.300. This exculpatory provision may have the effect of preventing stockholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require our company to use our assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment, or other circumstances.
COMPETITION IN THE INFRARED PRODUCTS INDUSTRY IS INTENSE.
Our business plan involves developing and licensing infrared products. This business is highly competitive. There are numerous similar companies providing such products in the United States. Our competitors will have greater financial resources and more expertise in this business. Our ability to develop our infrared products business will depend on our ability to successfully market our products in this highly competitive environment. We cannot guarantee that we will be able to do so successfully.
OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATELY PROTECTED.
While we have a patent pending, we cannot assure that a patent will be issued on the basis of our application or that, if such a patent is issued, it will be sufficiently broad to protect our technology. In addition, we cannot assure that any patents issued to us will not be challenged, invalidated, or circumvented. In order to safeguard our unpatented proprietary know-how, trade secrets, and technology, we rely primarily upon trade secret protection and nondisclosure provisions in agreements with employees and others having access to confidential information. We cannot assure that these measures will adequately protect us from improper disclosure or misappropriation of our proprietary information.
ENFORCING AND PROTECTING OUR PROPRIETARY INFORMATION CAN BE COSTLY.
If we are not able to adequately protect or enforce our proprietary information or if we become subject to infringement claims by others, our business, results of operations and financial condition may be materially adversely affected. We may need to engage in future litigation to enforce our intellectual property rights or the rights of our customers, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. We also may need to engage in litigation in the future to enforce any patent rights. In addition, we may receive in the future communications from third parties asserting that our products infringe the proprietary rights of third parties. We cannot assure you that any such claims would not result in protracted and costly litigation. Such litigation could result in substantial costs and diversion of our resources and could materially and adversely affect our business, financial condition and results of operations. Furthermore, we cannot assure you that we will have the financial resources to vigorously defend or enforce our proprietary technology.
THE SHARE CONTROL POSITION OF GARY BALL AND HIS WIFE WILL LIMIT THE ABILITY OF OTHER STOCKHOLDERS TO INFLUENCE CORPORATE ACTIONS.
With the distribution of shares to the stockholders, the largest stockholders, Gary and Wendy Ball, will own an aggregate of 352,805 shares of our common stock (including shares of common stock held in the IRA account for Wendy Ball) and thereby control approximately 31% of our
outstanding shares. Because Gary and Wendy Ball own such a significant percentage of the outstanding shares, other stockholders, individually or as a group, will be at a disadvantage in their ability to effectively influence the election or removal of our directors, the supervision and management of the business or a change in control of or the sale of our company, even if they believed such changes were in the best interest of our stockholders generally.
OUR FUTURE SUCCESS DEPENDS, IN LARGE PART, ON THE CONTINUED SERVICE OF OUR PRESIDENT.
We depend almost entirely on the efforts and continued employment of Mr. Gary Ball, our President and Secretary-Treasurer. Mr. Ball currently is our sole employee, and we will depend on him for nearly all aspects of our operations. We do not have an employment contract with Mr. Ball, and we do not carry key person insurance on his life. Mr. Ball currently is able to devote substantially all of his time on our behalf. The loss of the services of Mr. Ball, through incapacity or otherwise, would have a material adverse effect on our business. It would be very difficult to find and retain qualified personnel such as Mr. Ball.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES
We currently use the address of our President for company use. In 2009 additional space has been allocated to ISS. This space is for an electronics laboratory which is required for the Taiwanese (UIS) project and the ISS remote control station. In addition a test range has been established for the ISS demonstrations. In consideration for the added space and exterior test site the President now receives $900 per month to cover incurred expense. We own no real estate nor have plans to acquire any real estate.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS AND ISSUER PURCHASES OF EQUITY SECURITIES
A REGISTRANT THAT QUALIFIES AS A SMALLER REPORTING COMPANY IS NOT REQUIRED TO PROVIDE THE PERFORMANCE GRAPH REQUIRED IN PARAGRAPH (E) OF ITEM 201 OF REGULATION S-K.
MARKET INFORMATION
Our common stock is currently quoted on the OTCBB under the symbol "IFRS.OB". There is a limited trading market for our common stock. The following table sets forth the range of high and low bid quotations for each quarter since August 11, 2009, when our common stock became listed on the OTCBB. These quotations as reported by the OTCBB reflect inter-dealer prices without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions.
________________________________________________________________________________ Quarter Ending High Low ________________________________________________________________________________ September 30, 2009* $ 0.51 $ 0.02 ________________________________________________________________________________
*There was no trading in our common stock prior to August 11, 2009.
SECURITY HOLDERS
There are 1,001 shareholders of record of the Company's Common Stock on November 30, 2009.
EQUITY COMPENSATION PLANS
The following table provides information as of September 30, 2009 with respect to the shares of the Company's common stock that may be issued under the Company's existing equity compensation plans.
(1) Consists of the 2009 Stock Option Plan.
(2) The 2009 Stock Option Plan was not approved by our stockholders.
(3) The maximum number of securities authorized to be issued under the 2009 Stock Option Plan is 10% of the then outstanding shares of Common Stock.
NO STOCK REPURCHASES WERE MADE TO ISI DURING THE FOURTH QUARTER OF THE 2009 FISCAL YEAR.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
A REGISTRANT THAT QUALIFIES AS A SMALLER REPORTING COMPANY IS NOT REQUIRED TO PROVIDE THE INFORMATION REQUIRED BY THIS ITEM.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were formed on April 11, 2006 to pursue the development of a proprietary infrared security system. In July 2007, all assets and liabilities of Advance Technologies, Inc. (AVTX) were transferred to us in connection with a merger transaction involving AVTX.
CRITICAL ACCOUNTING POLICIES
We have identified the following policies below as critical to our business and results of operations. For further discussion on the application of these and other accounting policies, see Note 1 to the accompanying audited financial statements for the fiscal year ended September 30, 2009 included elsewhere in this Annual Report.
ALLOWANCE FOR DOUBTFUL ACCOUNTS We estimate allowances for doubtful accounts based on the aged receivable balances and historical losses. Since all accounts receivable are from one licensee, Kollsman, Inc., which has timely paid all royalties to us, we have concluded that no allowance for doubtful accounts is necessary.
PROPERTY, PLANT AND EQUIPMENT We record property and equipment at cost and use straight-line depreciation methods. Maintenance, repairs, and expenditures for renewals and betterments not determined to extend the useful lives or to materially increase the productivity of the assets are expensed as incurred. Other renewals and betterments are capitalized.
REVENUE RECOGNITION
LICENSING REVENUES Our revenue primarily comes from royalties derived through licensing our technology to a single customer, Kollsman. The licensing agreement with Kollsman grants to Kollsman a worldwide, exclusive license under ISI proprietary data to make, sell, maintain and repair products utilizing such data or patents for use on any aircraft licensed to operate by the Federal Aviation Administration or by equivalent foreign regulatory agencies. Royalty payments are required for each Enhanced Vision System (EVS) unit sold utilizing a licensed product, based upon the number of units sold. Pursuant to the license agreement, the royalty is $800 per unit for units 201 through 2,000 (The first 20 units were prepaid in 1997; no payment was required for units 21 through 200, all of which were sold prior to December 2004), $1,400 per unit for units 2,001 through 5,000, $3,800 per unit for units 5,001 through 10,000, and $200 per unit thereafter. Pursuant to the license agreement, advance royalty payments were made to ISI by Kollsman between 1997 and 1999 in an aggregate amount of $105,000. As a result, as each of units 201 through 410 were sold, Kollsman was required to pay only $300 in cash per unit, and the remaining $500 otherwise payable reduced the balance of the prior advance royalty payments. For accounting purposes, the $105,000 in advance royalty payments were deferred and recognized as the units were sold; therefore, $800 per unit in revenues was recognized as each of units 201 through 410 was sold. Through September 30, 2009, a total of 638 units have been sold. The license continues until terminated by the mutual consent of the parties, or at the written election of a party in the event of an uncured default by the other party, or by us if Kollsman fails to sell an EVS system containing our licensed rights for 24 months. The license continues until terminated by the mutual consent of the parties, or at the written election of a party in the event of an uncured default by the other party, or by us if Kollsman fails to sell an EVS system containing our licensed rights for 24 months. We recognize our royalty revenues as Kollsman sells aircraft systems that include our technology. At that time, in accordance with the license agreement, the royalty fee has been earned by us, there is an agreed upon amount for the royalty fee, and collection of the royalty is reasonably assured because the customer has timely made all payments required under the license agreement since it was signed in July 1997.
CONTRACTING We have acted as an export agent and service contractor for a Taiwanese corporation since 2000. That corporation, among other things, has developed and markets a digital infrared medical diagnosis system known as the SPECTRUM9000 System. We currently have been engaged by the corporation to purchase 40 infrared detectors from a U.S. supplier, install them into a camera shell provided by the corporation with a test circuit board, and ship them in the camera shell to the corporation in Taiwan.
As part of obtaining the detector systems for the Taiwanese corporation, we secured the necessary export license from the U.S. Department of Commerce for the export of the detector systems. This is the fourth time that we have performed these services for the Taiwanese corporation since 2000. None of our proprietary technology is utilized in these systems. Although the amount paid to us by the Taiwan Corporation for the current engagement was nearly $120,000, approximately $112,000 of this amount was to be used to purchase the infrared camera detectors from a Dallas based manufacturer.
Since the initial contract, difficulties with switching from the previous detector (a U3000) to a new detector (U3500) have led to several problems. ISI has filed for and received a new export license for the U3500 (D 396180, July 19, 2008) and ISI needed to be re-qualified with the Department of Commerce reflecting the change in ownership. To accomplish this additional effort UIS has contracted with Gary Ball to perform this work. This has resulted in a cost of $53,556.87 that has been paid by debiting the $112,000 allocated for purchasing of the detectors. This includes the purchase of two IR Cameras from FLIR Inc. for $8,875, that have been exported to Taiwan. This was a direct shipment of the cameras to UIS by FLIR Inc.
We continue to work with DRS to secure a Technical Data License from the Department of State for the U3500 detectors. The need to secure such a license is broader and more inclusive than the exporting for the SPECTRUM 9000. UIS has indicated they will be introducing a new medical product, called a Dry Eye Tester. The new system will use the U3500 as the detector, thus the securing of the requisite Data Release is important for several reasons.
Costs incurred by ISI in pursuing the out of scope tasks for UIS have been accepted and billed against the original advanced funds account. The obligation of ISI has been correspondingly reduced reflecting the expenditure of authorized expenses. Once the necessary Technical Data has been secured and all applicable expenses applied, the balance of the funds will be applied to the purchasing of the U3500 detectors for export. This will result in the number of units exported falling between 10 and 15 units. UIS at their option may remit additional funds to secure the full 40 units authorized under the DOC export license.
INFRARED SECURITY SYSTEM
The infrared security system (ISS) product is based upon a unique and proprietary concept. The ISS utilizes two or more infrared cameras directed at a common surveillance area. The locations of the cameras and their optical fields of view are pre-established and stored in a central computer database. Computer programs harmonize the information into a three dimensional grid, and camera processors perform image processing on the surveillance area to detect moving objects. Information is transmitted to the central computer, and compared to information in the database for pre-defined threats. Alarm criteria can be based on object size, location, and movement over time. We believe this system has a powerful threat detection capability that inherently rejects false alarms and which will separate our ISS from those of our competitors. A provisional patent was filed on November 7, 2005 (60/597,048), a full patent was filed on November 3, 2006, (11/592,639) preserving the original filing date, and a petition for an expedited patent application review was filed in August 2007. In September 2007, our request for an accelerated review was granted, and we are currently in discussions with the US patent office. The activity with the US customs office requiring our patent attorney was approximately $17,943 in FY 2009 and we estimated a cost between $2,000 and $3,000, in November and December of 2009 to complete the patent. We can provide no guarantee that the patent with be granted by 2010. We have no patents at this time.
PLAN OF OPERATION IN THE NEXT TWELVE MONTHS
If our ISS patent application is granted, we will then seek partners for our infrared security system. Such potential partners include infrared camera suppliers, suppliers of radio frequency identification technology, commercial wireless providers, and cellular handset suppliers. We have identified numerous potential applications for our infrared security system, and will engage in discussions with various corporations in search of partners who desire to utilize our system for one or more of the potential applications for our system.
The EVS project continues with ongoing sales by Kollsman to Gulfstream. These sales closely track the new aircraft deliveries by Gulfstream. The retrofit market for Gulfstream continues at a slow rate, but is projected to improve now that a modified form of the EVS, designated by Kollsman as the Enhanced Vision System II (EVS II), has been certified by the FAA and is in production. Gulfstream is heavily engaged in the introduction of their new G-650 luxury model, and their G-150/G-250 lower end economy models. The phasing out of older "G" series models, normal delays in the introduction of new models we believe will adversely affect sales of EVS to Gulfstream over the next two quarters. The slow down in the US economy has caused some number of business jet users to postpone, cancel, or push out deliveries of new aircraft. This will similarly affect sales in 2010, causing us great concern over future sales and income.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2009 COMPARED WITH THE FISCAL YEAR ENDED SEPTEMBER 30, 2008
NET SALES
Net sales were approximately $114,400 for the fiscal year ended September 30, 2009 as compared to approximately $51,200 for the prior fiscal year. The increase was due to an additional number of EVS units sold by Kollsman from 64 in fiscal 2008 to 143 in fiscal 2009. Consulting fees were zero in fiscal 2009, the same as the prior fiscal year. Such fees are generated by the periodic purchases by a foreign customer, with our assistance, of infrared detectors from a third party for its medical business. Since there were no costs of goods, gross profits were the same as revenues. ISI earned $800 per unit during both fiscal 2008 and fiscal 2009. The increase from 64 units to 143 units was the result of EVS II being completely phased in and additional new customers. The EVS market is for the lighter weight, smaller size, higher performing EVS II.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating expense for the fiscal year ended September 30, 2009 was $134,951 as compared to $180,920 for the prior fiscal year, a decrease of 34%. The decrease was primarily due to a decrease in professional fees from approximately $126,159 in fiscal 2008 to $54,604 in fiscal 2009 or approximately 56%, as a result of the completion of the spin-off of ISI in 2008. Travel, meals, and entertainment expenses decreased from $ 30,022 in 2008 to $24,423 in 2009, a decrease of 20%. Management fees increased from zero in 2008 to $20,413 in 2009. This increase was the result of payments to Gary Ball, our President and sole employee, for
his support efforts to ISI billing at a rate of 15% of incurred costs. General expenses increased from $13,666 in 2008 to $32,915 in 2009, an increase of 58%. The largest portion of these expenses was associated with responding to US Patent Office actions in pursuit of a patent by the company. Research and development was initiated in 2008 on the ISS project. Such costs in fiscal 2008 were $13,666, compared to only $2,596 for fiscal 2009, a decrease of 79%. The reduction in costs was the result of completing the initial test phase, and a desire to reduce our expenses on the ISS project until the pending patent application is resolved.
OTHER INCOME AND EXPENSE
For the fiscal year ended September 30, 2009, the expense was $ 2,727 compared to $359 for the prior fiscal year. The increase in expense resulted from an increase in corporate debt.
NET PROFIT (LOSS) BEFORE PROVISION FOR INCOME TAXES
The net loss for the fiscal year ended September 30, 2009 was $23,278 versus $130,011 for the prior fiscal year. The decrease in the loss ($106,733) was due to a large increase in revenues ($63,200) and a significant decrease in legal and accounting expenses associated with primarily the spin off of approximately ($71,555). The breaking out of the management fees of $20,413 as a separate line item would adjust the $71,555 to $51,142 for comparison purposes.
LIQUIDITY AND CAPITAL RESOURCES
Based upon our anticipated monthly expenses of approximately $5,000 to $7,000 per month, we may not have sufficient capital resources to maintain our business position. Our major priority in 2010 will be to secure the necessary funds to grow our business
GOING CONCERN We have limited working capital and limited revenues from sales of products or licenses. During 2007, all of our revenues were generated from a single licensee. These factors have caused our accountants to express substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.
Our ability to continue as a going concern is dependent on our attaining future profitable operations. Management's plans include strict restrictions on the cost of ongoing operations, such as providing minimal compensation to management, and limiting professional, travel and other operating expenses in order to remain within our budget of approximately $ 100,000 per year.
OFF-BALANCE SHEET ARRANGEMENTS
The company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of its operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is a smaller reporting company as defined by Rule 12b-2 under the Exchange Act and is not required to provide the information required under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INFRARED SYSTEMS INTERNATIONAL
SEPTEMBER 30, 2009 FINANCIAL STATEMENTS
Page _____________ Report of Independent Registered Public Accounting Firm 16 Balance Sheets, September 30, 2009 and 2008 17 Statements of Operations, For the Years Ended September 30, 2009 and 2008 18 Statements of Changes in Stockholders' Equity (Deficit), For the Years Ended September 30, 2009 and 2008 19 Statements of Cash Flows, For the Years Ended September 30, 2009 and 2008 20 Notes to the Financial Statements 21 to 24
CHILD, VAN WAGONER & BRADSHAW, PLLC CERTIFIED PUBLIC ACCONTANTS
Douglas W. Child, CPA Marty D. Van Wagoner, CPA J. Russ Bradshaw, CPA William R. Denney, CPA Russell E. Anderson, CPA Scott I. Farnes
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of Infrared Systems International
We have audited the accompanying balance sheets of Infrared Systems International (the "Company") as of September 30, 2009 and 2008, and the related statements of operations, changes in stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Infrared Systems International as of September 30, 2009 and 2008, and the results of its operations, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred losses from operations, has a liquidity problem, and requires funds for its operational activities. These factors raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Child, Van Wagoner & Bradshaw, PLLC Certified Public Accountants Salt Lake City, Utah December 16, 2009
1284 W. Flint Meadow Dr. #D Kaysville, Utah 84037 Telephone 801.927.1377 Facsimile 801.927.1344
5296 S. Commerce Dr. #300 Salt Lake City, Utah 84107 Telephone 801.281.4700 Facsimile 801.281.4701
Suite A, 5/F Max Share Centre 373 King's Road North Point, Hong Kong Telephone 852.21.555.333 Facsimile 852.21.165.222
www.cpaone.net
See accompanying notes.
INFRARED SYSTEMS INTERNATIONAL STATEMENTS OF OPERATIONS
For the Years Ended September 30, _____________________________________ 2009 2008 ________________ _________________ REVENUES: Royalty $ 114,400 $ 51,200
OPERATING EXPENSES: Professional fees 54,604 126,159 Travel, meals, and entertainment 24,423 30,022 Management fees 20,413 - Research and development 2,596 11,073 Other general and administrative 32,915 13,666 ________________ _________________ Total Operating Expenses 134,951 180,920 ________________ _________________
LOSS FROM OPERATIONS (20,551) (129,720)
OTHER INCOME (EXPENSE): Interest expense (2,727) (359) ________________ _________________
LOSS BEFORE INCOME TAX PROVISION (23,278) (130,079)
PROVISION FOR INCOME TAXES - 68 ________________ _________________
NET LOSS $ (23,278) $ (130,011) ================ =================
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.02) ================ =================
WEIGHTED AVERAGE SHARES OUTSTANDING 2,266,227 6,000,000 ================ =================
See accompanying notes.
See accompanying notes.
See accompanying notes.
INFRARED SYSTEMS INTERNATIONAL NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Infrared Systems International ("the Company") is a corporation organized under the laws of the State of Nevada on April 11, 2006 as a wholly-owned subsidiary of China SXAN Biotech, Inc. (formerly Advance Technologies, Inc.) ("CSBI"). CSBI was organized under the laws of the State of Delaware on June 16, 1969. In July 2007, CSBI transferred the assets, liabilities, and operations of its technology licensing business to the Company. Because CSBI's operations are considered to be the Company's predecessor business, the financial statements include CSBI's operations from the inception of the business. In December 2008, the Company completed its spin-off by dividend to stockholders of CSBI.
Nature of Operations - The Company licenses rights to use internally-developed optical technology. The Company also plans to develop a night vision system with applications for both military and civil aircraft. The Company has not paid any dividends and any dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors.
Use of Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly-liquid debt investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable - The Company records accounts receivable at cost less allowance for doubtful accounts. The Company estimates allowances for doubtful accounts based on the aged receivable balances and historical losses. Since all accounts receivable are from one licensee, Kollsman, Inc., which has timely paid all royalties to the Company, management has estimated that no allowance for doubtful accounts is necessary.
Property and Equipment - The Company records property and equipment at cost and uses straight-line depreciation methods. Maintenance, repairs, and expenditures for renewals and betterments not determined to extend the useful lives or to materially increase the productivity of the assets are expensed as incurred. Other renewals and betterments are capitalized.
Revenue Recognition - The Company's revenue primarily comes from royalties derived through licensing its technology to a single customer. The licensing agreement allows the customer exclusively to use the Company's technology in aircraft systems manufactured by the customer in exchange for a royalty fee for each system that includes the Company's technology sold by the customer. The royalty fee is payable quarterly and amounts to $800 per aircraft system for systems 201 through 2,000. There are provisions for the royalty fee to increase to $1,400 per system after 2,000 cumulative systems have sold, to increase to $3,800 per system after 5,000 cumulative systems have sold, and to decrease to $200 per system after 10,000 cumulative systems have sold. As of September 30, 2009, the customer had sold a total of 638 cumulative aircraft systems since the licensing agreement was signed in 1997. The licensing agreement continues in effect as long as the customer continues to use the Company's technology in aircraft systems it manufactures. The Company recognizes its royalty revenues as the customer sells aircraft systems that include the Company's technology. At that time, in accordance with the license agreement, the royalty fee has been earned by the Company, there is an agreed upon amount for the royalty fee, and collection of the royalty is reasonably assured because the customer has timely made all payments required under the license agreement since it was signed in 1997. The Company has also generated some revenues from consulting arrangements where the Company has assembled existing equipment and readied the assembled equipment for shipment in accordance with customer specifications. Consulting revenue is recognized when the equipment has been assembled, there is an agreed upon price for the services, and collection of the revenue is reasonably assured.
Research and Development - The Company expenses research and development costs as incurred.
INFRARED SYSTEMS INTERNATIONAL NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 - GOING CONCERN
The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At September 30, 2009, the Company had a retained deficit of $1,015,851 and current liabilities in excess of current assets by $52,004. During the year ended September 30, 2009, the Company incurred a net loss of $23,278 and negative cash flows from operations of $71,198. These factors create an uncertainty about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to increase revenues, decrease or contain costs, and achieve profitable operations. In this regard, Company management is proposing to develop additional applications for the Company's technology, specifically in security system surveillance. Management estimates 9 to 15 months before the Company will start realizing revenues from security system surveillance applications. Should the Company's financial resources prove inadequate to meet the Company's needs before additional revenue sources can be realized, the Company may raise additional funds through loans or through sales of common stock. There is no assurance that the Company will be successful in achieving profitable operations or in raising any additional capital.
NOTE 3 - RELATED PARTY TRANSACTIONS
Prepaid expense - In September 2009, the Company paid $900 to its officer for October 2009 rent.
Management Compensation - During the years ended September 30, 2009 and 2008, respectively, the Company paid management fees of $20,413 and $0 to its officer.
Office Space - The Company was renting office space from its officer for $400 per month; however, in April 2009, the Company's monthly rent increased to $900 and the Company paid an additional $1,500 for increased rent attributable to prior months. During the years ended September 30, 2009 and 2008, respectively, the Company paid or accrued $10,200 and $4,800 in rent to its officer.
Consulting - During the years ended September 30, 2009 and 2008, respectively, the Company paid $1,938 and $0 for consulting services.
NOTE 4 - PROPERTY AND EQUIPMENT
Depreciation expense for the years ended September 30, 2009 and 2008 was $802 and $379, respectively.
INFRARED SYSTEMS INTERNATIONAL NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - DEFINITE-LIFE INTANGIBLE ASSETS
The Company's definite-life intangible assets consist only of a pending patent application. Once a patent has been granted, the Company will amortize the related costs over the estimated useful life of the patent. If a patent application is denied, the related costs will be expensed immediately. Management anticipates that the U.S. Patent Office will grant the patent during 2010. Management compared the estimated cost of the patent of approximately $40,000 to management's estimate of the market for products utilizing the patent, if granted, in determining the recoverability of this asset.
NOTE 6 - CUSTOMER DEPOSITS
At September 30, 2009, the Company had received net cash deposits of $66,168 from a customer in Taiwan to purchase infrared detectors, affix them to cameras supplied by the customer, and ready them for shipment back to the customer in accordance with the requirements of the Company's export license. Although the terms of the arrangement provide that the deposits are not refundable, the Company has recorded them as a current liability as of September 30, 2009 because the earnings process was incomplete. The project has required additional research and testing and the funds paid to the Company have been used to pay those costs. The Company plans to negotiate a new agreement with the customer after the research and testing are complete.
NOTE 7 - COMMON STOCK
In December 2008, the Company completed its spin-off by distributing 1,167,279 common stock shares to stockholders of CSBI. The remaining 4,832,721 common stock shares previously owned by CSBI were returned and cancelled.
NOTE 8 - CONCENTRATIONS
At September 30, 2009, 100% of the Company's accounts receivable was due from a single licensee. During the years ended September 30, 2009 and 2008, 100% of the Company's royalty revenues were generated through a single licensee.
NOTE 9 - INCOME TAXES
At September 30, 2009, the Company has federal net operating loss carryovers of $180,076 available to offset future taxable income and expiring as follows: $2,320 in 2026, $12,616 in 2027, $127,675 in 2028, and $37,465 in 2029. The Company also has a federal contribution carryover of $150 that expires in 2029. At September 30, 2009, the Company had experienced losses since inception and had not yet generated any taxable income; therefore, the Company established a valuation allowance to offset the net deferred tax assets.
The income tax provision consists of the following components for the years ended September 30, 2009 and 2008:
2009 2008 _______ __________ Current income tax expense (benefit) $ - $ - Deferred income tax expense (benefit) - (68) _______ __________ Net income tax expense (benefit) charged to operations $ - $ (68) _______ __________
INFRARED SYSTEMS INTERNATIONAL NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (Continued)
The income tax provision differs from the amounts that would be obtained by applying the federal statutory income tax rate to loss before income tax provision as follows for the years ended September 30, 2009 and 2008:
2009 2008 ______________ _______________ Loss before income tax provision $ (23,278) $ (130,079) Expected federal income tax rate 15.0% 15.0% ______________ _______________ Expected income tax expense (benefit) at statutory rate $ (3,492) $ (19,512) Tax effect of: Meals and entertainment 551 734 Change in valuation allowance 2,941 18,710 ______________ _______________ Net income tax expense (benefit) $ - $ (68) ______________ _______________
The Company's deferred tax assets, deferred tax liabilities, and valuation allowance are as follows:
September 30, September 30, 2009 2008 _________________ _______________ Deferred tax assets: Organization costs $ 90 $ 150 Contribution carryover 23 - Net operating loss carryovers 27,173 21,392 _________________ _______________ Total deferred tax assets $ 27,286 $ 21,542 _________________ _______________
Deferred tax liabilities: Book basis of patent application $ (5,095) $ (2,695) Tax depreciation in excess of book (540) (137) _________________ _______________ Total deferred tax liabilities $ (5,635) $ (2,832) _________________ _______________
Total deferred tax assets $ 27,286 $ 21,542 Total deferred tax liabilities (5,635) (2,832) Valuation allowance (21,651) (18,710) _________________ _______________ Net deferred tax asset (liability) $ - $ - _________________ _______________
These amounts have been presented in the financial statements as follows:
September 30, September 30, 2009 2008 _________________ _______________ Current deferred tax asset (liability) $ - $ - Non-current deferred tax asset (liability) - - _________________ _______________ $ - $ - _________________ _______________
NOTE 10 - SUBSEQUENT EVENTS
The Company evaluated events subsequent to September 30, 2009 through December 16, 2009, which is the date that the September 30, 2009 financial statements were available to be issued. Previously, the Company evaluated events subsequent to September 30, 2008 through January 12, 2009, which is the date that the September 30, 2008 financial statements were issued.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The term "disclosure controls and procedures" (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within required time periods. The Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this annual report (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.
(b) Changes in internal controls.
The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company's internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was no change to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
(c) Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the Company. 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 in accordance with accounting principles generally accepted in the United States of America.
The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that material weaknesses exist due to a lack of segregation of duties, resulting from the Company's limited resources.
This annual 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 our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this Annual Report on Form 10-K.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The officers and directors of the Company are:
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE __________________ _____ ___________________________________ ________________ Gary E. Ball 72 Chairman, Chief Executive Officer, 2006 Chief Financial Officer
Gary L. Bane 71 Director 2006
James Watson 62 Director 2006
Wendy S. Ball 63 Secretary and Director 2009
Each director serves until his or her successor is elected. There are no arrangements or understandings between any director and any other person pursuant to which he or she was selected as a director or nominee.
Each officer serves until he or she is replaced by the Board of Directors. There are no arrangements or understandings between any officer of the Company and any other person pursuant to which he or she was selected as an officer.
GARY E. BALL has been ISI's Chief Executive Officer, President, Secretary-Treasurer, and a director since its formation in April 2006. For more than fifteen years until the closing of the merger in July 2007, Mr. Ball was CEO, President and a director of CSBI. Prior thereto, Mr. Ball specialized in product design, development, and management for North American Aviation; was a Technical Manager for the Pave Tack program for Ford Aerospace; was Program Manager for Northrop Electro-Mechanical in charge of business development on several classified Department of Defense programs; was Program Manager for Hughes Aircraft, where he developed their infrared enhanced vision system; and was a member of the NATO NIAG study group on aircraft integration. Mr. Ball has authored several articles for trade publications, the last 9 years he has provided consulting services to 10 U.S. and foreign corporations in the field of infrared technology. Mr. Ball attended California State University at Long Beach, where he graduated with a BSEE and MSEE, and later took additional graduate studies at the University of Southern California. In September 2009, Mr. Ball was replaced as Secretary.
GARY L. BANE has been a director of ISI since its formation in April 2006, and was a director of CSBI at the time of the closing of the merger in July 2007. Mr. Bane has been employed as an independent consultant for the last five years.
JAMES R. WATSON has been a director of ISI since its formation in April 2006, and was a director of CSBI at the time of the closing of the merger in July 2007. Mr. Watson is a sales, marketing and general management executive with over twenty-five years of experience in managing a wider range of marketing, sales and operations functions designed to create or expand domestic and international sales opportunities. Since 2001, he has been the Vice President of Operations for California Manufacturing Technology Consulting in Gardena, California, where he is responsible for marketing, sales, consulting services, and the development of delivery tools and services. Prior thereto, his duties have included establishing aerospace and defense and distribution industry teams. Mr. Watson also has served as a Vice President of Sales and General Manager, Europe, for Anchor Audio, Inc. in Los Angeles, California, where he was responsible for domestic sales planning, field sales, and government and OEM sales, and Vice President - Passenger & Cargo Sales for Western Airlines, where he was responsible for managing over 1,100 people in sales programs, field sales, reservations and advertising, with a budget in excess of $150 million.
WENDY S. BALL was a director of ISI's original corporation, SeaCrest Industries Inc. from 1995 until the merger with Advance Technologies Inc. in 2001. In September 2009, Ms. Ball was elected by the Board to fill a vacancy created by increasing the size of the Board from three to four and was elected Secretary of the Company. Ms. Ball was employed by Christian Lacroix as US National Sales Manager until February 2006. Since then she has worked as a part time Fashion Consultant for Brad Hughes & Associates as well as a "personal shopper" for individual clients. Ms. Ball is the wife of Gary Ball, President of ISI.
DIRECTOR INDEPENDENCE
Our board of directors consists of Gary E. Ball, Gary L. Bane, Wendy S. Ball, and James Watson. Messrs. Bane, Watson and Mss. Ball each is an "independent director" as such term is defined in Section 4200(a) (15) of the NASDAQ Marketplace Rules.
COMMITTEES OF THE BOARD OF DIRECTORS
Currently, we do not have any committees of the Board of Directors, and none are planned at this time. Our Board of Directors has determined that none of our directors is an audit committee financial expert.
INDEMNIFICATION AND LIMITATION ON LIABILITY OF DIRECTORS Our Articles of Incorporation eliminate the liability of our directors for monetary damages to the fullest extent permissible under Nevada law. Under the Nevada Revised Statutes, director immunity from liability to a company or its stockholders for monetary liabilities applies automatically unless it is specifically limited by a company's Articles of Incorporation. Excepted from that immunity are: (a) a willful failure to deal fairly with the company or its stockholders in connection with a matter in which the director has a material conflict of interest; (b) a violation of criminal law, unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful; (c) a transaction from which the director derived an improper personal profit; and (d) willful misconduct.
Our bylaws provide that we will indemnify our directors and officers to the fullest extent not prohibited by Nevada law; provided, however, that we may modify the extent of such indemnification by individual contracts with our directors and officers; and, provided, further, that we shall not be required to indemnify any director or officer in connection with any proceeding, or part thereof, initiated by such person unless such indemnification: (a) is expressly required to be made by law, (b) the proceeding was authorized by our board of directors, (c) is provided by us, in our sole discretion, pursuant to the powers vested in us under Nevada law or (d) is required to be made pursuant to the bylaws.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
CODE OF ETHICS
The Company does not have a written code of ethics applicable to its executive officers. The Board of Directors has not adopted a written code of ethics since the Company has only two officers who are both directors of the Company and due to the small size and limited funds of the Company.
FAMILY RELATIONSHIPS Gary E. Ball and Wendy S. Ball are husband and wife.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS To the best of our knowledge, during the past five years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each of Gary E. Ball, Gary L. Bane, Wendy S. Ball, and James Watson failed to file his or her report on Form 3 on a timely basis during the fiscal year ended September 30, 2009. Each such report on Form 3 subsequently was filed. There are no other known failures to file reports required by Section 16(a) of the Exchange Act.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
GENERAL At the present time, we do not pay any compensation to our directors or officers, other than a management fee paid to our President and Chief Financial Officer, Gary E. Ball, equal to 15% of certain incurred costs of the Company. Mr. Ball is also a director, and participated in the deliberations of the Board in determining his executive officer compensation. There is no separate compensation committee of the Board. We anticipate that we will begin to compensate our directors at some time in the future. At the present time, No pension benefits are provided to officer or director of the Company.
SUMMARY COMPENSATION TABLE The following table sets forth compensation information for services rendered to us by certain executive officers in all capacities, other than as directors, during the last two fiscal years. No executive officer's salary and bonus exceeded $100,000 in any of the applicable years. The following information includes the dollar value of base salaries, bonus awards, the number of stock options granted, and certain other compensation, if any, whether paid or deferred.
(1) Consists of (i) a management fee the Company paid to Mr. Ball in 209 equal to 15% of certain incurred costs of the Company, which totaled $20,413, and (ii) a leased car provided to Mr. Ball since August 2008, which costs $464.84 per month. for a lease car for Mr. Ball, $464.84 per month
(2) Does not include rent paid to Mr. Ball for space provided to him for the Company's use. Such rent was $400 per month during fiscal years 2008 and became $900 per month in fiscal 2009 due to increased space being utilized by the Company. See "Certain Relationships and Related Transactions."
COMPENSATION DISCUSSION AND ANALYSIS
As indicated in the Summary Compensation Table, the only compensation paid to an officer is the management fee payable to Gary E. Ball, our President and Treasurer, which commenced in fiscal 2009. Such fee is equal to 15% of certain third party fees incurred by the Company, and is intended to provide at least minimal compensation to Mr. Ball for his substantial time and effort overseeing the work performed by third parties on behalf of the Company, especially considering the fact that Mr. Ball receives no other compensation from the Company for his services as an officer and sole employee of the Company. The total management fee paid to Mr. Ball in fiscal 2009 was $20,413.
EMPLOYMENT AGREEMENTS
We do not have a written employment agreement with Gary E. Ball or Wendy S. Ball, our sole executive officers.
EQUITY INCENTIVE PLAN
No stock options or similar instruments have been granted to any of our officers or directors.
LACK OF COMPENSATION COMMITTEE
We do not have a separate compensation committee due to the fact that there is currently only one employee of the Company and since no compensation currently is paid to directors of the Company. The entire Board of Directors participates in the consideration of executive officer and director compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Gary E. Ball, the sole paid employee of the Company, also is a director of the Company, and participates in determining the amount of his compensation. Wendy S. Ball, the spouse of Mr. Ball, also is a director of the Company.
COMPENSATION COMMITTEE REPORT
The Board of Directors of the Company has reviewed and discussed the Compensation Discussion and Analysis provided above with management and, based on such review and discussions, has recommended that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
The members of the Board of Directors are:
Gary E. Ball
Wendy S. Ball
Gary L. Bane
James Watson
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of September 30, 2009, information regarding the ownership of common stock:
o Persons who own more than 5% of our common stock;
o Each of our directors and each of our executive officers; and
o All directors and executive officers as a group.
Each person will have sole voting and investment power with respect to the shares shown, except as noted.
NAME OF AMOUNT AND NATURE OF PERCENTAGE BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP OF CLASS ________________________________________________________________________________ Gary E. Ball 140,951(2) 12.1%((2))
Wendy S. Ball 211,864(3)(4) 18.1%(4) Gary L. Bane 19,653 1.7% James Watson 1,532 0.1% All directors and executive officers as a group (4 persons) 373,990(3) 32.0%
(1) The business address for such persons is c/o Infrared Systems International, 15 N. Longspur Drive, The Woodlands, TX 77380. (2) Does not include 211,864 shares owned by Wendy S. Ball, the spouse of Gary E. Ball, as to which Gary E. Ball disclaims any beneficial ownership. (3) Includes 70,903 shares held in the IRA of Wendy S. Ball. (4) Does not include 140,951 shares owned by Gary E. Ball, the spouse of Wendy S. Ball, as to which Wendy S. Ball disclaims any beneficial ownership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We utilize office space and storage provided by Gary E. Ball, for which we pay Mr. Ball $900 per month. We also pay for a leased car for Mr. Ball, $464.84 per month to Ford Credit. Both payments are made pursuant to authorization by the Board of Directors.
Pursuant to the Assignment and Assumption and Management Agreement entered into by CSBI, ISI, and Gary E. Ball dated July 10, 2007, ISI engaged Mr. Ball to manage and operate its business while a subsidiary of CSBI. Such agreement provided that the Board of Directors of ISI consisted, prior to the spin-off, of Mr. Ball, Mr. Bane, and Mr. Watson, and that Mr. Ball would serve as the sole officer of ISI. Mr. Ball was responsible for managing and operating the business of ISI prior to the spin-off.
The Taiwanese corporation for whom we currently are conducting services also has engaged Mr. Ball to provide personal assistance to it. Mr. Ball's fees for the assistance will be determined when the effort is complete. Until the final resolution of the R&D assistance, Mr. Ball's fees will be deducted from the UIS payment of $112,000 allocated to purchase detectors. The debit of funds for compensating Mr. Ball will have the effect of reducing the number of detectors purchased. For FY 2008 & 2009 a total of $45,421.87 has been billed to the UIS account. The cost to complete is estimated to be between $6,000 and $10,000. Uncertainties may cause the cost to complete to grow beyond the $10,000.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table sets forth the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the Company's annual financial statements and review of financial statements included in the Company's Form 10-Q quarterly reports or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years.
_________________________________________________________________________ 2009 2008 ___________________ _____________________ Audit Fees $ 13,270 $ 27,663 Audit-Related Fees $ - $ - Tax Fees $ - $ - All Other Fees $ - $ - ___________________ _____________________
TOTAL $ 13,270 $ 27,663 ==================== =====================
AUDIT COMMITTEE
Our auditor has not provided any non-audit services in the past and does not anticipate providing any non-audit services to the Company. In the event non-audit services are contemplated in the future, our Board of Directors, which functions in the capacity of an audit committee, will consider whether the non-audit services provided by our auditors to us would be compatible with maintaining the independence of our auditors and whether the independence of our auditors would be compromised by the provision of such services. Our Board of Directors pre-approves all auditing services and would approve any permitted non-audit services contemplated in the future, including the fees and terms of those services, to be performed for us by our independent auditor prior to engagement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A) FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Registered Public Accounting Firm
Balance Sheets -- September 30, 2009 and 2008
Statements of Operation -- Years ended September 30, 2009 and 2008
Statements of Changes in Stockholders' Equity (Deficit) -- Years ended September 30, 2009 and 2008
Statements of Cash Flows -- Years ended September 30, 2009 and 2008
(B) EXHIBIT LIST
3.1.1 Articles of Incorporation. - filed as an exhibit to the Company's Registration Statement on Form SB-2 (33-147367) and incorporated herein by reference.
3.2. By-laws. - filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed on September 2, 2008, and incorporated herein by reference.
10.1 Infrared Systems International 2009 Stock Option Plan -filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 16, 2009, and incorporated herein by reference.
31.1 Rule 13a-14(a) Certification
32.1 Section 906 Certification
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INFRARED SYSTEMS INTERNATIONAL
Date: December 18, 2009 By: /s/GARY E. BALL _________________ ______________________________________ Gary E. Ball, Chief Executive Officer, Principal Executive, Financial and Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date ______________________________________________________________________________
/s/GARY E. BALL December 18, 2009 ___________________ Gary E. Ball Chief Executive Officer, President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Director /s/WENDY S. BALL ___________________ Wendy S. Ball Director December 18, 2009
/s/ GARY L. BANE ___________________ Gary L. Bane Director December 18 2009
/s/ JAMES WATSON ___________________ James Watson Director December 18 2009